-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CZ4NSgXJVxdOoQUcOoLcc373q6HtUsT3MeyYcnQqoXL2reomC/6jAzY7XaF/rEUu g6k0rwDCYYIAQYq6fjHxaA== 0001047469-05-023483.txt : 20050928 0001047469-05-023483.hdr.sgml : 20050928 20050928085539 ACCESSION NUMBER: 0001047469-05-023483 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050731 FILED AS OF DATE: 20050928 DATE AS OF CHANGE: 20050928 EFFECTIVENESS DATE: 20050928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY AGGRESSIVE EQUITY FUND CENTRAL INDEX KEY: 0001048710 IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-08471 FILM NUMBER: 051106674 BUSINESS ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 BUSINESS PHONE: (212) 869-6397 MAIL ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY WITTER DEAN AGGRESSIVE EQUITY FUND DATE OF NAME CHANGE: 19981109 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY WITTER DEAN RESEARCH FUND DATE OF NAME CHANGE: 19971218 FORMER COMPANY: FORMER CONFORMED NAME: WITTER DEAN RESEARCH TRUST DATE OF NAME CHANGE: 19971029 N-CSR 1 a2163027zn-csr.txt N-CSR 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: 811-08471 Morgan Stanley Aggressive Equity Fund (Exact name of registrant as specified in charter) 1221 Avenue of the Americas, New York, New York 10020 (Address of principal executive offices) (Zip code) Ronald E. Robison 1221 Avenue of the Americas, New York, New York 10020 (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 Date of fiscal year end: July 31, 2005 Date of reporting period: July 31, 2005 Item 1 - Report to Shareholders WELCOME, SHAREHOLDER: IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY AGGRESSIVE EQUITY FUND PERFORMED DURING THE ANNUAL PERIOD. WE WILL PROVIDE AN OVERVIEW OF THE MARKET CONDITIONS, AND DISCUSS SOME OF THE FACTORS THAT AFFECTED PERFORMANCE DURING THE REPORTING PERIOD. IN ADDITION, THIS REPORT INCLUDES THE FUND'S FINANCIAL STATEMENTS AND A LIST OF FUND INVESTMENTS. THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING OFFERED. MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THIS FUND. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE INFORMATION ON INVESTMENT RISKS. FUND REPORT For the year ended July 31, 2005 TOTAL RETURN FOR THE 12 MONTHS ENDED JULY 31, 2005
RUSSELL LIPPER 3000(R) MULTI-CAP GROWTH GROWTH CLASS A CLASS B CLASS C CLASS D INDEX(1) FUNDS INDEX(2) 26.50% 25.69% 25.66% 26.86% 13.81% 18.89%
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 Despite volatility, uncertainty and changing market sentiment, the domestic stock market posted strong returns for the 12-month period ending July 31, 2005. While this advance was broad, small and mid capitalization stocks generally outpaced their larger counterparts. As the fiscal year opened, investors were distracted by rising oil prices, the pace of economic growth, inflation, and the intentions of the Federal Reserve (the "Fed"). The prospect of terrorist disruption at the Olympics, the conflict in Iraq and the November U.S. presidential election added to investors' unease. As the months progressed, sentiment improved and stocks gained ground. The Olympics and presidential election passed without major incident, the economy appeared to be on track for moderate growth, and investors seemed to come to terms with the Fed's "measured" rate hikes. Against this backdrop, stocks surged in a fourth-quarter rally. However, the market sold off sharply early in 2005 as investors sought to lock in 2004's gains. Earlier anxieties resurfaced. As oil prices soared and inflationary pressures loomed, investors feared for the future pace of U.S. economic growth. Maintaining the course it set in 2004, the Federal Open Market Committee continued to increase the federal funds target rate at each of its meetings in 2005. While short-term interest rates increased, long-term rates fell, and this flattening of the yield curve concerned some investors who believed it indicated looming trouble. In the final months of the reporting period, the market changed direction once again. Although oil prices remained high and the prospect for additional rate increases appeared likely, investor sentiment notably improved. Encouraging economic data, increased consumer confidence, waning inflationary fears, and many solid corporate earnings announcements boosted the stock market. PERFORMANCE ANALYSIS Morgan Stanley Aggressive Equity Fund outperformed the Russell 3000(R) Growth Index and the Lipper Multi-Cap Growth Funds Index for the 12 months ended July 31, 2005, assuming no deduction of applicable sales charges. Broad strength in stock selection and favorable allocations across sectors drove Fund's performance. Financial services, consumer discretionary and technology contributed most significantly. Within financial services, the Fund was well served by its overall underweighting relative to the Russell benchmark, as well as by individual stock performance. Diversified financial services, financial information services, multi-line insurance, and investment management services were notable buoys to performance. Also on the upside, 2 our investment discipline resulted in an overweighting in consumer discretionary stocks, with particular strength in consumer electronics, casino and gambling, and commercial services companies. Within technology, the Fund benefited from an overall underweighting versus the benchmark; as well as from stock selection. Positioning in computer services software and electronics were especially advantageous. Superior stock selection within the energy and the materials-and-processing sectors further propelled the Fund's advance, with robust gains in crude oil producers and building materials, respectively. While the Fund outperformed its benchmark by a wide margin, not all areas contributed with equal strength. Integrated oil, multi-industry, and consumer staples posted more muted gains. Additionally, underweights versus the benchmark within producer durables and health care were slightly disadvantageous. THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE FUND IN THE FUTURE. TOP 10 HOLDINGS Ultra Petroleum Corp. (Canada) 6.3% eBay Inc. 5.9 Corporate Executive Board Co. (The) 5.2 Google, Inc. (Class A) 5.2 Getty Images, Inc. 4.2 Carnival Corp. (Panama) 3.6 America Movil S.A. de C.V. (Series L) (ADR) (Mexico) 3.4 Monsanto Co. 3.2 Station Casinos, Inc. 3.1 Electronic Arts Inc. 3.0
TOP FIVE INDUSTRIES Other Consumer Services 9.0% Internet Software/Services 7.8 Casino/Gaming 7.0 Oil & Gas Production 6.7 Advertising/Marketing Services 6.2
DATA AS OF JULY 31, 2005. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP 10 HOLDINGS AND TOP FIVE INDUSTRIES ARE AS A PERCENTAGE OF NET ASSETS. THESE DATA ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL ADVISORY SERVICES. 3 INVESTMENT STRATEGY THE FUND NORMALLY INVESTS AT LEAST 80 PERCENT OF ITS ASSETS IN COMMON STOCKS AND OTHER EQUITY SECURITIES OF U.S. OR FOREIGN COMPANIES THAT OFFER THE POTENTIAL FOR SUPERIOR EARNINGS GROWTH IN THE OPINION OF THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS INC. THE FUND'S OTHER EQUITY SECURITIES MAY INCLUDE PREFERRED STOCK, DEPOSITARY RECEIPTS OR SECURITIES CONVERTIBLE INTO COMMON STOCK. FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE SEC'S WEB SITE, http://www.sec.gov. YOU MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD YOU MAY OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICY AND PROCEDURES WITHOUT CHARGE, UPON REQUEST, BY CALLING TOLL FREE 800-869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com. IT IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT http://www.sec.gov. YOU MAY OBTAIN INFORMATION REGARDING HOW THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JUNE 30 BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT http://www.sec.gov. HOUSEHOLDING NOTICE TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS. YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS. 4 (This page has been left blank intentionally.) 5 PERFORMANCE SUMMARY [CHART] PERFORMANCE OF $10,000 INVESTMENT
RUSSELL 3000(R) ($ IN THOUSANDS) CLASS A~~ CLASS B~~ CLASS C~~ CLASS D~~ GROWTH(1) LIPPER(2) Feb-1999 $ 9,475 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000 Apr-1999 $ 10,138 $ 10,680 $ 10,680 $ 10,700 $ 10,424 $ 10,620 Jul-1999 $ 10,299 $ 10,840 $ 10,840 $ 10,890 $ 10,481 $ 10,892 Oct-1999 $ 11,162 $ 11,720 $ 11,720 $ 11,800 $ 11,168 $ 11,477 Jan-2000 $ 14,137 $ 14,820 $ 14,820 $ 14,960 $ 12,516 $ 14,125 Apr-2000 $ 14,241 $ 14,900 $ 14,900 $ 15,080 $ 13,328 $ 14,950 Jul-2000 $ 14,440 $ 15,080 $ 15,080 $ 15,300 $ 13,014 $ 14,844 Oct-2000 $ 14,989 $ 15,620 $ 15,620 $ 15,880 $ 12,263 $ 14,554 Jan-2001 $ 13,160 $ 13,687 $ 13,687 $ 13,950 $ 7,872 $ 12,804 Apr-2001 $ 11,288 $ 11,719 $ 11,719 $ 11,963 $ 9,096 $ 10,949 Jul-2001 $ 10,352 $ 10,718 $ 10,718 $ 10,976 $ 8,557 $ 10,119 Oct-2001 $ 9,265 $ 9,580 $ 9,580 $ 9,841 $ 7,439 $ 8,435 Jan-2002 $ 9,806 $ 10,118 $ 10,118 $ 10,412 $ 8,012 $ 9,127 Apr-2002 $ 9,666 $ 9,958 $ 9,970 $ 10,275 $ 7,342 $ 8,520 Jul-2002 $ 8,111 $ 8,348 $ 8,360 $ 8,635 $ 6,088 $ 6,797 Oct-2002 $ 7,927 $ 8,143 $ 8,143 $ 8,441 $ 5,972 $ 6,697 Jan-2003 $ 7,484 $ 7,663 $ 7,674 $ 7,974 $ 5,733 $ 6,482 Apr-2003 $ 7,722 $ 7,891 $ 7,903 $ 8,225 $ 6,240 $ 7,018 Jul-2003 $ 8,327 $ 8,497 $ 8,508 $ 8,886 $ 6,859 $ 7,858 Oct-2003 $ 9,072 $ 9,239 $ 9,250 $ 9,672 $ 7,367 $ 8,582 Jan-2004 $ 9,634 $ 9,787 $ 9,798 $ 10,275 $ 7,872 $ 9,146 Apr-2004 $ 9,342 $ 9,479 $ 9,490 $ 9,979 $ 7,671 $ 8,929 Jul-2004 $ 9,007 $ 9,113 $ 9,125 $ 9,626 $ 7,455 $ 8,676 Oct-2004 $ 9,644 $ 9,753 $ 9,764 $ 10,321 $ 7,627 $ 9,075 Jan-2005 $ 10,087 $ 10,187 $ 10,198 $ 10,799 $ 7,947 $ 9,570 Apr-2005 $ 9,688 $ 9,753 $ 9,764 $ 10,378 $ 7,694 $ 9,126 Jul-2005 $ 11,394 $ 11,454 $ 11,466 $ 12,212 $ 8,484 $ 10,315
6 AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED JULY 31, 2005
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++ (SINCE 02/24/99) (SINCE 02/24/99) (SINCE 02/24/99) (SINCE 02/24/99) SYMBOL AEQAX AEQBX AEQCX AEQDX 1 YEAR 26.50%(3) 25.69%(3) 25.66%(3) 26.86%(3) 19.86(4) 20.69(4) 24.66(4) -- 5 YEARS (4.63)(3) (5.35)(3) (5.33)(3) (4.41)(3) (5.65)(4) (5.69)(4) (5.33)(4) -- SINCE INCEPTION 2.91(3) 2.13(3) 2.15(3) 3.16(3) 2.05(4) 2.13(4) 2.15(4) --
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFOMANCE, WHICH IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. FOR THE 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 RUSSELL 3000(R) GROWTH INDEX MEASURES THE PERFORMANCE OF THOSE COMPANIES IN THE RUSSELL 3000(R) INDEX WITH HIGHER PRICE-TO-BOOK RATIOS AND HIGHER FORECASTED GROWTH VALUES. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. (2) THE LIPPER MULTI-CAP GROWTH FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER MULTI-CAP GROWTH FUNDS CLASSIFICATION. THE INDEX, WHICH IS ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS REPRESENTED IN THIS INDEX. (3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE DEDUCTION OF ANY SALES CHARGES. (4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR COMPLETE DETAILS ON FEES AND SALES CHARGES. ~~ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON JULY 31, 2005. 7 EXPENSE EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption fees; and (2) ongoing costs, including advisory fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 02/01/05 - 07/31/05. ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- --------------- 02/01/05 - 02/01/05 07/31/05 07/31/05 ------------- ------------- --------------- CLASS A Actual (12.96% return) $ 1,000.00 $ 1,129.60 $ 7.50 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,017.75 $ 7.10 CLASS B Actual (12.44% return) $ 1,000.00 $ 1,124.40 $ 11.43 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,014.03 $ 10.84 CLASS C Actual (12.43% return) $ 1,000.00 $ 1,124.30 $ 11.38 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,014.08 $ 10.79 CLASS D Actual (13.08% return) $ 1,000.00 $ 1,130.80 $ 6.18 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,018.99 $ 5.86
- ---------- * EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.42%, 2.17%, 2.16% AND 1.17% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). 8 INVESTMENT ADVISORY AGREEMENT APPROVAL NATURE, EXTENT AND QUALITY OF SERVICES The Board reviewed and considered the nature and extent of the investment advisory services provided by the Investment Adviser under the Advisory Agreement, including portfolio management, investment research and equity and fixed income securities trading. The Board also reviewed and considered the nature and extent of the non-advisory, administrative services provided by the Fund's Administrator under the Administration Agreement, including accounting, clerical, bookkeeping, compliance, business management and planning, and the provision of supplies, office space and utilities. (The Investment Adviser and the Administrator together are referred to as the "Adviser" and the Advisory and Administration Agreements together are referred to as the "Management Agreement.") The Board also compared the nature of the services provided by the Adviser with similar services provided by non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper"). The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser who provide the administrative and investment advisory services to the Fund. The Board determined that the Adviser's portfolio managers and key personnel are well qualified by education and/or training and experience to perform the services in an efficient and professional manner. The Board concluded that the nature and extent of the advisory and administrative services provided were necessary and appropriate for the conduct of the business and investment activities of the Fund. The Board also concluded that the overall quality of the advisory and administrative services was satisfactory. PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS The Board reviewed the Fund's performance for the one-, three- and five-year periods ended November 30, 2004, as shown in reports provided by Lipper (the "Lipper Reports"), compared to the performance of comparable funds selected by Lipper (the "performance peer group"), and noted that the Fund's performance was lower than its performance peer group average for the three-year period but better for the one- and five-year periods. The Board concluded that the Fund's overall performance was competitive with its performance peer group. FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT STRATEGIES The Board reviewed the advisory and administrative fees (together, the "management fee") paid by the Fund under the Management Agreement. The Board noted that the rate was comparable to the management fee rates charged by the Adviser to any other funds it manages with investment strategies comparable to those of the Fund. FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS The Board reviewed the management fee rate and the total expense ratio of the Fund. The Board noted that: (i) the Fund's management fee rate was lower than the average management fee rate for funds, selected by Lipper (the "expense peer group"), managed by other advisers with investment strategies comparable to those of the Fund, as 9 shown in the Lipper Report for the Fund; and (ii) the Fund's total expense ratio was also lower than the average total expense ratio of the funds included in the Fund's expense peer group. The Board concluded that the Fund's management fee and total expense ratio were competitive with those of the Fund's expense peer group. BREAKPOINTS AND ECONOMIES OF SCALE The Board reviewed the structure of the Fund's management fee schedule under the Management Agreement and noted that it includes breakpoints. The Board also reviewed the level of the Fund's management fee and noted that the fee, as a percentage of the Fund's net assets, would decrease as net assets increase because the management fee includes breakpoints. The Board concluded that the Fund's management fee would reflect economies of scale as assets increase. PROFITABILITY OF ADVISER AND AFFILIATES The Board considered and reviewed information concerning the costs incurred and profits realized by the Adviser and its affiliates during the last two years from their relationship with the Fund and the Morgan Stanley Fund Complex and reviewed with the Controller of the Adviser the cost allocation methodology used to determine the Adviser's profitability. Based on their review of the information they received, the Board concluded that the profits earned by the Adviser and its affiliates were not excessive in light of the advisory, administrative and other services provided to the Fund. FALL-OUT BENEFITS The Board considered so-called "fall-out benefits" derived by the Adviser and its affiliates from their relationship with the Fund and the Morgan Stanley Fund Complex, such as "float" benefits derived from handling of checks for purchases and redemptions of Fund shares through a broker-dealer affiliate of the Adviser and "soft dollar" benefits (discussed in the next section). The Board also considered that a broker-dealer affiliate of the Adviser receives from the Fund 12b-1 fees for distribution and shareholder services. The Board also considered that an affiliate of the Adviser, through a joint venture, receives revenue in connection with trading done on behalf of the Fund through an electronic trading system network ("ECN"). The Board concluded that the float benefits and the above-referenced ECN-related revenue were relatively small and that the 12b-1 fees were competitive with those of other broker-dealer affiliates of investment advisers of mutual funds. SOFT DOLLAR BENEFITS The Board considered whether the Adviser realizes any benefits as a result of brokerage transactions executed through "soft dollar" arrangements. Under such arrangements, brokerage commissions paid by the Fund and/or other funds managed by the Adviser would be used to pay for research that a securities broker obtains from third parties, or to pay for both research and execution services from securities brokers who effect transactions for the 10 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 Fund Complex. ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS The Board considered whether the Adviser is financially sound and has the resources necessary to perform its obligations under the Management Agreement. The Board noted that the Adviser's operations remain profitable, although increased expenses in recent years have reduced the Adviser's profitability. The Board concluded that the Adviser has the financial resources necessary to fulfill its obligations under the Management Agreement. HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER The Board also reviewed and considered the historical relationship between the Fund and the Adviser, including the organizational structure of the Adviser, the policies and procedures formulated and adopted by the Adviser for managing the Fund's operations and the Board's confidence in the competence and integrity of the senior managers and key personnel of the Adviser. The Board concluded that it is beneficial for the Fund to continue its relationship with the Adviser. OTHER FACTORS AND CURRENT TRENDS The Board considered the controls and procedures adopted and implemented by the Adviser and monitored by the Fund's Chief Compliance Officer and concluded that the conduct of business by the Adviser indicates a good faith effort on its part to adhere to high ethical standards in the conduct of the Fund's business. GENERAL CONCLUSION After considering and weighing all of the above factors, the Board concluded it would be in the best interest of the Fund and its shareholders to approve renewal of the Management Agreement for another year. 11 MORGAN STANLEY AGGRESSIVE EQUITY FUND PORTFOLIO OF INVESTMENTS - JULY 31, 2005
NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------- COMMON STOCKS (99.1%) ADVERTISING/MARKETING SERVICES (6.2%) 164,500 Getty Images, Inc.* $ 13,283,375 145,200 Lamar Advertising Co. (Class A)* 6,390,252 --------------- 19,673,627 --------------- AIR FREIGHT/COURIERS (3.7%) 95,700 C.H. Robinson Worldwide, Inc. 5,987,949 105,800 Expeditors International of Washington, Inc. 5,824,290 --------------- 11,812,239 --------------- CASINO/GAMING (7.0%) 272,300 International Game Technology 7,450,128 134,600 Station Casinos, Inc. 9,886,370 89,160 Wynn Resorts, Ltd.* 5,019,708 --------------- 22,356,206 --------------- CHEMICALS: AGRICULTURAL (3.2%) 151,320 Monsanto Co. 10,194,428 --------------- COMPUTER PROCESSING HARDWARE (1.9%) 152,900 Dell, Inc.* 6,187,863 --------------- CONSTRUCTION MATERIALS (1.1%) 59,300 Rinker Group Ltd. (ADR) (Australia) 3,406,192 --------------- DISCOUNT STORES (5.0%) 134,800 Costco Wholesale Corp. 6,196,756 62,200 Sears Holdings Corp.* 9,593,106 --------------- 15,789,862 --------------- ELECTRONIC PRODUCTION EQUIPMENT (2.2%) 196,000 Tessera Technologies, Inc.* 6,883,520 --------------- GAS DISTRIBUTORS (1.0%) 47,300 Questar Corp. 3,319,514 --------------- HOME BUILDING (2.2%) 7,654 NVR, Inc.* $ 7,179,452 --------------- HOTELS/RESORTS/ CRUISELINES (3.6%) 219,600 Carnival Corp. (Panama) 11,507,040 --------------- INTERNET RETAIL (1.2%) 85,300 Amazon.com, Inc.* 3,853,001 --------------- INTERNET SOFTWARE/ SERVICES (7.8%) 57,100 Google, Inc. (Class A)* 16,431,096 252,500 Yahoo!, Inc.* 8,418,350 --------------- 24,849,446 --------------- INVESTMENT BANKS/ BROKERS (4.8%) 28,555 Chicago Mercantile Exchange Holdings, Inc. 8,596,483 174,899 Greenhill & Co., Inc. 6,709,126 --------------- 15,305,609 --------------- MEDICAL DISTRIBUTORS (1.4%) 101,300 Patterson Companies, Inc.* 4,517,980 --------------- MEDICAL SPECIALTIES (2.6%) 107,500 Dade Behring Holdings Inc. 8,148,500 --------------- MISCELLANEOUS COMMERCIAL SERVICES (5.2%) 205,900 Corporate Executive Board Co. (The) 16,612,012 --------------- OIL & GAS PRODUCTION (6.7%) 23,030 Southwestern Energy Co.* 1,269,183 527,520 Ultra Petroleum Corp. (Canada)* 20,003,558 --------------- 21,272,741 --------------- OTHER CONSUMER SERVICES (9.0%) 78,700 Career Education Corp.* 3,052,773 450,100 eBay Inc.* 18,805,178 69,600 Strayer Education, Inc. 6,850,728 --------------- 28,708,679 ---------------
SEE NOTES TO FINANCIAL STATEMENTS 12
NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------- PACKAGED SOFTWARE (3.2%) 270,700 Red Hat, Inc.* $ 4,125,468 254,500 Salesforce.com Inc.* 5,993,475 --------------- 10,118,943 --------------- PERSONNEL SERVICES (2.9%) 306,600 Monster Worldwide, Inc.* 9,311,442 --------------- PROPERTY - CASUALTY INSURERS (1.8%) 2,074 Berkshire Hathaway, Inc. (Class B)* 5,769,868 --------------- RECREATIONAL PRODUCTS (4.0%) 167,300 Electronic Arts Inc.* 9,636,480 99,800 Shanda Interactive Entertainment, Ltd. (ADR) (Cayman Islands)* 3,264,448 --------------- 12,900,928 --------------- RESTAURANTS (1.9%) 103,900 P.F. Chang's China Bistro, Inc.* 5,921,261 --------------- SEMICONDUCTORS (1.6%) 117,500 Marvell Technology Group Ltd. (Bermuda)* 5,133,575 --------------- SERVICES TO THE HEALTH INDUSTRY (2.5%) 137,884 Stericycle, Inc.* 8,013,818 --------------- SPECIALTY TELECOMMUNICATIONS (2.0%) 298,416 Crown Castle International Corp.* 6,493,532 --------------- WIRELESS TELECOMMUNICATIONS (3.4%) 490,200 America Movil S.A. de C.V. (Series L) (ADR) (Mexico) 10,911,852 --------------- TOTAL COMMON STOCKS (COST $268,078,179) 316,153,130 --------------- PRINCIPAL AMOUNT IN THOUSANDS VALUE - ---------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (1.5%) REPURCHASE AGREEMENT $ 4,783 Joint repurchase agreement account 3.29% due 08/01/05 (dated 07/29/05; proceeds $4,784,311) (a) (COST $4,783,000) $ 4,783,000 --------------- TOTAL INVESTMENTS (COST $272,861,179) (b) 100.6% 320,936,130 LIABILITIES IN EXCESS OF OTHER ASSETS (0.6) (1,959,519) ----- --------------- NET ASSETS 100.0% $ 318,976,611 ===== ===============
- ---------- ADR AMERICAN DEPOSITARY RECEIPT. * NON-INCOME PRODUCING SECURITY. (a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS. (b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $272,861,179. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $51,542,564 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $3,467,613, RESULTING IN NET UNREALIZED APPRECIATION OF $48,074,951. SEE NOTES TO FINANCIAL STATEMENTS 13 MORGAN STANLEY AGGRESSIVE EQUITY SUMMARY OF INVESTMENTS - JULY 31, 2005
PERCENT OF INDUSTRY VALUE NET ASSETS - ------------------------------------------------------------------------------------- Other Consumer Services $ 28,708,679 9.0% Internet Software/Services 24,849,446 7.8 Casino/Gaming 22,356,206 7.0 Oil & Gas Production 21,272,741 6.7 Advertising/ Marketing Services 19,673,627 6.2 Miscellaneous Commercial Services 16,612,012 5.2 Discount Stores 15,789,862 5.0 Investment Banks/Brokers 15,305,609 4.8 Recreational Products 12,900,928 4.0 Air Freight/Couriers 11,812,239 3.7 Hotels/Resorts/Cruiselines 11,507,040 3.6 Wireless Telecommunications 10,911,852 3.4 Chemicals: Agricultural 10,194,428 3.2 Packaged Software 10,118,943 3.2 Personnel Services 9,311,442 2.9 Medical Specialties $ 8,148,500 2.6% Services To The Health Industry 8,013,818 2.5 Home Building 7,179,452 2.2 Electronic Production Equipment 6,883,520 2.2 Specialty Telecommunications 6,493,532 2.0 Computer Processing Hardware 6,187,863 1.9 Restaurants 5,921,261 1.9 Property - Casualty Insurers 5,769,868 1.8 Semiconductors 5,133,575 1.6 Repurchase Agreement 4,783,000 1.5 Medical Distributors 4,517,980 1.4 Internet Retail 3,853,001 1.2 Construction Materials 3,406,192 1.1 Gas Distributors 3,319,514 1.0 --------------- ------------- $ 320,936,130 100.6% =============== =============
SEE NOTES TO FINANCIAL STATEMENTS 14 MORGAN STANLEY AGGRESSIVE EQUITY FUND FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JULY 31, 2005 ASSETS: Investments in securities, at value (cost $272,861,179) $ 320,936,130 Receivable for: Investments sold 738,901 Shares of beneficial interest sold 102,856 Foreign withholding taxes reclaimed 7,060 Prepaid expenses and other assets 32,275 --------------- TOTAL ASSETS 321,817,222 --------------- LIABILITIES: Payable for: Investments purchased 2,052,737 Shares of beneficial interest redeemed 273,061 Distribution fee 237,902 Investment advisory fee 177,747 Administration fee 21,224 Accrued expenses and other payables 77,940 --------------- TOTAL LIABILITIES 2,840,611 --------------- NET ASSETS $ 318,976,611 =============== COMPOSITION OF NET ASSETS: Paid-in-capital $ 666,635,891 Net unrealized appreciation 48,076,892 Accumulated net investment loss (360) Accumulated net realized loss (395,735,812) --------------- NET ASSETS $ 318,976,611 =============== CLASS A SHARES: Net Assets $ 42,145,696 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 3,994,825 NET ASSET VALUE PER SHARE $ 10.55 =============== MAXIMUM OFFERING PRICE PER SHARE, (NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 11.13 =============== CLASS B SHARES: Net Assets $ 244,707,857 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 24,405,840 NET ASSET VALUE PER SHARE $ 10.03 =============== CLASS C SHARES: Net Assets $ 30,385,884 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 3,026,897 NET ASSET VALUE PER SHARE $ 10.04 =============== CLASS D SHARES: Net Assets $ 1,737,174 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 162,118 NET ASSET VALUE PER SHARE $ 10.72 ===============
SEE NOTES TO FINANCIAL STATEMENTS 15 STATEMENT OF OPERATIONS FOR THE YEAR ENDED JULY 31, 2005 NET INVESTMENT LOSS: INCOME Dividends (net of $22,881 foreign withholding tax) $ 2,194,511 Interest 69,162 --------------- TOTAL INCOME 2,263,673 --------------- EXPENSES Distribution fee (Class A shares) 54,354 Distribution fee (Class B shares) 2,828,306 Distribution fee (Class C shares) 316,010 Investment advisory fee 2,338,311 Transfer agent fees and expenses 1,105,189 Administration fee 198,840 Shareholder reports and notices 103,512 Registration fees 65,276 Professional fees 63,642 Custodian fees 37,301 Trustees' fees and expenses 4,538 Other 27,142 --------------- TOTAL EXPENSES 7,142,421 --------------- NET INVESTMENT LOSS (4,878,748) --------------- Net Realized and Unrealized Gain: Net realized gain 47,277,366 Net change in unrealized appreciation 33,865,577 --------------- NET GAIN 81,142,943 --------------- NET INCREASE $ 76,264,195 ===============
SEE NOTES TO FINANCIAL STATEMENTS 16 STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR ENDED ENDED JULY 31, 2005 JULY 31, 2004 -------------- -------------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment loss $ (4,878,748) $ (6,470,810) Net realized gain 47,277,366 68,831,800 Net change in unrealized appreciation/depreciation 33,865,577 (25,961,207) -------------- -------------- NET INCREASE 76,264,195 36,399,783 Net decrease from transactions in shares of beneficial interest (123,847,024) (118,954,439) -------------- -------------- NET DECREASE (47,582,829) (82,554,656) NET ASSETS: Beginning of period 366,559,440 449,114,096 -------------- -------------- END OF PERIOD (INCLUDING ACCUMULATED NET INVESTMENT LOSSES OF $360 AND $215, RESPECTIVELY) $ 318,976,611 $ 366,559,440 ============== ==============
SEE NOTES TO FINANCIAL STATEMENTS 17 MORGAN STANLEY AGGRESSIVE EQUITY FUND NOTES TO FINANCIAL STATEMENTS - JULY 31, 2005 1. ORGANIZATION AND ACCOUNTING POLICIES Morgan Stanley Aggressive Equity 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 capital growth. The Fund was organized as a Massachusetts business trust on October 29, 1997 and commenced operations on February 24, 1999. The Fund offers Class A shares, Class B shares, Class C shares and Class D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within eighteen months, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses. Effective August 29, 2005, the Board of Trustees of the Fund approved the implementation of a 2% redemption fee on Class A shares, Class B shares, Class C shares, and Class D shares, which is paid directly to the Fund, for shares redeemed within seven days of purchase. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading. The following is a summary of significant accounting policies: A. VALUATION OF INVESTMENTS -- (1) an equity portfolio security listed or traded on the New York Stock Exchange ("NYSE") or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) futures are valued at the latest price published by the commodities exchange on which they trade; (6) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Trustees. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities trade) and the close of business on the NYSE. If developments occur during such periods that are 18 expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund's Trustees or by the Investment Adviser using a pricing service and/or procedures approved by the Trustees of the Fund; (7) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; and (8) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily. C. REPURCHASE AGREEMENTS -- Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment Adviser, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, U.S. Treasury or federal agency obligations. The Fund may also invest directly with institutions in repurchase agreements. The Fund's custodian receives the collateral, which is marked-to-market daily to determine that the value of the collateral does not decrease below the repurchase price plus accrued interest. D. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class. E. 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 19 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. F. 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. G. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required. H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to shareholders are recorded on the ex-dividend date. I. USE OF ESTIMATES -- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. 2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS Effective November 1, 2004, pursuant to an Investment Advisory Agreement, the Fund pays the Investment Adviser an advisory fee, accrued daily and payable monthly, by applying the annual rate to the net assets of the Fund determined as of the close of each business day: 0.67% to the portion of the daily net assets not exceeding $500 million; 0.645% to the portion of the daily net assets exceeding $500 million but not exceeding $2 billion; 0.62% to the portion of the daily net assets exceeding $2 billion but not exceeding $3 billion; and 0.595% to the portion of the daily net assets in excess of $3 billion. Effective November 1, 2004, pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% to the Fund's daily net assets. 20 Prior to November 1, 2004, the Fund retained the Investment Adviser to provide administrative services and to manage the investment of the Fund's assets pursuant to an investment management agreement pursuant to which the Fund paid the Investment Adviser a monthly management fee accrued daily and payable monthly, by applying the following annual rates to the net assets of Fund determined as of the close of each business day: 0.75% to the portion of the daily net assets not exceeding $2 billion; and 0.725% to the portion of the daily net assets exceeding $2 billion. 3. PLAN OF DISTRIBUTION Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Adviser and Administrator. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B -- up to 1.0% of the average daily net assets of Class B; and (iii) Class C -- up to 1.0% of the average daily net assets of Class C. In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of 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 $21,275,637 at July 31, 2005. In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the year ended July 31, 2005, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.25% and 0.99%, respectively. The Distributor has informed the Fund that for the year ended July 31, 2005, it received contingent deferred sales charges from certain redemptions of the Fund's Class A shares, Class B shares and Class C shares of $2,000, $647,158 and $2,199, respectively and received $14,059 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. 21 4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the year ended July 31, 2005, aggregated $414,359,967 and $543,449,338, respectively. Included in the aforementioned are purchases and sales with other Morgan Stanley funds of $313,243 and $282,052, respectively including a net realized gain of $50,928. For the year ended July 31, 2005, the Fund incurred brokerage commissions of $21,542 with Morgan Stanley & Co., Inc., an affiliate of the Investment Adviser, Administrator and Distributor, for portfolio transactions executed on behalf of the Fund. At July 31, 2005, Morgan Stanley Fund of Funds -- Domestic Portfolio, an affiliate of the Investment Adviser, Administrator and Distributor held 70,187 Class D shares of beneficial interest of the Fund. Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund's transfer agent. At July 31, 2005, the Fund had transfer agent fees and expenses payable of approximately $6,300. The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan") which allows each independent Trustee to defer payment of all, or a portion, of the fees he receives for serving on the Board of Trustees. Each eligible Trustee generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund. 5. 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. 22 As of July 31, 2005, the tax-basis components of accumulated losses were as follows: Net accumulated earnings -- Capital loss carryforward* $ (395,735,804) Temporary differences (368) Net unrealized appreciation 48,076,892 ----------------- Total accumulated losses $ (347,659,280) =================
*During the year ended July 31, 2005, the Fund utilized $46,857,586 of its net capital loss carryforward. As of July 31, 2005, the Fund had a net capital loss carryforward of $395,735,804 of which $274,679,081 will expire on July 31, 2010 and $121,056,723 will expire on July 31, 2011 to offset future capital gains to the extent provided by regulations. As of July 31, 2005, the Fund had temporary book/tax differences attributable to nondeductible expenses and permanent book/tax differences attributable to a net operating loss. To reflect reclassifications arising from the permanent differences, paid-in-capital was charged and accumulated net investment loss was credited $4,878,603. 6. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS The Fund may enter into forward contracts to facilitate settlement of foreign currency denominated portfolio transactions or to manage foreign currency exposure associated with foreign currency denominated securities. To hedge against adverse interest rate, foreign currency and market risks, the Fund may purchase and sell interest rate, currency and index futures ("futures contracts"). Forward contracts and futures contracts involve elements of market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rates underlying the forward contracts. Risks may also rise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts. 23 7. SHARES OF BENEFICIAL INTEREST Transactions in shares of beneficial interest were as follows:
FOR THE YEAR FOR THE YEAR ENDED ENDED JULY 31, 2005 JULY 31, 2004 -------------------------------- -------------------------------- SHARES AMOUNT SHARES AMOUNT -------------- -------------- -------------- -------------- CLASS A SHARES Sold 231,806 $ 2,009,382 220,437 $ 1,847,474 Conversion from Class B 2,971,793 26,716,883 -- -- Redeemed (1,195,775) (11,026,653) (611,642) (5,246,780) -------------- -------------- -------------- -------------- Net increase (decrease) -- Class A 2,007,824 17,699,612 (391,205) (3,399,306) -------------- -------------- -------------- -------------- CLASS B SHARES Sold 607,812 5,372,272 1,388,713 11,363,567 Conversion to Class A (3,122,042) (26,716,883) -- -- Redeemed (12,433,367) (108,895,987) (14,138,172) (116,228,250) -------------- -------------- -------------- -------------- Net decrease -- Class B (14,947,597) (130,240,598) (12,749,459) (104,864,683) -------------- -------------- -------------- -------------- CLASS C SHARES Sold 113,688 1,001,636 226,518 1,868,007 Redeemed (1,304,111) (11,509,513) (1,452,268) (11,955,602) -------------- -------------- -------------- -------------- Net decrease -- Class C (1,190,423) (10,507,877) (1,225,750) (10,087,595) -------------- -------------- -------------- -------------- CLASS D SHARES Sold 9,562 90,754 110,174 951,405 Redeemed (94,938) (888,915) (179,248) (1,554,260) -------------- -------------- -------------- -------------- Net decrease -- Class D (85,376) (798,161) (69,074) (602,855) -------------- -------------- -------------- -------------- Net decrease in Fund (14,215,572) $ (123,847,024) (14,435,488) $ (118,954,439) ============== ============== ============== ==============
8. LEGAL MATTERS The Investment Adviser, certain affiliates of the Investment Adviser, certain officers of such affiliates and certain investment companies advised by the Investment Adviser or its affiliates, including the 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 24 compensatory damages, rescissionary damages, fees and costs. The defendants have moved to dismiss the action and intend to otherwise vigorously defend it. On March 10, 2005, Plaintiffs sought leave to supplement their complaint to assert claims on behalf of other investors. While the Fund and Adviser believe that each has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter. 25 MORGAN STANLEY AGGRESSIVE EQUITY FUND FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE YEAR ENDED JULY 31, ------------------------------------------------------------------------ 2005 2004 2003 2002 2001 ------------ ------------ ------------ ------------ ------------ CLASS A SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 8.34 $ 7.71 $ 7.51 $ 9.62 $ 15.24 ------------ ------------ ------------ ------------ ------------ Income (loss) from investment operations: Net investment loss++ (0.08) (0.07) (0.02) (0.03) 0.00 Net realized and unrealized gain (loss) 2.29 0.70 0.22 (2.05) (3.90) ------------ ------------ ------------ ------------ ------------ Total income (loss) from investment operations 2.21 0.63 0.20 (2.08) (3.90) ------------ ------------ ------------ ------------ ------------ Less distributions from net realized gains - - - (0.03) (1.72) ------------ ------------ ------------ ------------ ------------ Net asset value, end of period $ 10.55 $ 8.34 $ 7.71 $ 7.51 $ 9.62 ============ ============ ============ ============ ============ TOTAL RETURN+ 26.50% 8.17% 2.66% (21.65)% (28.31)% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.42% 1.37% 1.40% 1.29% 1.16% Net investment loss (0.75)% (0.77)% (0.32)% (0.39)% (0.03)% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 42,146 $ 16,564 $ 18,340 $ 21,888 $ 39,662 Portfolio turnover rate 123% 219% 263% 325% 399%
- ---------- ++ 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 26
FOR THE YEAR ENDED JULY 31, ------------------------------------------------------------------------ 2005 2004 2003 2002 2001 ------------ ------------ ------------ ------------ ------------ CLASS B SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 7.98 $ 7.44 $ 7.31 $ 9.42 $ 15.08 ------------ ------------ ------------ ------------ ------------ Income (loss) from investment operations: Net investment loss++ (0.13) (0.12) (0.08) (0.10) (0.10) Net realized and unrealized gain (loss) 2.18 0.66 0.21 (1.98) (3.84) ------------ ------------ ------------ ------------ ------------ Total income (loss) from investment operations 2.05 0.54 0.13 (2.08) (3.94) ------------ ------------ ------------ ------------ ------------ Less distributions from net realized gains - - - (0.03) (1.72) ------------ ------------ ------------ ------------ ------------ Net asset value, end of period $ 10.03 $ 7.98 $ 7.44 $ 7.31 $ 9.42 ============ ============ ============ ============ ============ TOTAL RETURN+ 25.69% 7.26% 1.78% (22.11)% (28.93)% RATIOS TO AVERAGE NET ASSETS(1): Expenses 2.17% 2.13% 2.15% 2.05% 1.94% Net investment loss (1.50)% (1.53)% (1.07)% (1.15)% (0.81)% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 244,708 $ 314,195 $ 387,751 $ 492,959 $ 881,115 Portfolio turnover rate 123% 219% 263% 325% 399%
- ---------- ++ 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 27
FOR THE YEAR ENDED JULY 31, ------------------------------------------------------------------------ 2005 2004 2003 2002 2001 ------------ ------------ ------------ ------------ ------------ CLASS C SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 7.99 $ 7.45 $ 7.32 $ 9.42 $ 15.08 ------------ ------------ ------------ ------------ ------------ Income (loss) from investment operations: Net investment loss++ (0.13) (0.12) (0.08) (0.09) (0.10) Net realized and unrealized gain (loss) 2.18 0.66 0.21 (1.98) (3.84) ------------ ------------ ------------ ------------ ------------ Total income (loss) from investment operations 2.05 0.54 0.13 (2.07) (3.94) ------------ ------------ ------------ ------------ ------------ Less distributions from net realized gains - - - (0.03) (1.72) ------------ ------------ ------------ ------------ ------------ Net asset value, end of period $ 10.04 $ 7.99 $ 7.45 $ 7.32 $ 9.42 ============ ============ ============ ============ ============ TOTAL RETURN+ 25.66% 7.25% 1.78% (22.00)% (28.93)% RATIOS TO AVERAGE NET ASSETS(1): Expenses 2.16% 2.12% 2.15% 1.93% 1.94% Net investment loss (1.49)% (1.52)% (1.07)% (1.03)% (0.81)% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 30,386 $ 33,710 $ 40,555 $ 49,639 $ 83,603 Portfolio turnover rate 123% 219% 263% 325% 399%
- ---------- ++ 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 28
FOR THE YEAR ENDED JULY 31, ------------------------------------------------------------------------ 2005 2004 2003 2002 2001 ------------ ------------ ------------ ------------ ------------ CLASS D SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 8.45 $ 7.80 $ 7.58 $ 9.68 $ 15.30 ------------ ------------ ------------ ------------ ------------ Income (loss) from investment operations: Net investment income (loss)++ (0.05) (0.04) (0.01) (0.01) 0.02 Net realized and unrealized gain (loss) 2.32 0.69 0.23 (2.06) (3.92) ------------ ------------ ------------ ------------ ------------ Total income (loss) from investment operations 2.27 0.65 0.22 (2.07) (3.90) ------------ ------------ ------------ ------------ ------------ Less distributions from net realized gains - - - (0.03) (1.72) ------------ ------------ ------------ ------------ ------------ Net asset value, end of period $ 10.72 $ 8.45 $ 7.80 $ 7.58 $ 9.68 ============ ============ ============ ============ ============ TOTAL RETURN+ 26.86% 8.33% 2.90% (21.33)% (28.26)% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.17% 1.13% 1.15% 1.05% 0.94% Net investment income (loss) (0.50)% (0.53)% (0.07)% (0.15)% 0.19% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 1,737 $ 2,091 $ 2,468 $ 2,622 $ 5,111 Portfolio turnover rate 123% 219% 263% 325% 399%
- ---------- ++ 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 29 MORGAN STANLEY AGGRESSIVE EQUITY FUND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF MORGAN STANLEY AGGRESSIVE EQUITY FUND: We have audited the accompanying statement of assets and liabilities of Morgan Stanley Aggressive Equity Fund (the "Fund"), including the portfolio of investments, as of July 31, 2005, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of July 31, 2005, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Morgan Stanley Aggressive Equity Fund as of July 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP NEW YORK, NEW YORK SEPTEMBER 16, 2005 30 MORGAN STANLEY AGGRESSIVE EQUITY FUND TRUSTEE AND OFFICER INFORMATION INDEPENDENT TRUSTEES:
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE - ------------------------ ----------- ------------ ------------------------------ ------------- ------------------------------ Michael Bozic (64) Trustee Since April Private Investor; Director or 197 Director of various business c/o Kramer Levin 1994 Trustee of the Retail Funds organizations. Naftalis & Frankel LLP (since April 1994) and the Counsel to the Institutional Funds (since Independent Trustees July 2003); formerly Vice 1177 Avenue of the Chairman of Kmart Corporation Americas (December 1998-October 2000), New York, NY 10036 Chairman and Chief Executive Officer of Levitz Furniture Corporation (November 1995-November 1998) and President and Chief Executive Officer of Hills Department Stores (May 1991-July 1995); formerly variously Chairman, Chief Executive Officer, President and Chief Operating Officer (1987-1991) of the Sears Merchandise Group of Sears, Roebuck & Co. Edwin J. Garn (72) Trustee Since Consultant; Director or 197 Director of Franklin Covey 1031 N. Chartwell Court January 1993 Trustee of the Retail Funds (time management systems), BMW Salt Lake City, UT 84103 (since January 1993) and the Bank of North America, Inc. Institutional Funds (since (industrial loan corporation), July 2003); member of the Utah Escrow Bank USA (industrial Regional Advisory Board of loan corporation), United Pacific Corp. (utility Space Alliance (joint venture company); formerly Managing between Lockheed Martin and Director of Summit Ventures the Boeing Company) and Nuskin LLC (lobbying and consulting Asia Pacific (multilevel firm) (2000-2004); United marketing); member of the States Senator (R-Utah) board of various civic and (1974-1992) and Chairman, charitable organizations. Senate Banking Committee (1980-1986), Mayor of Salt Lake City, Utah (1971-1974), Astronaut, Space Shuttle Discovery (April 12-19, 1985), and Vice Chairman, Huntsman Corporation (chemical company). Wayne E. Hedien (71) Trustee Since Retired; Director or Trustee 197 Director of The PMI Group Inc. c/o Kramer Levin September of the Retail Funds (since (private mortgage insurance); Naftalis & Frankel LLP 1997 September 1997) and the Trustee and Vice Chairman of Counsel to the Institutional Funds (since The Field Museum of Natural Independent Trustees July 2003); formerly History; director of various 1177 Avenue of the associated with the Allstate other business and charitable Americas Companies (1966-1994), most organizations. New York, NY 10036 recently as Chairman of The Allstate Corporation (March 1993-December 1994) and Chairman and Chief Executive Officer of its wholly-owned subsidiary, Allstate Insurance Company (July 1989-December 1994).
31
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE - ------------------------ ----------- ------------ ------------------------------ ------------- ------------------------------ Dr. Manuel H. Johnson Trustee Since July Senior Partner, Johnson 197 Director of NVR, Inc. (home (56) 1991 Smick International, Inc., construction); Director of c/o Johnson Smick Group, a consulting firm; Chairman KFX Energy; Director of RBS Inc. of the Audit Committee and Greenwich Capital Holdings 888 16th Street, NW Director or Trustee of the (financial holding Suite 740 Retail Funds (since July company). Washington, D.C. 20006 1991) and the Institutional Funds (since July 2003); Co-Chairman and a founder of the Group of Seven Council (G7C), an international economic commission; formerly Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury. Joseph J. Kearns (62) Trustee Since July President, Kearns & Associates 198 Director of Electro Rent c/o Kearns & Associates 2003 LLC (investment consulting); Corporation (equipment LLC Deputy Chairman of the Audit leasing), The Ford Family PMB754 Committee and Director or Foundation, and the UCLA 23852 Pacific Coast Trustee of the Retail Funds Foundation. Highway (since July 2003) and the Malibu, CA 90265 Institutional Funds (since August 1994); previously Chairman of the Audit Committee of the Institutional Funds (October 2001- July 2003); formerly CFO of the J. Paul Getty Trust. Michael E. Nugent (69) Trustee Since July General Partner of Triumph 197 Director of various business c/o Triumph Capital, 1991 Capital, L.P., a private organizations. L.P. investment partnership; 445 Park Avenue Chairman of the Insurance New York, NY 10022 Committee and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2001); formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988). Fergus Reid (72) Trustee Since July Chairman of Lumelite Plastics 198 Trustee and Director of c/o Lumelite Plastics 2003 Corporation; Chairman of the certain investment companies Corporation Governance Committee and in the JPMorgan Funds complex 85 Charles Colman Blvd. Director or Trustee of the managed by J.P. Morgan Pawling, NY 12564 Retail Funds (since July 2003) Investment Management Inc. and the Institutional Funds (since June 1992).
32 INTERESTED TRUSTEES:
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER DIRECTORSHIPS INTERESTED TRUSTEE REGISTRANT TIME SERVED* PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE - ------------------------ ----------- ------------ ------------------------------ ------------- ------------------------------ Charles A. Fiumefreddo Chairman of Since July Chairman and Director or 197 None. (72) the Board 1991 Trustee of the Retail Funds c/o Morgan Stanley Trust and Trustee (since July 1991) and the Harborside Financial Institutional Funds (since Center, July 2003); formerly Chief Plaza Two, Executive Officer of the Jersey City, NJ 07311 Retail Funds (until September 2002). James F. Higgins (57) Trustee Since June Director or Trustee of the 197 Director of AXA Financial, c/o Morgan Stanley Trust 2000 Retail Funds (since June Inc. and The Equitable Life Harborside Financial 2000) and the Institutional Assurance Society of the Center, Funds (since July 2003); United States (financial Plaza Two, Senior Advisor of Morgan services). Jersey City, NJ 07311 Stanley (since August 2000); Director of the Distributor and Dean Witter Realty Inc.; previously President and Chief Operating Officer of the Private Client Group of Morgan Stanley (May 1999- August 2000), and President and Chief Operating Officer of Individual Securities of Morgan Stanley (February 1997-May 1999).
- ---------- * THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT ADVISER") (THE "RETAIL FUNDS"). ** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE "INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE DIRECTOR/TRUSTEE BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS, AS APPLICABLE. *** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT ADVISER AND ANY FUNDS THAT HAVE AN INVESTMENT ADVISER THAT IS AN AFFILIATED PERSON OF THE INVESTMENT ADVISER (INCLUDING, BUT NOT LIMITED TO, MORGAN STANLEY INVESTMENT MANAGEMENT INC.) 33 OFFICERS:
TERM OF POSITION(S) OFFICE AND NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** - ------------------------------ ------------- -------------- ----------------------------------------------------------------- Mitchell M. Merin (51) President Since May 1999 President and Chief Operating Officer of Morgan Stanley 1221 Avenue of the Americas Investment Management Inc.; President, Director and Chief New York, NY 10020 Executive Officer of the Investment Adviser and the Administrator; Chairman and Director of the Distributor; Chairman and Director of the Transfer Agent; Director of various Morgan Stanley subsidiaries; President of the Institutional Funds (since July 2003) and President of the Retail Funds (since May 1999); Trustee (since July 2003) and President (since December 2002) of the Van Kampen Closed-End Funds; Trustee and President (since October 2002) of the Van Kampen Open-End Funds. Ronald E. Robison (66) Executive Since April Principal Executive Officer of Funds in the Fund Complex (since 1221 Avenue of the Americas Vice 2003 May 2003); Managing Director of Morgan Stanley & Co. New York, NY 10020 President and Incorporated, Morgan Stanley Investment Management Inc. and Principal Morgan Stanley; Managing Director, Chief Administrative Officer Executive and Director of the Investment Adviser and the Administrator; Officer Director of the Transfer Agent; Managing Director and Director of the Distributor; Executive Vice President and Principal Executive Officer of the Institutional Funds (since July 2003) and the Retail Funds (since April 2003); Director of Morgan Stanley SICAV (since May 2004); previously, President and Director of the Institutional Funds (March 2001-July 2003) and Chief Global Operations Officer and Managing Director of Morgan Stanley Investment Management Inc. Joseph J. McAlinden (62) Vice Since July Managing Director and Chief Investment Officer of the Investment 1221 Avenue of the Americas President 1995 Adviser and Morgan Stanley Investment Management Inc.; Chief New York, NY 10020 Investment Officer of the Van Kampen Funds; Vice President of the Institutional Funds (since July 2003) and the Retail Funds (since July 1995). Barry Fink (50) Vice Since February General Counsel (since May 2000) and Managing Director (since 1221 Avenue of the Americas President 1997 December 2000) of Morgan Stanley Investment Management Inc.; New York, NY 10020 Managing Director (since December 2000), Secretary (since February 1997) and Director of the Investment Adviser and the Administrator; Vice President of the Retail Funds; Assistant Secretary of Morgan Stanley DW; Vice President of the Institutional Funds (since July 2003); Managing Director, Secretary and Director of the Distributor; previously Secretary (February 1997-July 2003) and General Counsel (February 1997-April 2004) of the Retail Funds; Vice President and Assistant General Counsel of the Investment Adviser and the Administrator (February 1997- December 2001). Amy R. Doberman (43) Vice Since July Managing Director and General Counsel, U.S. Investment 1221 Avenue of the Americas President 2004 Management; Managing Director of Morgan Stanley Investment New York, NY 10020 Management Inc. and the Investment Adviser, Vice President of the Institutional and Retail Funds (since July 2004); Vice President of the Van Kampen Funds (since August 2004); previously, Managing Director and General Counsel - Americas, UBS Global Asset Management (July 2000-July 2004) and General Counsel, Aeltus Investment Management, Inc. (January 1997-July 2000). Carsten Otto (41) Chief Since October Executive Director and U.S. Director of Compliance for Morgan 1221 Avenue of the Americas Compliance 2004 Stanley Investment Management (since October 2004); Executive New York, NY 10020 Officer Director of the Investment Adviser and Morgan Stanley Investment Management Inc.; formerly Assistant Secretary and Assistant General Counsel of the Morgan Stanley Retail Funds.
34
TERM OF POSITION(S) OFFICE AND NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** - ------------------------------ ------------- -------------- ----------------------------------------------------------------- Stefanie V. Chang (38) Vice Since July Executive Director of Morgan Stanley & Co. Incorporated, Morgan 1221 Avenue of the Americas President 2003 Stanley Investment Management Inc. and the Investment Adviser; New York, NY 10020 Vice President of the Institutional Funds (since December 1997) and the Retail Funds (since July 2003); formerly practiced law with the New York law firm of Rogers & Wells (now Clifford Chance US LLP). Francis J. Smith (39) Treasurer and Treasurer Executive Director of the Investment Adviser and the c/o Morgan Stanley Trust Chief since July Administration (since December 2001); previously, Vice President Harborside Financial Center, Financial 2003 and Chief of the Retail Funds (September 2002-July 2003); Vice President of Plaza Two, Officer Financial the Investment Adviser and the Administrator (August Jersey City, NJ 07311 Officer since 2000-November 2001) and Senior Manager at PricewaterhouseCoopers September 2002 LLP (January 1998-August 2000). Thomas F. Caloia (59) Vice Since July Executive Director (since December 2002) and Assistant Treasurer c/o Morgan Stanley Trust President 2003 of the Investment Adviser, the Distributor and the Administrator; Harborside Financial Center, previously Treasurer of the Retail Funds (April 1989-July 2003); Plaza Two, formerly First Vice President of the Investment Adviser, the Jersey City, NJ 07311 Distributor and the Administrator. Mary E. Mullin (38) Secretary Since July Executive Director of Morgan Stanley & Co. Incorporated, Morgan 1221 Avenue of the Americas 2003 Stanley Investment Management Inc. and the Investment Adviser; New York, NY 10020 Secretary of the Institutional Funds (since June 1999) and the Retail Funds (since July 2003); formerly practiced law with the New York law firms of McDermott, Will & Emery and Skadden, Arps, Slate, Meagher & Flom LLP.
- ---------- * THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. EACH OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS ELECTED. ** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICE AS AN OFFICER FOR THE RETAIL AND INSTITUTIONAL FUNDS REFLECT THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS, AS APPLICABLE. 35 TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael E. Nugent Fergus Reid OFFICERS Charles A. Fiumefreddo CHAIRMAN OF THE BOARD Mitchell M. Merin PRESIDENT Ronald E. Robison EXECUTIVE VICE PRESIDENT and PRINCIPAL EXECUTIVE OFFICER Joseph J. McAlinden VICE PRESIDENT Barry Fink VICE PRESIDENT Amy R. Doberman VICE PRESIDENT Carsten Otto CHIEF COMPLIANCE OFFICER Stefanie V. Chang VICE PRESIDENT Francis J. Smith TREASURER and CHIEF FINANCIAL OFFICER Thomas F. Caloia VICE PRESIDENT Mary E. Mullin SECRETARY TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT ADVISER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. (C) 2005 Morgan Stanley [MORGAN STANLEY LOGO] 36052RPT-RA05-00749P-Y07/05 [GRAPHIC] MORGAN STANLEY FUNDS MORGAN STANLEY AGGRESSIVE EQUITY FUND ANNUAL REPORT JULY 31, 2005 [MORGAN STANLEY LOGO] Item 2. Code of Ethics. (a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Fund or a third party. (b) No information need be disclosed pursuant to this paragraph. (c) The Fund has amended its Code of Ethics during the period covered by the shareholder report presented in Item 1 hereto to delete from the end of the following paragraph on page 2 of the Code the phrase "to the detriment of the Fund.": "Each Covered Officer must not use his personal influence or personal relationship improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally (directly or indirectly)." (d) Not applicable. (e) Not applicable. (f) (1) The Fund's Code of Ethics is attached hereto as Exhibit A. (2) Not applicable. (3) Not applicable. Item 3. Audit Committee Financial Expert. The Fund's Board of Trustees has determined that it has two "audit committee financial experts" serving on its audit committee, each of whom are "independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Trustees in the absence of such designation or identification. Item 4. Principal Accountant Fees and Services. (a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2005 REGISTRANT COVERED ENTITIES(1) AUDIT FEES $ 32,666 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ 540(2) $ 3,215,745(2) TAX FEES $ 5,502(3) $ 24,000(4) ALL OTHER FEES $ - $ - TOTAL NON-AUDIT FEES $ 6,042 $ 3,239,745 TOTAL $ 38,708 $ 3,239,745 2004 REGISTRANT COVERED ENTITIES(1) AUDIT FEES $ 31,230 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ 452(2) $ 3,225,276(2) TAX FEES $ 4,889(3) $ 610,053(4) ALL OTHER FEES $ - $ -(5) TOTAL NON-AUDIT FEES $ 5,341 $ 3,835,329 TOTAL $ 36,571 $ 3,835,329
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. (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. 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 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 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 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. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Applicable only to reports filed by closed-end funds. Item 8. Portfolio Managers of Closed-End Management Investment Companies Applicable only to reports filed by closed-end funds. Item 9. Closed-End Fund Repurchases Applicable only to reports filed by closed-end funds. Item 10. Submission of Matters to a Vote of Security Holders Not applicable. Item 11. Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits (a) The Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. 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 Aggressive Equity Fund /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer September 20, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer September 20, 2005 /s/ Francis Smith Francis Smith Principal Financial Officer September 20, 2005 EX-99.CODEETH 2 a2163027zex-99_codeeth.txt EX-99.CODEETH EXHIBIT 12 A CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS ADOPTED SEPTEMBER 28, 2004 I. This Code of Ethics (the "Code") for the investment companies within the Morgan Stanley complex identified in Exhibit A (collectively, "Funds" and each, a "Fund") applies to each Fund's Principal Executive Officer, President, Principal Financial Officer and Treasurer (or persons performing similar functions) ("Covered Officers" each of whom are set forth in Exhibit B) for the purpose of promoting: - honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. - full, fair, accurate, timely and understandable disclosure in reports and documents that a company files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Fund; - compliance with applicable laws and governmental rules and regulations; - prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and - accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. Any question about the application of the Code should be referred to the General Counsel or his/her designee (who is set forth in Exhibit C). II. COVERED OFFICERS SHOULD HANDLE ETHICALLY ACTUAL AND APPARENT CONFLICTS OF INTEREST OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes, or appears to interfere, with the interests of, or his service to, the Fund. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the Fund. Certain conflicts of interest arise out of the relationships between Covered Officers and the Fund and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Fund because of their status as "affiliated persons" (as defined in the Investment Company Act) of the Fund. The Fund's and its investment adviser's compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside the parameters of this Code, unless or until the General Counsel determines that any violation of such programs and procedures is also a violation of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts may arise from, or as a result of, the contractual relationship between the Fund and its investment adviser of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Fund or for the investment adviser, or for both), be involved in establishing policies and implementing decisions that will have different effects on the Fund and its investment adviser. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Fund and the investment adviser and is consistent with the performance by the Covered Officers of their duties as officers of the Fund. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Funds' Boards of Directors/Trustees ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Fund. Each Covered Officer must not: - use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally (directly or indirectly); - cause the Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Fund; or - use material non-public knowledge of portfolio transactions made or contemplated for, or actions proposed to be taken by, the Fund to trade personally or cause others to trade personally in contemplation of the market effect of such transactions. Each Covered Officer must, at the time of signing this Code, report to the General Counsel all affiliations or significant business relationships outside the Morgan Stanley complex and must update the report annually. Conflict of interest situations should always be approved by the General Counsel and communicated to the relevant Fund or Fund's Board. Any activity or relationship that would present such a conflict for a Covered Officer would likely also present a conflict for the Covered Officer if an immediate member of the Covered Officer's family living in the same household engages in such an activity or has such a relationship. Examples of these include: - service or significant business relationships as a director on the board of any public or private company; - accepting directly or indirectly, anything of value, including gifts and gratuities in excess of $100 per year from any person or entity with which the Fund has current or prospective business dealings, not including occasional meals or tickets for theatre or sporting events or other similar entertainment; provided it is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety; - any ownership interest in, or any consulting or employment relationship with, any of the Fund's service providers, other than its investment adviser, principal underwriter, or any affiliated person thereof; and - a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Fund for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. III. DISCLOSURE AND COMPLIANCE - Each Covered Officer should familiarize himself/herself with the disclosure and compliance requirements generally applicable to the Funds; - each Covered Officer must not knowingly misrepresent, or cause others to misrepresent, facts about the Fund to others, whether within or outside the Fund, including to the Fund's Directors/Trustees and auditors, or to governmental regulators and self-regulatory organizations; - each Covered Officer should, to the extent appropriate within his area of responsibility, consult with other officers and employees of the Funds and their investment advisers with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and - it is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. IV. REPORTING AND ACCOUNTABILITY Each Covered Officer must: - upon adoption of the Code (thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Boards that he has received, read and understands the Code; - annually thereafter affirm to the Boards that he has complied with the requirements of the Code; - not retaliate against any other Covered Officer, other officer or any employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; and - notify the General Counsel promptly if he/she knows or suspects of any violation of this Code. Failure to do so is itself a violation of this Code. The General Counsel is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any waivers(2) sought by a Covered Officer must be considered by the Board of the relevant Fund or Funds. The Funds will follow these procedures in investigating and enforcing this Code: - the General Counsel will take all appropriate action to investigate any potential violations reported to him; - if, after such investigation, the General Counsel believes that no violation has occurred, the General Counsel is not required to take any further action; - any matter that the General Counsel believes is a violation will be reported to the relevant Fund's Audit Committee; - if the directors/trustees/managing general partners who are not "interested persons" as defined by the Investment Company Act (the "Independent Directors/Trustees/Managing General Partners") of the relevant Fund concur that a violation has occurred, they will consider appropriate action, which may include review of, and appropriate modifications to, applicable - ---------- (2) Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics." policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer or other appropriate disciplinary actions; - the Independent Directors/Trustees/Managing General Partners of the relevant Fund will be responsible for granting waivers of this Code, as appropriate; and - any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, the Funds' investment advisers, principal underwriters, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code unless any provision of this Code conflicts with any applicable federal or state law, in which case the requirements of such law will govern. The Funds' and their investment advisers' and principal underwriters' codes of ethics under Rule 17j-1 under the Investment Company Act and Morgan Stanley's Code of Ethics are separate requirements applying to the Covered Officers and others, and are not part of this Code. VI. AMENDMENTS Any amendments to this Code, other than amendments to Exhibits A, B or C, must be approved or ratified by a majority vote of the Board of each Fund, including a majority of Independent Directors/Trustees/Managing General Partners. VII. CONFIDENTIALITY All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the Independent Directors/Trustees/Managing General Partners of the relevant Fund or Funds and their counsel, the relevant Fund or Funds and their counsel and the relevant investment adviser and its counsel. VIII. INTERNAL USE The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Fund, as to any fact, circumstance, or legal conclusion I have read and understand the terms of the above Code. I recognize the responsibilities and obligations incurred by me as a result of my being subject to the Code. I hereby agree to abide by the above Code. __________________________ Date:_____________________ EXHIBIT B INSTITUTIONAL FUNDS COVERED OFFICERS Mitchell M. Merin - President Ronald E. Robison - Executive Vice President and Principal Executive Officer James W. Garrett - Chief Financial Officer and Treasurer RETAIL FUNDS COVERED OFFICERS Mitchell M. Merin - President Ronald E. Robison - Executive Vice President and Principal Executive Officer Frank Smith - Chief Financial Officer and Treasurer EXHIBIT C GENERAL COUNSEL Barry Fink EX-99.CERT 3 a2163027zex-99_cert.txt EX-99.CERT EXHIBIT 12 B1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER CERTIFICATIONS I, Ronald E. Robison, certify that: 1. I have reviewed this report on Form N-CSR of Morgan Stanley Aggressive Equity Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: September 20, 2005 /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer EXHIBIT 12 B2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER CERTIFICATIONS I, Francis Smith, certify that: 1. I have reviewed this report on Form N-CSR of Morgan Stanley Aggressive Equity Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: September 20, 2005 /s/ Francis Smith Francis Smith Principal Financial Officer EX-99.906CERT 4 a2163027zex-99_906cert.txt EX-99.906CERT SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Aggressive Equity Fund In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended July 31, 2005 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: September 20, 2005 /s/ Ronald E. Robison --------------------- Ronald E. Robison Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Aggressive Equity Fund and will be retained by Morgan Stanley Aggressive Equity Fund and furnished to the Securities and Exchange Commission or its staff upon request. SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Aggressive Equity Fund In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended July 31, 2005 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: September 20, 2005 /s/ Francis Smith ----------------- Francis Smith Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Aggressive Equity Fund and will be retained by Morgan Stanley Aggressive Equity Fund and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----