-----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, V9uK5goXtJquLC1EUjJgxVNk7v+q4MtcyQ1LltqKEAMnTLcd0uDbImVvUA81l/Hp n2biq0AGv7mF6yEtSnmGKA== 0001047469-05-023485.txt : 20050928 0001047469-05-023485.hdr.sgml : 20050928 20050928090901 ACCESSION NUMBER: 0001047469-05-023485 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 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 ALLOCATOR FUND CENTRAL INDEX KEY: 0001201932 IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-21248 FILM NUMBER: 051106697 BUSINESS ADDRESS: STREET 1: 1221 AVE OF THE AMERICAS STREET 2: 22ND FL CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2127625065 N-CSRS 1 a2163025zn-csrs.txt N-CSRS 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: 811-21248 Morgan Stanley Allocator 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: January 31, 2006 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 ALLOCATOR FUND PERFORMED DURING THE SEMIANNUAL 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 six months ended July 31, 2005 TOTAL RETURN FOR THE 6 MONTHS ENDED JULY 31, 2005
LEHMAN LIPPER BROTHERS U.S. FLEXIBLE S&P 500(R) AGGREGATE PORTFOLIO CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2) FUNDS INDEX(3) 4.28% 3.85% 3.98% 4.39% 5.44% 0.95% 4.49%
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 U.S. economic expansion continued over the six-months ending July 31, 2005. With the economy growing, payrolls expanding, albeit modestly, and a moderate pick up in inflation, the Federal Open Market Committee (the "Fed") continued to tighten monetary policy through four 25 basis point moves, raising the federal funds target rate from 2.25 percent to 3.25 percent. The manufacturing sector, which had been a prime area of concern for investors earlier in the year, regained strength towards the end of the period as both the Industrial Production index (which measures levels of output for manufacturing, mining, and utilities) and the Institute for Supply Management manufacturing index pointed to a re-acceleration in manufacturing. Stock market performance was mostly positive at the sector level during the period. All but one sector within the S&P 500(R) Index posted positive returns, led by the energy, utilities and healthcare sectors. Materials was the only sector that generated a negative return. Across the broader stock market, small-caps and mid-caps more than doubled the return of their larger counterparts for the period; and value stocks generally outperformed growth securities. The bond market continued to experience volatility during the period. After reaching a high in March, long-term bond yields began to fall again until reaching a low in June. Meanwhile, short-term yields continued to move up and the yield curve continued to flatten throughout June, a situation which Federal Reserve Chairman Alan Greenspan characterized as a "conundrum." However, after the Fed raised the target rate an additional 25 basis points on June 30, 2005 to 3.25 percent, long-term yields began to rise again. Yields continued to rise through July, and the yield on the 10-year Treasury ended the period at 4.2 percent. PERFORMANCE ANALYSIS Morgan Stanley Allocator Fund underperformed the S&P 500(R) Index, outperformed the Lehman Brothers U.S. Aggregate Index and underperformed the Lipper Flexible Portfolio Funds Index for the six-months ended July 31, 2005, assuming no deduction of applicable sales charges. During the reporting period, the Fund generally held an overweight position in stocks and an underweight position in bonds relative to many of its Lipper group peers. The Fund's overall performance benefited from this emphasis on stocks, as the S&P 500(R) Index outperformed the Lehman Brothers U.S. Aggregate Index by a substantial margin. However, sector allocation within the equity portion of the Fund slowed its relative pace, especially in the first half of the period. 2 Throughout the period, the Fund maintained a considerably underweighted position in energy producers and a complementary overweighted position in select energy consumers relative to the S&P 500(R) Index. This position was based on the premise that oil prices were set to retreat after surging to record highs late in 2004. As commodity prices, including oil, started to decline in the second half of the reporting period, this stance benefited the Fund, although not enough to fully offset the impact of this strategy during the earlier portion of the period. With the Fed showing no signs of slowing its "measured" pace of rate hikes, the Fund was positioned for an increase in long-term bond yields. For example, the Fund's equity portfolio was underweighted relative to the S&P 500(R) Index in interest-rate sensitive sectors such as financials, real estate, and utilities. However, although short-term rates rose in response to the Fed's actions, long-term bond yields remained low. As a result, the interest-rate sensitive sectors continued to outperform the S&P 500(R) Index, making this position a hindrance to overall returns. Also, during a majority of the period, the Fund included a small exposure to the Japanese equity market. Japan had showed signs of an improved domestic outlook and seemed situated to benefit from continued global growth. While Japan performed well in local currency terms, the Fund's exposure had a negative impact on performance, due to a strong rally in the U.S. dollar versus the yen. The Fund closed out this position by the end of the period in anticipation of continued dollar strength. 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 iShares GS InvesTop Corp. 4.0% U.S.Treasury 4.0 General Electric Co. 3.1 Microsoft Corp. 2.5 Intel Corp. 1.7 Pfizer, Inc. 1.5 Johnson & Johnson 1.5 Exxon Mobil Corp. 1.4 Wal-Mart Stores, Inc. 1.4 Citigroup Inc. 1.3
PORTFOLIO COMPOSITION* Common Stocks 89.0% U.S. Government Agencies & Obligations 5.7 Convertible Corporate Notes/Bonds 2.3 Corporate Notes/Bonds 1.7 Asset-Backed 1.0 Convertible Preferred Stocks 0.2 Foreign Government Obligations 0.1
DATA AS OF JULY 31, 2005. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP10 HOLDINGS ARE AS A PERCENTAGE OF NET ASSETS. ALL PERCENTAGES FOR PORTFOLIO COMPOSITION ARE AS A PERCENTAGE OF TOTAL INVESTMENTS. THESE DATA ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL ADVISORY SERVICES. * DOES NOT INCLUDE OUTSTANDING LONG FUTURES WITH AN UNDERLYING FACE AMOUNT OF $4,955,055 AND OUTSTANDING SHORT FUTURES WITH AN UNDERLYING FACE AMOUNT OF $9,420,844 WITH UNREALIZED NET APPRECIATION OF $71,484. 3 INVESTMENT STRATEGY THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS INC., ACTIVELY ALLOCATES THE FUND'S ASSETS AMONG THE THREE MAJOR ASSET CATEGORIES OF EQUITY SECURITIES (INCLUDING DEPOSITARY RECEIPTS), FIXED-INCOME SECURITIES AND MONEY MARKET INSTRUMENTS, THE COMBINATION OF WHICH WILL BE VARIED FROM TIME TO TIME BOTH WITH RESPECT TO INDUSTRY SECTOR WEIGHTINGS AND TYPES OF SECURITIES IN RESPONSE TO CHANGING MARKET AND ECONOMIC TRENDS. THERE IS NO LIMIT AS TO THE PERCENTAGE OF ASSETS THAT MAY BE ALLOCATED TO ANY ONE ASSET CLASS. THE FUND MAY INVEST 100 PERCENT OF ITS ASSETS IN ANY ONE OF THE THREE MAJOR ASSET CATEGORIES MENTIONED ABOVE AT ANY TIME. IT IS ANTICIPATED THAT THERE WILL BE SIGNIFICANT FLUCTUATIONS IN THE ALLOCATIONS OVER TIME AND THUS, THE FUND MAY EXHIBIT HIGHER VOLATILITY THAN OTHER FUNDS. 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 PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED JULY 31, 2005
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++ (SINCE 02/26/03) (SINCE 02/26/03) (SINCE 02/26/03) (SINCE 02/26/03) SYMBOL ALRAX ALRBX ALRCX ALRDX 1 YEAR 11.44%(4) 10.63%(4) 10.68%(4) 11.74%(4) 5.59(5) 5.63(5) 9.68(5) -- SINCE INCEPTION 10.19(4) 9.37(4) 9.39(4) 10.47(4) 7.77(5) 8.27(5) 9.39(5) --
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT www.morganstanley.com OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE TABLE DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS D SHARES WILL VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES. * THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 5.25%. ** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%. THE CDSC DECLINES TO 0% AFTER SIX YEARS. + THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1% FOR SHARES REDEEMED WITHIN ONE YEAR OF PURCHASE. ++ CLASS D HAS NO SALES CHARGE. (1) THE STANDARD & POOR'S 500 INDEX (S&P 500(R)) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON STOCKS CHOSEN FOR MARKET SIZE, LIQUIDITY AND INDUSTRY GROUP REPRESENTATION. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. (2) THE LEHMAN BROTHERS U.S. AGGREGATE INDEX TRACKS THE PERFORMANCE OF ALL U.S. GOVERNMENT AGENCY AND TREASURY SECURITIES, INVESTMENT-GRADE CORPORATE DEBT SECURITIES, AGENCY MORTGAGE-BACKED SECURITIES, ASSET-BACKED SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. (3) THE LIPPER FLEXIBLE PORTFOLIO FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER FLEXIBLE PORTFOLIO FUNDS CLASSIFICATION. THE INDEX, WHICH IS ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS REPRESENTED IN THIS INDEX. (4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE DEDUCTION OF ANY SALES CHARGES. (5) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR COMPLETE DETAILS ON FEES AND SALES CHARGES. 5 EXPENSE EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption fees; and (2) ongoing costs, including advisory fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 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 (4.28% return) $ 1,000.00 $ 1,042.80 $ 6.69 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,018.25 $ 6.61 CLASS B Actual (3.85% return) $ 1,000.00 $ 1,038.50 $ 10.46 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,014.53 $ 10.34 CLASS C Actual (3.98% return) $ 1,000.00 $ 1,039.80 $ 10.47 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,014.53 $ 10.34 CLASS D Actual (4.39% return) $ 1,000.00 $ 1,043.90 $ 5.42 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,019.49 $ 5.36
- ---------- * EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.32%, 2.07%, 2.07% AND 1.07% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). 6 INVESTMENT ADVISORY AGREEMENT APPROVAL NATURE, EXTENT AND QUALITY OF SERVICES The Board reviewed and considered the nature and extent of the investment advisory services provided by the Investment Adviser under the Advisory Agreement, including portfolio management, investment research and equity and fixed income securities trading. The Board also reviewed and considered the nature and extent of the non-advisory, administrative services provided by the Fund's Administrator under the Administration Agreement, including accounting, clerical, bookkeeping, compliance, business management and planning, and the provision of supplies, office space and utilities at the Adviser's expense. (The Investment Adviser and the Administrator together are referred to as the "Adviser" and the Advisory and Administration Agreements together are referred to as the "Management Agreement.") The Board also compared the nature of the services provided by the Adviser with similar services provided by non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper"). The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser who provide the 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-year period ended November 30, 2004 and for the period from February 28, 2003 to 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 both periods. The Adviser informed the Board that in order to try to improve performance the Adviser had restructured the portfolio management team in January 2004 and implemented a revised investment strategy. The Board concluded that the changes implemented by the Adviser were reasonably designed to improve performance. FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS The Board reviewed the management fee rate for the Fund and the total expense ratio of the Fund and noted that: (i) the Fund's management fee rate was higher than the average management fee rate for funds managed by other advisers (the "expense peer group"), selected by Lipper, managed by other advisers with investment strategies comparable to those of the Fund, as shown in the Lipper Report for this Fund; but (ii) the Fund's total expense ratio was lower than the average total expense ratio of the funds included in the Fund's expense peer group. The Board concluded that the management fee rate was competitive in light of the fact that the Adviser managed the Fund so that the total expense ratio of the Fund was less than the total expense ratio of the funds in the expense peer group average. 7 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 does not include any breakpoints. The Board considered that the assets of the Fund were relatively small and its potential growth was uncertain. The board concluded that it was premature to consider adding breakpoints to the management fee schedule. 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 Adviser made no profit from its operation of 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 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. 8 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. 9 MORGAN STANLEY ALLOCATOR FUND PORTFOLIO OF INVESTMENTS - JULY 31, 2005 (UNAUDITED)
NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- COMMON STOCKS (88.8%) ADVERTISING/MARKETING SERVICES (0.2%) 4,784 Interpublic Group of Companies, Inc. (The)* $ 59,800 2,029 Omnicom Group, Inc. 172,201 -------------- 232,001 -------------- AEROSPACE & DEFENSE (1.4%) 8,375 Boeing Co. 552,834 2,122 General Dynamics Corp. 244,433 1,341 Goodrich Corp. 59,326 1,285 L-3 Communications Holdings, Inc. 100,526 4,626 Lockheed Martin Corp. 288,662 3,848 Northrop Grumman Corp. 213,372 4,787 Raytheon Co. 188,273 1,979 Rockwell Collins, Inc. 96,575 -------------- 1,744,001 -------------- AGRICULTURAL COMMODITIES/MILLING (0.1%) 5,617 Archer-Daniels-Midland Co. 128,854 -------------- AIR FREIGHT/COURIERS (0.9%) 3,058 FedEx Corp. 257,147 11,380 United Parcel Service, Inc. (Class B) 830,399 -------------- 1,087,546 -------------- AIRLINES (2.0%) 14,169 Alaska Air Group, Inc.* 495,632 26,932 AMR Corp.* 378,395 24,151 Delta Air Lines, Inc.* 71,487 52,452 Flyi Inc. 34,094 29,687 Frontier Airlines, Inc.* 364,556 9,702 JetBlue Airways Corp.* 203,742 37,382 Mesa Air Group, Inc.* 315,504 15,308 SkyWest, Inc. 317,641 21,082 Southwest Airlines Co. 299,154 -------------- 2,480,205 -------------- ALTERNATIVE POWER GENERATION (0.0%) 2,202 Calpine Corp.* 7,311 -------------- ALUMINUM (0.1%) 4,012 Alcoa, Inc. 112,537 --------------
SEE NOTES TO FINANCIAL STATEMENTS 10
NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- APPAREL/FOOTWEAR (0.5%) 2,272 Cintas Corp. $ 100,718 4,167 Coach, Inc.* 146,303 1,379 Jones Apparel Group, Inc. 42,156 1,241 Liz Claiborne, Inc. 51,638 2,905 Nike, Inc. (Class B) 243,439 676 Reebok International Ltd. 28,595 1,267 V.F. Corp. 74,804 -------------- 687,653 -------------- APPAREL/FOOTWEAR RETAIL (0.4%) 10,197 Gap, Inc. (The) 215,259 4,571 Limited Brands, Inc. 111,441 3,023 Nordstrom, Inc. 111,881 5,206 TJX Companies, Inc. (The) 122,393 -------------- 560,974 -------------- AUTO PARTS: O.E.M. (0.2%) 1,702 Dana Corp. 26,738 6,261 Delphi Corp. 33,183 1,687 Eaton Corp. 110,229 2,125 Johnson Controls, Inc. 122,060 1,532 Visteon Corp.* 13,635 -------------- 305,845 -------------- AUTOMOTIVE AFTERMARKET (0.0%) 771 Cooper Tire & Rubber Co. 15,513 1,994 Goodyear Tire & Rubber Co. (The)* 34,716 -------------- 50,229 -------------- BEVERAGES: ALCOHOLIC (0.3%) 6,643 Anheuser-Busch Companies, Inc. 294,617 1,397 Brown-Forman Corp. (Class B) 81,655 747 Molson Coors Brewing Co. (Class B) 46,837 -------------- 423,109 -------------- BEVERAGES: NON-ALCOHOLIC (0.8%) 20,614 Coca-Cola Co. (The) 902,069 4,066 Coca-Cola Enterprises Inc. 95,551 2,155 Pepsi Bottling Group, Inc. (The) 62,840 -------------- 1,060,460 --------------
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NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- BIOTECHNOLOGY (1.6%) 14,870 Amgen Inc.* $ 1,185,883 3,830 Biogen Idec Inc.* 150,481 2,624 Chiron Corp.* 95,068 2,672 Genzyme Corp.* 198,824 4,838 Gilead Sciences, Inc.* 216,791 3,482 MedImmune, Inc.* 98,924 498 Millipore Corp.* 30,512 -------------- 1,976,483 -------------- BROADCASTING (0.2%) 6,065 Clear Channel Communications, Inc. 197,962 3,610 Univision Communications, Inc. (Class A)* 102,091 -------------- 300,053 -------------- BUILDING PRODUCTS (0.2%) 2,387 American Standard Companies, Inc. 105,696 4,718 Masco Corp. 159,987 -------------- 265,683 -------------- CABLE/SATELLITE TV (0.6%) 24,403 Comcast Corp. (Class A)* 749,904 -------------- CASINO/GAMING (0.2%) 1,273 Harrah's Entertainment, Inc. 100,236 3,826 International Game Technology 104,679 -------------- 204,915 -------------- CHEMICALS: AGRICULTURAL (0.1%) 1,257 Monsanto Co. 84,684 -------------- CHEMICALS: MAJOR DIVERSIFIED (0.4%) 4,422 Dow Chemical Co. (The) 212,035 4,578 Du Pont (E.I.) de Nemours & Co. 195,389 396 Eastman Chemical Co. 21,934 598 Engelhard Corp. 17,157 557 Hercules Inc.* 7,798 1,065 Rohm & Haas Co. 49,054 -------------- 503,367 -------------- CHEMICALS: SPECIALTY (0.1%) 1,079 Air Products & Chemicals, Inc. 64,481 571 Chemtura Corp. 8,988 1,523 Praxair, Inc. 75,221
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NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- 340 Sigma-Aldrich Corp. $ 21,814 -------------- 170,504 -------------- COMMERCIAL PRINTING/FORMS (0.1%) 698 Deluxe Corp. 27,920 2,933 Donnelley (R.R.) & Sons Co. 105,735 -------------- 133,655 -------------- COMPUTER COMMUNICATIONS (1.2%) 5,699 Avaya Inc.* 58,871 74,395 Cisco Systems, Inc.* 1,424,664 1,056 QLogic Corp.* 32,789 -------------- 1,516,324 -------------- COMPUTER PERIPHERALS (0.5%) 27,942 EMC Corp.* 382,526 1,488 Lexmark International, Inc. (Class A)* 93,298 4,268 Network Appliance, Inc.* 108,877 -------------- 584,701 -------------- COMPUTER PROCESSING HARDWARE (2.1%) 9,404 Apple Computer, Inc.* 401,081 28,011 Dell, Inc.* 1,133,605 3,693 Gateway, Inc.* 14,698 33,966 Hewlett-Packard Co. 836,243 2,287 NCR Corp.* 79,382 39,748 Sun Microsystems, Inc.* 152,632 -------------- 2,617,641 -------------- CONSTRUCTION MATERIALS (0.0%) 481 Vulcan Materials Co. 33,785 -------------- CONTAINERS/PACKAGING (0.1%) 558 Ball Corp. 21,176 529 Bemis Company, Inc. 14,283 736 Pactiv Corp.* 16,207 413 Sealed Air Corp.* 21,914 552 Temple-Inland Inc. 21,964 -------------- 95,544 -------------- CONTRACT DRILLING (0.2%) 787 Nabors Industries, Ltd. (Bermuda)* 51,509 677 Noble Corp. (Cayman Islands) 45,481 567 Rowan Companies, Inc.* 19,369
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NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- 1,602 Transocean Inc. (Cayman Islands)* $ 90,401 -------------- 206,760 -------------- DATA PROCESSING SERVICES (1.0%) 1,454 Affiliated Computer Services, Inc. (Class A)* 72,656 6,554 Automatic Data Processing, Inc. 291,063 2,167 Computer Sciences Corp.* 99,205 1,637 Convergys Corp.* 23,818 8,744 First Data Corp. 359,728 2,178 Fiserv, Inc.* 96,638 4,250 Paychex, Inc. 148,368 3,260 SunGard Data Systems Inc.* 117,001 -------------- 1,208,477 -------------- DEPARTMENT STORES (0.5%) 986 Dillard's, Inc. (Class A) 22,540 1,849 Federated Department Stores, Inc. 140,284 3,804 Kohl's Corp.* 214,355 3,302 May Department Stores Co. 135,547 2,951 Penney (J.C.) Co., Inc. 165,669 -------------- 678,395 -------------- DISCOUNT STORES (2.3%) 1,365 Big Lots, Inc.* 17,704 4,085 Costco Wholesale Corp. 187,787 3,765 Dollar General Corp. 76,505 1,897 Family Dollar Stores, Inc. 48,943 1,381 Sears Holdings Corp.* 212,992 9,775 Target Corp. 574,281 35,784 Wal-Mart Stores, Inc. 1,765,940 -------------- 2,884,152 -------------- DRUGSTORE CHAINS (0.5%) 6,927 CVS Corp. 214,945 8,744 Walgreen Co. 418,488 -------------- 633,433 -------------- ELECTRIC UTILITIES (1.1%) 2,548 AES Corp. (The)* 40,895 563 Allegheny Energy, Inc.* 16,046 764 Ameren Corp. 42,494 1,500 American Electric Power Co., Inc. 58,050 1,265 CenterPoint Energy, Inc. 17,381
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NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- 773 Cinergy Corp. $ 34,128 801 CMS Energy Corp.* 12,688 949 Consolidated Edison, Inc. 45,704 693 Constellation Energy Group, Inc. 41,726 1,311 Dominion Resources, Inc. 96,830 680 DTE Energy Co. 31,960 3,541 Duke Energy Corp. 104,601 1,273 Edison International 52,040 831 Entergy Corp. 64,768 2,549 Exelon Corp. 136,422 1,288 FirstEnergy Corp. 64,117 1,530 FPL Group, Inc. 65,974 1,439 PG&E Corp. 54,150 403 Pinnacle West Capital Corp. 18,457 741 PPL Corp. 45,631 972 Progress Energy, Inc. 43,361 932 Public Service Enterprise Group, Inc. 59,928 2,869 Southern Co. (The) 100,386 847 TECO Energy, Inc. 16,059 936 TXU Corp. 81,095 1,569 Xcel Energy, Inc. 30,454 -------------- 1,375,345 -------------- ELECTRICAL PRODUCTS (0.4%) 2,164 American Power Conversion Corp. 60,830 1,042 Cooper Industries Ltd. (Class A) (Bermuda) 67,292 4,428 Emerson Electric Co. 291,362 2,007 Molex Inc. 56,678 -------------- 476,162 -------------- ELECTRONIC COMPONENTS (0.1%) 2,187 Jabil Circuit, Inc.* 68,213 6,246 Sanmina-SCI Corp.* 29,856 11,178 Solectron Corp.* 42,924 -------------- 140,993 -------------- ELECTRONIC EQUIPMENT/INSTRUMENTS (0.5%) 5,029 Agilent Technologies, Inc.* 131,961 16,650 JDS Uniphase Corp.* 25,142 1,965 Rockwell Automation, Inc. 101,217 1,800 Scientific-Atlanta, Inc. 69,300 2,794 Symbol Technologies, Inc. 32,522
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NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- 1,024 Tektronix, Inc. $ 25,661 1,606 Thermo Electron Corp.* 47,955 11,278 Xerox Corp.* 148,982 -------------- 582,740 -------------- ELECTRONIC PRODUCTION EQUIPMENT (0.5%) 21,316 Applied Materials, Inc. 393,493 2,556 KLA-Tencor Corp. 132,145 1,845 Novellus Systems, Inc.* 53,228 2,675 Teradyne, Inc.* 41,543 -------------- 620,409 -------------- ELECTRONICS/APPLIANCE STORES (0.3%) 3,620 Best Buy Co., Inc. 277,292 2,187 Circuit City Stores - Circuit City Group 39,913 1,768 RadioShack Corp. 41,495 -------------- 358,700 -------------- ELECTRONICS/APPLIANCES (0.1%) 3,208 Eastman Kodak Co. 85,782 946 Maytag Corp. 15,959 759 Whirlpool Corp. 60,705 -------------- 162,446 -------------- ENGINEERING & CONSTRUCTION (0.0%) 972 Fluor Corp. 62,014 -------------- ENVIRONMENTAL SERVICES (0.2%) 4,466 Allied Waste Industries, Inc.* 38,318 6,617 Waste Management, Inc. 186,070 -------------- 224,388 -------------- FINANCE/RENTAL/LEASING (1.6%) 1,742 Capital One Financial Corp. 143,715 1,489 CIT Group, Inc. 65,724 6,341 Countrywide Financial Corp. 228,276 10,471 Fannie Mae 584,910 7,471 Freddie Mac 472,765 8,759 MBNA Corp. 220,376 680 PHH Corp. 19,237 2,082 Providian Financial Corp.* 39,350 733 Ryder System, Inc. 28,580 2,899 SLM Corp. 149,270 -------------- 1,952,203 --------------
SEE NOTES TO FINANCIAL STATEMENTS 16
NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- FINANCIAL CONGLOMERATES (2.7%) 8,091 American Express Co. $ 445,005 35,944 Citigroup, Inc.+ 1,563,564 24,312 JPMorgan Chase & Co. 854,324 2,051 Principal Financial Group, Inc. 90,141 3,607 Prudential Financial, Inc.* 241,308 3,192 State Street Corp. 158,770 -------------- 3,353,112 -------------- FINANCIAL PUBLISHING/SERVICES (0.3%) 1,842 Equifax, Inc. 67,049 4,145 McGraw-Hill Companies, Inc. (The) 190,711 1,928 Moody's Corp. 91,214 -------------- 348,974 -------------- FOOD DISTRIBUTORS (0.2%) 5,417 SYSCO Corp. 195,337 -------------- FOOD RETAIL (0.3%) 3,223 Albertson's, Inc. 68,682 6,229 Kroger Co.* 123,646 3,872 Safeway Inc. 94,090 1,187 Supervalu, Inc. 42,020 -------------- 328,438 -------------- FOOD: MAJOR DIVERSIFIED (1.2%) 3,490 Campbell Soup Co. 107,667 4,475 ConAgra Foods Inc. 101,627 3,158 General Mills, Inc. 149,689 2,996 Heinz (H.J.) Co. 110,193 3,519 Kellogg Co. 159,446 14,349 PepsiCo, Inc. 782,451 6,737 Sara Lee Corp. 134,268 -------------- 1,545,341 -------------- FOOD: SPECIALTY/CANDY (0.2%) 2,090 Hershey Foods Corp. 133,488 1,185 McCormick & Co., Inc. (Non-Voting) 41,214 1,925 Wrigley (Wm.) Jr. Co. 136,945 -------------- 311,647 --------------
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NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- FOREST PRODUCTS (0.1%) 547 Louisiana-Pacific Corp. $ 14,671 1,148 Weyerhaeuser Co. 79,189 -------------- 93,860 -------------- GAS DISTRIBUTORS (0.1%) 1,561 Dynegy, Inc. (Class A)* 8,679 632 KeySpan Corp. 25,716 181 Nicor Inc. 7,388 1,061 NiSource, Inc. 25,772 155 Peoples Energy Corp. 6,688 933 Sempra Energy 39,653 -------------- 113,896 -------------- HOME BUILDING (0.2%) 1,414 Centex Corp. 104,608 918 KB Home 75,193 1,427 Pulte Homes, Inc. 133,596 -------------- 313,397 -------------- HOME FURNISHINGS (0.1%) 2,152 Leggett & Platt, Inc. 54,424 3,108 Newell Rubbermaid, Inc. 77,296 -------------- 131,720 -------------- HOME IMPROVEMENT CHAINS (1.3%) 23,800 Home Depot, Inc. (The) 1,035,538 8,553 Lowe's Companies, Inc. 566,380 1,575 Sherwin-Williams Co. 74,986 -------------- 1,676,904 -------------- HOSPITAL/NURSING MANAGEMENT (0.3%) 4,297 HCA, Inc. 211,627 2,457 Health Management Associates, Inc. (Class A) 58,477 861 Manor Care, Inc. 32,684 4,672 Tenet Healthcare Corp.* 56,718 -------------- 359,506 -------------- HOTELS/RESORTS/CRUISELINES (0.7%) 8,907 Carnival Corp. (Panama) 466,727 4,268 Hilton Hotels Corp. 105,633 2,467 Marriott International, Inc. (Class A) 168,915
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NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- 2,390 Starwood Hotels & Resorts Worldwide, Inc.* $ 151,335 -------------- 892,610 -------------- HOUSEHOLD/PERSONAL CARE (1.9%) 805 Alberto-Culver Co. 36,322 4,039 Avon Products, Inc. 132,116 1,350 Clorox Co. (The) 75,398 4,476 Colgate-Palmolive Co. 236,959 8,514 Gillette Co. (The) 456,946 466 International Flavors & Fragrances, Inc. 17,671 4,098 Kimberly-Clark Corp. 261,288 21,344 Procter & Gamble Co. (The) 1,187,367 -------------- 2,404,067 -------------- INDUSTRIAL CONGLOMERATES (5.2%) 8,172 3M Co. 612,900 3,262 Danaher Corp. 180,878 111,809 General Electric Co. 3,857,411 8,984 Honeywell International, Inc. 352,892 1,830 Ingersoll-Rand Co. Ltd. (Class A) (Bermuda) 143,051 1,025 ITT Industries, Inc. 109,060 1,460 Textron, Inc. 108,288 21,262 Tyco International Ltd. (Bermuda) 647,853 10,803 United Technologies Corp. 547,712 -------------- 6,560,045 -------------- INDUSTRIAL MACHINERY (0.3%) 3,085 Illinois Tool Works Inc. 264,230 1,335 Parker Hannifin Corp. 87,736 -------------- 351,966 -------------- INDUSTRIAL SPECIALTIES (0.1%) 1,202 Ecolab Inc. 40,363 808 PPG Industries, Inc. 52,544 -------------- 92,907 -------------- INFORMATION TECHNOLOGY SERVICES (1.4%) 1,943 Citrix Systems, Inc.* 46,302 5,809 Electronic Data Systems Corp. 119,491 18,677 International Business Machines Corp. 1,558,782 3,896 Unisys Corp.* 25,207 -------------- 1,749,782 --------------
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NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- INSURANCE BROKERS/SERVICES (0.1%) 2,248 AON Corp. $ 57,189 3,682 Marsh & McLennan Companies, Inc. 106,668 -------------- 163,857 -------------- INTEGRATED OIL (2.3%) 462 Amerada Hess Corp. 54,451 10,237 Chevron Corp. 593,848 6,793 ConocoPhillips 425,174 31,067 Exxon Mobil Corp. 1,825,186 -------------- 2,898,659 -------------- INTERNET SOFTWARE/SERVICES (0.5%) 5,934 Siebel Systems, Inc. 49,846 15,591 Yahoo!, Inc.* 519,804 -------------- 569,650 -------------- INVESTMENT BANKS/BROKERS (1.7%) 1,475 Bear Stearns Companies, Inc. (The) 150,612 4,937 E*TRADE Group, Inc.* 76,573 6,234 Goldman Sachs Group Inc. (The) 670,030 3,271 Lehman Brothers Holdings Inc. 343,880 12,320 Merrill Lynch & Co., Inc. 724,170 17,063 Schwab (Charles) Corp. (The) 233,763 -------------- 2,199,028 -------------- INVESTMENT MANAGERS (0.4%) 1,021 Federated Investors, Inc. (Class B) 32,611 2,420 Franklin Resources, Inc. 195,584 2,246 Janus Capital Group, Inc. 33,735 4,080 Mellon Financial Corp. 124,277 1,266 Price (T.) Rowe Group, Inc. 83,999 -------------- 470,206 -------------- INVESTMENT TRUSTS/MUTUAL FUNDS (4.0%) 34,950 iShares S&P Midcap 400 Index Fund 2,520,244 43,821 iShares S&P Smallcap 600 Index Fund 2,553,888 -------------- 5,074,132 -------------- LIFE/HEALTH INSURANCE (0.5%) 3,467 AFLAC, Inc. 156,362 962 Jefferson-Pilot Corp. 48,264 1,238 Lincoln National Corp. 59,795
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NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- 5,066 MetLife, Inc. $ 248,943 736 Torchmark Corp.* 38,471 2,106 UnumProvident Corp. 40,330 -------------- 592,165 -------------- MAJOR BANKS (2.9%) 27,787 Bank of America Corp. 1,211,513 7,484 Bank of New York Co., Inc. (The) 230,358 3,775 BB&T Corp. 157,871 1,194 Comerica, Inc. 72,953 1,643 Huntington Bancshares, Inc. 40,976 2,846 KeyCorp 97,447 4,150 National City Corp. 153,177 1,959 PNC Financial Services Group 107,392 3,205 Regions Financial Corp. 107,816 2,348 SunTrust Banks, Inc. 170,747 10,892 Wachovia Corp. 548,739 11,659 Wells Fargo & Co. 715,163 -------------- 3,614,152 -------------- MAJOR TELECOMMUNICATIONS (2.2%) 2,786 ALLTEL Corp. 185,269 7,360 AT&T Corp. 145,728 16,868 BellSouth Corp. 465,557 30,436 SBC Communications, Inc. 744,160 13,594 Sprint Corp. 365,679 25,535 Verizon Communications Inc. 874,063 -------------- 2,780,456 -------------- MANAGED HEALTH CARE (1.3%) 2,829 Aetna, Inc. 218,965 4,382 Caremark Rx, Inc.* 195,350 1,275 CIGNA Corp. 136,106 1,612 Humana, Inc.* 64,238 12,351 UnitedHealth Group, Inc. 645,957 5,965 WellPoint Inc.* 421,964 -------------- 1,682,580 -------------- MEDIA CONGLOMERATES (2.1%) 23,047 Disney (Walt) Co. (The)* 590,925 36,151 News Corp Inc. (Class A) 592,153 51,831 Time Warner, Inc.* 882,164
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NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- 17,816 Viacom Inc. (Class B) (Non-Voting) $ 596,658 -------------- 2,661,900 -------------- MEDICAL DISTRIBUTORS (0.4%) 1,039 AmerisourceBergen Corp. 74,590 4,187 Cardinal Health, Inc. 249,461 2,915 McKesson Corp. 131,175 -------------- 455,226 -------------- MEDICAL SPECIALTIES (2.1%) 3,400 Applera Corp. - Applied Biosystems Group 70,788 1,048 Bard (C.R.), Inc. 69,996 530 Bausch & Lomb, Inc. 44,865 6,039 Baxter International, Inc.* 237,152 2,459 Becton, Dickinson & Co. 136,155 2,478 Biomet, Inc. 94,486 8,115 Boston Scientific Corp.* 234,929 1,196 Fisher Scientific International, Inc.* 80,192 3,156 Guidant Corp. 217,133 1,571 Hospira, Inc.* 60,091 11,756 Medtronic, Inc. 634,119 1,440 Pall Corp. 44,597 1,292 PerkinElmer, Inc. 27,106 3,520 St. Jude Medical, Inc.* 166,883 3,926 Stryker Corp.* 212,357 1,171 Waters Corp.* 53,023 2,405 Zimmer Holdings, Inc.* 198,076 -------------- 2,581,948 -------------- MISCELLANEOUS COMMERCIAL SERVICES (0.0%) 1,506 Sabre Holdings Corp. (Class A) 28,915 -------------- MISCELLANEOUS MANUFACTURING (0.1%) 2,260 Dover Corp. 93,248 -------------- MOTOR VEHICLES (0.5%) 20,363 Ford Motor Co. 218,699 6,256 General Motors Corp. 230,346 3,150 Harley-Davidson, Inc. 167,549 -------------- 616,594 -------------- MULTI-LINE INSURANCE (1.1%) 17,930 American International Group, Inc. 1,079,386 2,050 Hartford Financial Services Group, Inc. (The) 165,169
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NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- 1,115 Loews Corp. $ 93,247 902 Safeco Corp. 49,556 -------------- 1,387,358 -------------- OFFICE EQUIPMENT/SUPPLIES (0.1%) 1,355 Avery Dennison Corp. 76,788 2,641 Pitney Bowes, Inc. 117,736 -------------- 194,524 -------------- OIL & GAS PIPELINES (0.1%) 3,208 El Paso Corp. 38,496 610 Kinder Morgan, Inc. 54,205 2,850 Williams Companies, Inc. (The) 60,534 -------------- 153,235 -------------- OIL & GAS PRODUCTION (0.7%) 1,162 Anadarko Petroleum Corp. 102,663 1,603 Apache Corp. 109,645 1,882 Burlington Resources, Inc. 120,655 2,311 Devon Energy Corp. 129,624 1,195 EOG Resources, Inc. 73,015 1,157 Kerr-McGee Corp. 92,803 1,944 Occidental Petroleum Corp. 159,952 1,340 Unocal Corp. 86,899 1,737 XTO Energy Inc. 60,951 -------------- 936,207 -------------- OIL REFINING/MARKETING (0.2%) 382 Ashland Inc, 23,474 1,800 Marathon Oil Corp. 105,048 344 Sunoco, Inc. 43,251 1,246 Valero Energy Corp. 103,144 -------------- 274,917 -------------- OILFIELD SERVICES/EQUIPMENT (0.5%) 1,669 Baker Hughes Inc. 94,365 812 BJ Services Co. 49,524 2,461 Halliburton Co. 137,939 858 National-Oilwell, Inc.* 44,916 2,874 Schlumberger Ltd. (Netherlands Antilles) 240,669 -------------- 567,413 --------------
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NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- OTHER CONSUMER SERVICES (0.9%) 2,006 Apollo Group, Inc. (Class A)* $ 150,751 1,827 Block (H.&R.), Inc. 104,066 11,457 Cendant Corp. 244,722 14,925 eBay, Inc.* 623,567 -------------- 1,123,106 -------------- OTHER CONSUMER SPECIALTIES (0.1%) 1,606 Fortune Brands, Inc. 151,847 -------------- OTHER METALS/MINERALS (0.0%) 456 Phelps Dodge Corp. 48,541 -------------- PACKAGED SOFTWARE (3.9%) 5,467 Adobe Systems, Inc. 162,042 2,583 Autodesk, Inc. 88,313 2,547 BMC Software, Inc.* 48,622 6,641 Computer Associates International, Inc. 182,295 4,453 Compuware Corp.* 37,539 2,157 Intuit Inc.* 103,536 996 Mercury Interactive Corp.* 39,213 121,340 Microsoft Corp. 3,107,517 4,355 Novell, Inc.* 26,478 57,683 Oracle Corp.* 783,335 3,274 Parametric Technology Corp.* 22,591 13,347 Symantec Corp.* 293,234 -------------- 4,894,715 -------------- PERSONNEL SERVICES (0.1%) 1,601 Monster Worldwide, Inc.* 48,622 2,343 Robert Half International, Inc. 79,404 -------------- 128,026 -------------- PHARMACEUTICALS: GENERIC DRUGS (0.1%) 2,685 Mylan Laboratories, Inc. 46,612 1,098 Watson Pharmaceuticals, Inc.* 36,673 -------------- 83,285 -------------- PHARMACEUTICALS: MAJOR (5.7%) 15,104 Abbott Laboratories 704,300 19,042 Bristol-Myers Squibb Co. 475,669 28,952 Johnson & Johnson 1,851,770 11,036 Lilly (Eli) & Co. 621,548 21,481 Merck & Co., Inc. 667,200
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NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- 72,421 Pfizer, Inc. $ 1,919,157 14,367 Schering-Plough Corp. 299,121 13,020 Wyeth 595,665 -------------- 7,134,430 -------------- PHARMACEUTICALS: OTHER (0.2%) 1,270 Allergan, Inc. 113,500 3,458 Forest Laboratories, Inc.* 138,043 2,411 King Pharmaceuticals, Inc.* 26,883 -------------- 278,426 -------------- PRECIOUS METALS (0.1%) 846 Freeport-McMoRan Copper & Gold, Inc. (Class B) 34,077 2,098 Newmont Mining Corp. 78,780 -------------- 112,857 -------------- PROPERTY - CASUALTY INSURERS (0.8%) 2,006 ACE Ltd. (Cayman Islands) 92,697 4,617 Allstate Corp. (The) 282,837 1,349 Chubb Corp. (The) 119,818 1,179 Cincinnati Financial Corp. 48,598 1,374 Progressive Corp. (The) 136,974 4,656 St. Paul Travelers Companies, Inc. (The) 204,957 991 XL Capital Ltd. (Class A) (Cayman Islands) 71,174 -------------- 957,055 -------------- PUBLISHING: BOOKS/MAGAZINES (0.0%) 559 Meredith Corp. 27,671 -------------- PUBLISHING: NEWSPAPERS (0.4%) 934 Dow Jones & Co., Inc. 35,053 2,761 Gannett Co., Inc. 201,443 851 Knight-Ridder, Inc. 53,239 1,649 New York Times Co. (The) (Class A) 51,976 3,513 Tribune Co. 128,225 -------------- 469,936 -------------- PULP & PAPER (0.1%) 1,216 Georgia-Pacific Corp. 41,526 2,308 International Paper Co. 72,933 965 MeadWestvaco Corp. 28,197 -------------- 142,656 --------------
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NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- RAILROADS (0.6%) 4,480 Burlington Northern Santa Fe Corp. $ 243,040 2,643 CSX Corp. 120,362 4,761 Norfolk Southern Corp. 177,157 3,103 Union Pacific Corp. 218,172 -------------- 758,731 -------------- REAL ESTATE INVESTMENT TRUSTS (0.8%) 1,346 Apartment Investment & Management Co. (Class A) 59,224 2,751 Archstone-Smith Trust 116,918 5,615 Equity Office Properties Trust 199,052 3,958 Equity Residential 159,903 2,566 Plum Creek Timber Co., Inc. 97,123 2,566 ProLogis 116,907 3,034 Simon Property Group, Inc. 241,931 -------------- 991,058 -------------- RECREATIONAL PRODUCTS (0.3%) 1,102 Brunswick Corp.* 51,309 3,447 Electronic Arts, Inc.* 198,547 2,019 Hasbro, Inc. 44,297 4,660 Mattel, Inc.* 86,909 -------------- 381,062 -------------- REGIONAL BANKS (0.9%) 2,497 AmSouth Bancorporation 69,691 877 Compass Bancshares, Inc. 42,280 3,605 Fifth Third Bancorp 155,376 878 First Horizon National Corp. 35,814 692 M&T Bank Corp. 75,089 1,506 Marshall & Ilsley Corp. 69,156 3,334 North Fork Bancorporation, Inc. 91,318 2,129 Northern Trust Corp. 108,153 2,201 Synovus Financial Corp. 65,084 12,664 U.S. Bancorp 380,680 634 Zions Bancorporation 45,318 -------------- 1,137,959 -------------- RESTAURANTS (0.8%) 1,774 Darden Restaurants, Inc. 61,558 14,025 McDonald's Corp.* 437,159 4,403 Starbucks Corp.* 231,378
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NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- 1,281 Wendy's International, Inc. $ 66,228 3,220 Yum! Brands, Inc. 168,567 -------------- 964,890 -------------- SAVINGS BANKS (0.6%) 3,323 Golden West Financial Corp. 216,394 4,091 Sovereign Bancorp, Inc. 98,143 9,490 Washington Mutual, Inc. 403,135 -------------- 717,672 -------------- SEMICONDUCTORS (3.5%) 5,149 Advanced Micro Devices, Inc.* 103,392 4,800 Altera Corp.* 104,976 4,817 Analog Devices, Inc. 188,826 4,313 Applied Micro Circuits Corp.* 12,982 3,811 Broadcom Corp. (Class A)* 162,996 5,160 Freescale Semiconductor Inc. (Class B)* 132,870 80,661 Intel Corp. 2,189,140 3,984 Linear Technology Corp. 154,818 5,192 LSI Logic Corp.* 50,674 4,302 Maxim Integrated Products, Inc. 180,125 8,192 Micron Technology, Inc.* 97,321 4,512 National Semiconductor Corp. 111,492 2,262 NVIDIA Corp.* 61,210 2,407 PMC - Sierra, Inc.* 23,661 21,657 Texas Instruments Inc. 687,826 4,572 Xilinx, Inc. 129,616 -------------- 4,391,925 -------------- SERVICES TO THE HEALTH INDUSTRY (0.3%) 1,479 Express Scripts, Inc.* 77,352 2,259 IMS Health Inc. 61,513 1,342 Laboratory Corp. of America Holdings* 67,999 2,696 Medco Health Solutions Inc.* 130,594 1,990 Quest Diagnostics Inc. 102,167 -------------- 439,625 -------------- SPECIALTY INSURANCE (0.1%) 766 Ambac Financial Group, Inc. 55,029 958 MBIA Inc. 58,189 1,058 MGIC Investment Corp. 72,558 -------------- 185,776 --------------
SEE NOTES TO FINANCIAL STATEMENTS 27
NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- SPECIALTY STORES (0.5%) 3,022 AutoNation, Inc.* $ 65,245 901 AutoZone, Inc.* 87,793 3,255 Bed Bath & Beyond Inc.* 149,405 3,564 Office Depot, Inc.* 101,146 1,063 OfficeMax Inc. 31,571 8,162 Staples, Inc. 185,849 1,629 Tiffany & Co. 55,435 -------------- 676,444 -------------- SPECIALTY TELECOMMUNICATIONS (0.1%) 1,300 CenturyTel, Inc. 44,681 3,337 Citizens Communications Co. 43,848 17,848 Qwest Communications International, Inc.* 68,179 -------------- 156,708 -------------- STEEL (0.1%) 476 Allegheny Technologies Inc. 13,837 754 Nucor Corp. 41,809 564 United States Steel Corp. 24,055 -------------- 79,701 -------------- TELECOMMUNICATION EQUIPMENT (1.6%) 1,330 ADC Telecommunications, Inc.* 34,766 1,867 Andrew Corp.* 20,518 6,896 CIENA Corp.* 15,447 2,380 Comverse Technology, Inc.* 60,190 16,683 Corning, Inc.* 317,811 52,051 Lucent Technologies Inc.* 152,509 28,599 Motorola, Inc. 605,727 19,088 QUALCOMM Inc. 753,785 5,409 Tellabs, Inc.* 52,575 -------------- 2,013,328 -------------- TOBACCO (1.1%) 17,705 Altria Group, Inc. 1,185,527 1,274 Reynolds American, Inc. 106,137 1,448 UST, Inc. 66,637 -------------- 1,358,301 -------------- TOOLS/HARDWARE (0.1%) 903 Black & Decker Corp. 81,550 686 Snap-On, Inc. 25,162
SEE NOTES TO FINANCIAL STATEMENTS 28
NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- 938 Stanley Works (The) $ 45,896 -------------- 152,608 -------------- TRUCKS/CONSTRUCTION/FARM MACHINERY (0.6%) 7,246 Caterpillar Inc. 390,632 508 Cummins Inc. 43,404 2,603 Deere & Co. 191,399 811 Navistar International Corp.* 27,696 1,836 PACCAR, Inc. 132,596 -------------- 785,727 -------------- WHOLESALE DISTRIBUTORS (0.1%) 1,950 Genuine Parts Co. 89,276 1,020 Grainger (W.W.), Inc. 63,566 -------------- 152,842 -------------- WIRELESS TELECOMMUNICATIONS (0.3%) 10,304 Nextel Communications, Inc. (Class A)* 358,579 -------------- TOTAL COMMON STOCKS (COST $101,921,192) 111,759,951 -------------- PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE - --------- ------ -------- CORPORATE BONDS (1.7%) ADVERTISING/MARKETING SERVICES (0.0%) $ 20 Interpublic Group of Companies, Inc. (The) 5.40% 11/15/09 19,061 10 WPP Finance Corp.(United Kingdom) 5.875 06/15/14 10,341 -------------- 29,402 -------------- AEROSPACE & DEFENSE (0.1%) 15 Northrop Grumman Corp. 4.079 11/16/06 14,895 34 Systems 2001 Asset Trust - 144A** (Cayman Islands) 6.664 09/15/13 36,773 -------------- 51,668 -------------- AIR FREIGHT/COURIERS (0.0%) 10 Fedex Corp. 7.25 02/15/11 11,119 -------------- AUTO PARTS: O.E.M. (0.0%) 10 Lear Corp. (Series B) 8.11 05/15/09 10,371
SEE NOTES TO FINANCIAL STATEMENTS 29
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------- $ 10 Meritor Automotive Inc. 6.80% 02/15/09 $ 10,050 -------------- 20,421 -------------- BEVERAGES: ALCOHOLIC (0.0%) 20 FBG Finance Ltd. - 144A** (Australia) 5.125 06/15/15 19,689 -------------- CABLE/SATELLITE TV (0.1%) 30 Comcast Cable Communications Inc. 6.75 01/30/11 32,660 20 Cox Communications, Inc. 4.625 01/15/10 19,676 30 Echostar DBS Corp. 6.375 10/01/11 30,038 -------------- 82,374 -------------- CHEMICALS: MAJOR DIVERSIFIED (0.0%) 15 ICI Wilmington Inc. 4.375 12/01/08 14,748 -------------- CONTAINERS/PACKAGING (0.0%) 25 Sealed Air Corp. - 144A** 5.625 07/15/13 25,310 -------------- DEPARTMENT STORES (0.0%) 15 Penny (JC) Co., Inc. 7.40 04/01/37 16,412 -------------- ELECTRIC UTILITIES (0.2%) 20 Arizona Public Service Co. 5.80 06/30/14 21,051 25 Cincinnati Gas & Electric Co. 5.70 09/15/12 26,205 15 Consolidated Natural Gas Co. 5.00 12/01/14 14,923 15 Consolidated Natural Gas Co. (Series C) 6.25 11/01/11 16,103 15 Consumers Energy Co. (Series B) 5.375 04/15/13 15,298 5 Detroit Edison Co. (The) 6.125 10/01/10 5,318 15 Detroit Edison Co. (The) - 144A** 4.80 02/15/15 14,731 10 Entergy Gulf States, Inc. 3.60 06/01/08 9,705 10 Entergy Gulf States, Inc. 3.73++ 12/01/09 10,034 10 Exelon Corp. 6.75 05/01/11 10,927 20 Monongahela Power Co. 5.00 10/01/06 20,089 10 Pacific Gas & Electric Co. 4.80 03/01/14 9,896 5 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 4,858 30 PSEG Energy Holdings Inc. 8.625 02/15/08 32,175 15 Wisconsin Electric Power Co. 3.50 12/01/07 14,679 -------------- 225,992 -------------- ELECTRONICS/APPLIANCES (0.0%) 10 LG Electronics Inc. - 144A** (South Korea) 5.00 06/17/10 9,840 -------------- FINANCE/RENTAL/LEASING (0.2%) 20 CIT Group, Inc. 3.65 11/23/07 19,619 20 Countrywide Home Loans, Inc. (Series MTN) 3.25 05/21/08 19,278 30 Ford Motor Credit Co. 7.25 10/25/11 29,563
SEE NOTES TO FINANCIAL STATEMENTS 30
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------- $ 15 Hertz Corp. 7.625% 06/01/12 $ 14,674 25 MBNA Corp. 3.64++ 05/05/08 25,226 20 MBNA Corp. 6.125 03/01/13 21,435 25 Nationwide Building Society - 144A** (United Kingdom) 4.25 02/01/10 24,554 20 Residential Capital Corp. - 144A** 6.375 06/30/10 20,343 15 SLM Corp. 4.00 01/15/10 14,590 -------------- 189,282 -------------- FINANCIAL CONGLOMERATES (0.2%) 50 Citigroup Inc. 5.625 08/27/12 52,395 45 General Electric Capital Corp. (Series MTNA) 5.45 01/15/13 46,909 55 General Motors Acceptance Corp. 6.875 09/15/11 53,146 20 General Motors Acceptance Corp. 8.00 11/01/31 19,452 65 J.P. Morgan Chase & Co. 6.625 03/15/12 71,199 -------------- 243,101 -------------- FOOD: MAJOR DIVERSIFIED (0.0%) 15 Kraft Foods Inc. 5.625 11/01/11 15,684 -------------- GAS DISTRIBUTORS (0.1%) 20 NiSource Finance Corp. 3.854++ 11/23/09 20,101 25 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A** (Qatar) 8.294 03/15/14 29,375 10 Sempra Energy 4.621 05/17/07 10,001 -------------- 59,477 -------------- HOME FURNISHINGS (0.0%) 10 Mohawk Industries, Inc. (Series D) 7.20 04/15/12 11,209 -------------- HOSPITAL/NURSING MANAGEMENT (0.0%) 30 HCA, Inc. 6.30 10/01/12 30,640 10 HCA, Inc. 7.875 02/01/11 11,002 -------------- 41,642 -------------- HOTELS/RESORTS/CRUISELINES (0.0%) 25 Hyatt Equities LLC - 144A** 6.875 06/15/07 25,619 10 Starwood Hotels & Resorts Worldwide, Inc. 7.375 05/01/07 10,450 -------------- 36,069 -------------- HOUSEHOLD/PERSONAL CARE (0.0%) 25 Clorox Co. (The) 3.525++ 12/14/07 25,050 -------------- INDUSTRIAL CONGLOMERATES (0.1%) 25 Hutchison Whampoa International Ltd. - 144A** (Kyrgyzstan) 6.50 02/13/13 26,724 --------------
SEE NOTES TO FINANCIAL STATEMENTS 31
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------- INSURANCE BROKERS/SERVICES (0.1%) $ 100 Farmers Exchange Capital - 144A** 7.05% 07/15/28 $ 105,336 30 Marsh & McLennan Companies, Inc. 5.375 07/15/14 29,047 -------------- 134,383 -------------- MAJOR TELECOMMUNICATIONS (0.1%) 25 AT&T Corp. 9.75 11/15/31 32,500 20 Deutsche Telekom International Finance Corp. NV (Netherlands) 8.75 06/15/30 26,836 20 France Telecom S.A. (France) 8.75 03/01/31 27,629 10 Sprint Capital Corp. 8.75 03/15/32 13,803 25 Telecom Italia Capital SpA - 144A** (Luxembourg) 4.00 01/15/10 24,147 -------------- 124,915 -------------- MANAGED HEALTH CARE (0.1%) 30 Aetna, Inc. 7.875 03/01/11 34,397 25 Health Net, Inc. 9.875 04/15/11 29,366 10 WellPoint Inc. 3.75 12/14/07 9,801 10 WellPoint Inc. 4.25 12/15/09 9,822 -------------- 83,386 -------------- MEDIA CONGLOMERATES (0.0%) 10 News America Holdings, Inc. 7.28 06/30/28 11,490 15 Time Warner, Inc. 7.70 05/01/32 18,801 -------------- 30,291 -------------- MEDICAL SPECIALTIES (0.0%) 15 Fisher Scientific International, Inc. 6.75 08/15/14 15,863 -------------- MISCELLANEOUS COMMERCIAL SERVICES (0.0%) 30 Iron Mountain Inc. 7.75 01/15/15 31,050 -------------- MOTOR VEHICLES (0.1%) 15 DaimlerChrysler North American Holdings Co. 8.50 01/18/31 19,284 40 General Motors Corp. 8.375 07/15/33 36,300 -------------- 55,584 -------------- MULTI-LINE INSURANCE (0.1%) 60 AIG Sun America Global Finance VI - 144A** 6.30 05/10/11 64,397 15 American General Finance Corp. (Series MTNI) 4.625 05/15/09 14,882 10 AXA Financial Inc. 6.50 04/01/08 10,493 -------------- 89,772 --------------
SEE NOTES TO FINANCIAL STATEMENTS 32
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------- OTHER METALS/MINERALS (0.0%) $ 15 Brascan Corp. (Canada) 7.125% 06/15/12 $ 16,613 -------------- PROPERTY - CASUALTY INSURERS (0.0%) 20 St. Paul Travelers 5.01 08/16/07 20,124 -------------- PULP & PAPER (0.1%) 20 Abitibi-Consolidated Inc. (Canada) 8.55 08/01/10 21,100 40 Abitibi-Consolidated Inc. (Canada) 8.85 08/01/30 39,200 45 Bowater Canada Finance (Canada) 7.95 11/15/11 47,925 10 Sappi Papier Holding AG - 144A** (Austria) 6.75 06/15/12 10,382 -------------- 118,607 -------------- RAILROADS (0.0%) 13 Burlington North Santa Fe Railway Co. 4.575 01/15/21 12,896 15 Norfolk Southern Corp. 7.35 05/15/07 15,720 5 Union Pacific Corp. 6.625 02/01/08 5,243 15 Union Pacific Corp. 6.65 01/15/11 16,385 -------------- 50,244 -------------- REAL ESTATE INVESTMENT TRUSTS (0.0%) 35 EOP Operating L.P. 4.75 03/15/14 33,983 -------------- REGIONAL BANKS (0.0%) 30 Marshall & Isley Bank (Series BKNT) 3.80 02/08/08 29,520 -------------- SAVINGS BANKS (0.1%) 45 Household Finance Corp. 8.00 07/15/10 51,074 23 Washington Mutual Inc. 8.25 04/01/10 25,994 -------------- 77,068 -------------- SPECIALTY STORES (0.0%) 10 Autonation, Inc. 9.00 08/01/08 11,075 -------------- TOBACCO (0.0%) 20 Altria Group, Inc. 7.00 11/04/13 21,952 -------------- TRUCKS/CONSTRUCTION/FARM MACHINERY (0.0%) 45 Caterpillar Financial Services Corp. (Series MTNF) 3.35++ 08/20/07 45,084 -------------- WIRELESS TELECOMMUNICATIONS (0.0%) 10 AT&T Wireless Services, Inc. 8.75 03/01/31 13,857 -------------- TOTAL CORPORATE BONDS (COST $2,133,051) 2,158,584 --------------
SEE NOTES TO FINANCIAL STATEMENTS 33
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------- U.S. GOVERNMENT & AGENCIES OBLIGATIONS (5.7%) Federal Home Loan Mortgage Corp. $ 395 5.00% 05/01/20 $ 396,290 300 5.50 *** 306,000 Federal National Mortgage Assoc. 250 4.50 *** 245,938 250 6.00 *** 255,469 925 6.50 11/01/34 957,302 U.S. Treasury Bonds 965 6.125 08/15/29 1,189,363 85 6.375 08/15/27 106,476 U.S. Treasury Notes 600 3.50 11/15/06 596,883 400 4.25 08/15/13 400,625 2,300 5.625 05/15/08 2,395,057 U.S. Treasury Strips 400 0.00 02/15/25 163,239 375 0.00 02/15/27 140,507 -------------- TOTAL U.S. GOVERNMENT & AGENCIES OBLIGATIONS (COST $7,171,674) 7,153,149 -------------- CONVERTIBLE BONDS (2.3%) AIRLINES (0.3%) 350 Continental Airlines Inc. 5.00 06/15/23 352,188 -------------- ELECTRONIC EQUIPMENT/INSTRUMENTS (0.2%) 300 JDS Uniphase Corp. 0.00 11/15/10 236,250 -------------- FINANCIAL CONGLOMERATES (0.8%) 1,000 American Express Co. - 144A** 1.85# 12/01/33 1,032,500 -------------- FOOD: MAJOR DIVERSIFIED (0.2%) 300 General Mills Inc. 0.00 10/28/22 213,750 -------------- HOTELS/RESORTS/CRUISELINES (0.2%) 200 Starwood Hotels & Resorts Worldwide, Inc. 3.50 05/16/23 258,000 -------------- INTERNET RETAIL (0.2%) 300 Amazon.com, Inc. 4.75 02/01/09 291,000 -------------- OILFIELD SERVICES/EQUIPMENT (0.2%) 200 Schlumberger Ltd. (Netherlands Antilles) 2.125 06/01/23 234,500 --------------
SEE NOTES TO FINANCIAL STATEMENTS 34
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------- PHARMACEUTICALS: GENERIC DRUGS (0.2%) $ 250 Ivax Corp. 1.50% 03/01/24 $ 277,500 -------------- TOTAL CONVERTIBLE BONDS (COST $2,832,894) 2,895,688 -------------- ASSET-BACKED SECURITIES (1.0%) FINANCE/RENTAL/LEASING 150 American Express Credit Account Master Trust 2002-3 A 3.498++ 12/15/09 150,352 11 Asset Backed Funding Certificates 2004-HE1 A1 3.59++ 06/25/22 10,722 29 Capital Auto Receivables Asset Trust 2003-2 A3A 1.44 02/15/07 29,250 100 Capital Auto Receivables Asset Trust 2003-3 A3B 3.468++ 01/15/08 100,126 100 Citibank Credit Card Issuance Trust 2000-A1 A1 6.90 10/15/07 100,694 100 GE Capital Credit Card Master Note Trust 2004-1 A 3.27++ 06/15/10 100,129 100 GE Capital Credit Card Master Note Trust 2004-2 A 3.428++ 09/15/10 100,139 100 GE Dealer Floorplan Master Note Trust 2004-1 A 3.48++ 07/20/08 100,052 38 New Century Home Equity Loan Trust 2004-A AI11 2.598++ 08/25/34 37,671 51 Residential Asset Securities Corp. 2004-KSB AI1 3.62++ 10/25/22 51,109 70 SLM Student Loan Trust 2004-6 A2 2.74++ 01/25/13 70,535 150 SLM Student Loan Trust 2004-9 A2 2.72++ 10/25/12 149,934 25 TXU Electric Delivery Transition Bond Co. LLC 2004-1 A2 4.81 11/17/14 25,117 54 USAA Auto Owner Trust 2004-2 A2 2.41 02/15/07 54,030 67 Wachovia Auto Owner Trust 2004-B A2 2.40 05/21/07 67,140 56 World Omni Auto Receivables Trust 2004-A A2 2.58 07/12/07 56,130 -------------- TOTAL ASSET-BACKED SECURITIES (COST $1,206,075) 1,203,130 --------------
SEE NOTES TO FINANCIAL STATEMENTS 35
NUMBER OF SHARES VALUE - --------------------------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCK (0.2%) LIFE/HEALTH INSURANCE (0.2%) 8,800 MetLife, Inc. (Series B) (COST $227,920) $ 243,496 -------------- PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE - --------- ------ -------- FOREIGN GOVERNMENT OBLIGATIONS (0.1%) $ 30 Russian Federation (Russia) - 144A** 5.00% 03/31/30 33,375 125 United Mexican States (Mexico) 8.375 01/14/11 143,688 -------------- TOTAL FOREIGN GOVERNMENT OBLIGATIONS (COST $171,803) 177,063 -------------- SHORT-TERM INVESTMENT (a) (0.0%) U.S. GOVERNMENT OBLIGATION 50 U.S. Treasury Bills+ (COST $49,237) 3.35 01/12/06 49,237 -------------- TOTAL INVESTMENTS (COST $115,713,846) (b) (c) 99.8% 125,640,298 OTHER ASSETS IN EXCESS OF LIABILITIES 0.2 273,322 ----- -------------- NET ASSETS 100.0% $ 125,913,620 ===== ==============
- ---------- * NON-INCOME PRODUCING SECURITY. ** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. *** SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS WITH AN APPROXIMATE PRINCIPAL AMOUNT AND NO DEFINITE MATURITY DATE; THE ACTUAL PRINCIPAL AMOUNT AND THE MATURITY DATE WILL BE DETERMINED UPON SETTLEMENT. + ALL OR A PORTION OF THESE SECURITIES HAVE BEEN PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS IN THE AMOUNT OF $70,350. ++ RATE SHOWN IS THE RATE IN EFFECT AT JULY 31, 2005. # CURRENTLY A 1.85% COUPON RATE; WILL CONVERT TO 0% ON DECEMBER 1, 2006. (a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (b) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO $15,253,812 IN CONNECTION WITH OPEN FUTURES CONTRACTS AND SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS. (c) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $14,185,502 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $4,259,050, RESULTING IN NET UNREALIZED APPRECIATION OF $9,926,452. SEE NOTES TO FINANCIAL STATEMENTS 36 FUTURES CONTRACTS OPEN AT JULY 31, 2005:
UNREALIZED NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION/ CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE DEPRECIATION - ----------------------------------------------------------------------------------------------- 16 Long NASDAQ - 100 E-Mini September 2005 $ 515,680 $ 8,920 17 Short U.S. Treasury Notes 2 Year, September 2005 (3,510,234) 25,015 39 Short U.S. Treasury Notes 5 Year, September 2005 (4,180,922) 57,173 40 Long U.S. Treasury Notes 10 Year, September 2005 4,439,375 (41,641) 15 Short U.S. Treasury Notes 20 Year, September 2005 (1,729,688) 22,017 --------- Net unrealized appreciation $ 71,484 =========
SEE NOTES TO FINANCIAL STATEMENTS 37 MORGAN STANLEY ALLOCATOR FUND FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JULY 31, 2005 (UNAUDITED) ASSETS: Investments in securities, at value (cost $115,713,846) $ 125,640,298 Cash 60,848 Receivable for: Investments sold 1,335,149 Interest 132,943 Dividends 121,437 Shares of beneficial interest sold 18,139 Variation margin 2,121 Prepaid expenses and other assets 53,906 --------------- TOTAL ASSETS 127,364,841 --------------- LIABILITIES: Payable for: Investments purchased 843,052 Shares of beneficial interest redeemed 375,874 Distribution fee 94,729 Investment advisory fee 71,979 Administration fee 8,594 Accrued expenses and other payables 56,993 --------------- TOTAL LIABILITIES 1,451,221 --------------- NET ASSETS $ 125,913,620 =============== COMPOSITION OF NET ASSETS: Paid-in-capital $ 115,109,429 Net unrealized appreciation 9,997,936 Net investment loss (6,004) Accumulated undistributed net realized gain 812,259 --------------- NET ASSETS $ 125,913,620 =============== CLASS A SHARES: Net Assets $ 15,194,604 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 1,386,204 NET ASSET VALUE PER SHARE $ 10.96 =============== MAXIMUM OFFERING PRICE PER SHARE, (NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 11.57 =============== CLASS B SHARES: Net Assets $ 92,738,610 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 8,556,029 NET ASSET VALUE PER SHARE $ 10.84 =============== CLASS C SHARES: Net Assets $ 14,483,372 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 1,336,609 NET ASSET VALUE PER SHARE $ 10.84 =============== CLASS D SHARES: Net Assets $ 3,497,034 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 318,011 NET ASSET VALUE PER SHARE $ 11.00 ===============
SEE NOTES TO FINANCIAL STATEMENTS 38 STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 31, 2005 (UNAUDITED) NET INVESTMENT LOSS: INCOME Dividends $ 1,037,762 Interest 281,764 --------------- TOTAL INCOME 1,319,526 --------------- EXPENSES Distribution fee (Class A shares) 18,693 Distribution fee (Class B shares) 506,814 Distribution fee (Class C shares) 76,023 Investment advisory fee 455,764 Administration fee 54,419 Transfer agent fees and expenses 50,641 Professional fees 41,072 Registration fees 37,477 Custodian fees 33,949 Shareholder reports and notices 28,567 Trustees' fees and expenses 1,229 Other 24,100 --------------- TOTAL EXPENSES 1,328,748 --------------- NET INVESTMENT LOSS (9,222) --------------- NET REALIZED AND UNREALIZED GAIN (LOSS): NET REALIZED GAIN/LOSS ON: Investments 1,388,880 Futures contracts (11,469) --------------- NET REALIZED GAIN 1,377,411 --------------- NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON: Investments 3,532,316 Futures contracts 74,696 --------------- NET APPRECIATION 3,607,012 --------------- NET GAIN 4,984,423 --------------- NET INCREASE $ 4,975,201 ===============
SEE NOTES TO FINANCIAL STATEMENTS 39 STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JULY 31, 2005 JANUARY 31, 2005 ---------------- ---------------- (UNAUDITED) INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income (loss) $ (9,222) $ 398,662 Net realized gain 1,377,411 14,693,417 Net change in unrealized appreciation 3,607,012 (11,134,676) ---------------- ---------------- NET INCREASE 4,975,201 3,957,403 ---------------- ---------------- DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income Class A shares (30,984) (146,436) Class B shares (108,494) (156,304) Class C shares (21,257) (25,204) Class D shares (8,269) (72,064) Net realized gain Class A shares (132,321) (1,657,944) Class B shares (804,019) (11,996,031) Class C shares (121,579) (1,697,139) Class D shares (31,802) (630,134) ---------------- ---------------- TOTAL DIVIDENDS AND DISTRIBUTIONS (1,258,725) (16,381,256) ---------------- ---------------- Net decrease from transactions in shares of beneficial interest (32,603,258) (47,024,636) ---------------- ---------------- NET DECREASE (28,886,782) (59,448,489) NET ASSETS: Beginning of period 154,800,402 214,248,891 ---------------- ---------------- END OF PERIOD (INCLUDING A NET INVESTMENT LOSS OF $6,004 AND ACCUMULATED UNDISTRIBUTED INVESTMENT INCOME OF $172,222, RESPECTIVELY) $ 125,913,620 $ 154,800,402 ================ ================
SEE NOTES TO FINANCIAL STATEMENTS 40 MORGAN STANLEY ALLOCATOR FUND NOTES TO FINANCIAL STATEMENTS - JULY 31, 2005 (UNAUDITED) 1. ORGANIZATION AND ACCOUNTING POLICIES Morgan Stanley Allocator Fund (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a non-diversified, open-end management investment company. The Fund's investment objective is selecting securities to maximize total investment return through different stages of an economic cycle. The Fund was organized as a Massachusetts business trust on October 25, 2002 and commenced operations on February 26, 2003. 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 share, 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 41 trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund's Trustees or by the Investment Adviser using a pricing service and/or procedures approved by the Trustees of the Fund; (7) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; and (8) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily. C. REPURCHASE AGREEMENTS -- Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment Adviser, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, U.S. Treasury or federal agency obligations. The Fund may also invest directly with institutions in repurchase agreements. The Fund's custodian receives the collateral, which is marked-to-market daily to determine that the value of the collateral does not decrease below the repurchase price plus accrued interest. D. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class. E. FUTURES CONTRACTS -- A futures contract is an agreement between two parties to buy and sell financial instruments or contracts based on financial indices at a set price on a future date. Upon entering into such a contract, the Fund is required to pledge to the broker cash, U.S. Government securities or other liquid portfolio securities equal to the minimum initial margin requirements of the applicable futures exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments known as variation margin are recorded by the Fund as unrealized gains and losses. Upon closing of the contract, the Fund realizes a gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. 42 F. FOREIGN CURRENCY TRANSLATION AND FORWARD FOREIGN CURRENCY CONTRACTS -- The books and records of the Fund are maintained in U.S. dollars as follows: (1) the foreign currency market value of investment securities, other assets and liabilities and forward foreign currency contracts ("forward contracts") are translated at the exchange rates prevailing at the end of the period; and (2) purchases, sales, income and expenses are translated at the exchange rates prevailing on the respective dates of such transactions. The resultant exchange gains and losses are recorded as realized and unrealized gain/loss on foreign exchange transactions. Pursuant to U.S. federal income tax regulations, certain foreign exchange gains/losses included in realized and unrealized gain/loss are included in or are a reduction of ordinary income for federal income tax purposes. The Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of the securities. Forward contracts are valued daily at the appropriate exchange rates. The resultant unrealized exchange gains and losses are recorded as unrealized foreign currency gain or loss. The Fund records realized gains or losses on delivery of the currency or at the time the forward contract is extinguished (compensated) by entering into a closing transaction prior to delivery. G. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required. H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to shareholders are recorded on the ex-dividend date. I. USE OF ESTIMATES -- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. 2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS Pursuant to an Investment Advisory Agreement with the Investment Adviser, the Fund pays an advisory fee, accrued daily and payable monthly, by applying the following annual rate of 0.67% to the net assets of the Fund determined as of the close of each business day. Pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% to the Fund's daily net assets. 3. PLAN OF DISTRIBUTION Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Adviser and Administrator. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee 43 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 $3,168,194 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 six months 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 1.0%, respectively. The Distributor has informed the Fund that for the six months ended July 31, 2005, it received contingent deferred sales charges from certain redemptions of the Fund's Class B shares and Class C shares of $267,738 and $1,084, respectively. The respective shareholders pay such charges which are not an expense of the Fund. 4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES The cost of purchases and proceeds from sales/prepayments of portfolio securities, excluding short-term investments, for the six months ended July 31, 2005 aggregated $34,966,937 and $70,538,632, respectively. Included in the aforementioned transactions are purchases and sales/prepayments of U.S Government Securities of $9,270,535 and $13,911,225, respectively. For the six months ended July 31, 2005, the Fund incurred brokerage commissions of $5,503 with Morgan Stanley & Co., Inc., an affiliate of the Investment Adviser, Administrator and Distributor, for portfolio transactions executed on behalf of the Fund. Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund's transfer agent. 44 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. SHARES OF BENEFICIAL INTEREST Transactions in shares of beneficial interest were as follows:
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JULY 31, 2005 JANUARY 31, 2005 ----------------------------- ---------------------------- (UNAUDITED) SHARES AMOUNT SHARES AMOUNT ------------- ------------- ------------ ------------- CLASS A SHARES Sold 84,780 $ 900,830 382,760 $ 4,288,847 Conversion from Class B 412,550 4,289,713 -- -- Reinvestment of dividend and distributions (586,683) (6,236,808) 150,624 1,650,200 Redeemed 13,968 148,900 (1,015,352) (11,300,294) ------------- ------------- ------------ ------------- Net decrease -- Class A (75,385) (897,365) (481,968) (5,361,247) ------------- ------------- ------------ ------------- CLASS B SHARES Sold 152,635 1,612,735 1,105,328 12,362,538 Conversion to Class A (416,599) (4,289,713) -- -- Reinvestment of dividends and distributions (2,301,960) (24,377,793) 1,021,928 11,109,253 Redeemed 79,435 837,248 (4,983,593) (54,958,695) ------------- ------------- ------------ ------------- Net decrease -- Class B (2,486,489) (26,217,523) (2,856,337) (31,486,904) ------------- ------------- ------------ ------------- CLASS C SHARES Sold 49,133 523,981 193,028 2,140,499 Reinvestment of dividends and distributions (330,948) (3,513,554) 146,728 1,594,805 Redeemed 12,598 132,781 (672,931) (7,434,605) ------------- ------------- ------------ ------------- Net decrease -- Class C (269,217) (2,856,792) (333,175) (3,699,301) ------------- ------------- ------------ ------------- CLASS D SHARES Sold 5,789 62,259 79,027 885,410 Reinvestment of dividends and distributions (255,588) (2,730,122) 59,339 651,744 Redeemed 3,394 36,285 (713,229) (8,014,338) ------------- ------------- ------------ ------------- Net decrease -- Class D (246,405) (2,631,578) (574,863) (6,477,184) ------------- ------------- ------------ ------------- Net decrease in Fund (3,077,496) $ (32,603,258) (4,246,343) $ (47,024,636) ============= ============= ============ =============
45 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. The Fund may purchase and sell interest rate and index futures ("futures contracts") to facilitate trading; increase or decrease Fund's market exposure, seek higher investment returns, or to protect against a decline in the value of the Fund's securities or an increase in prices of securities that may be purchased. Forward contracts and futures contracts involve elements of market risk in excess of the amounts 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 or in the value of the underlying securities. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts. 7. FEDERAL INCOME TAX STATUS The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital. As of January 31, 2005, the Fund had temporary book/tax differences primarily attributable to capital loss deferrals on wash sales, mark-to market of open futures contracts, capital loss deferrals on straddles and tax adjustments on real estate investment trust ("REITs") held by the Fund. 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 46 affiliates of the Investment Adviser allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Adviser or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Adviser or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants have moved to dismiss the action and intend to otherwise vigorously defend it. On March 10, 2005, Plaintiffs sought leave to supplement their complaint to assert claims on behalf of other investors. While the Fund and Adviser believe that each has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter. 47 MORGAN STANLEY ALLOCATOR FUND FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE PERIOD FOR THE SIX FOR THE YEAR FEBRUARY 26, 2003* MONTHS ENDED ENDED THROUGH JULY 31, 2005 JANUARY 31, 2005 JANUARY 31, 2004 -------------------- ------------------- -------------------- (UNAUDITED) CLASS A SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 10.62 $ 11.39 $ 10.00 ----------- ---------- ---------- Income from investment operations: Net investment income++ 0.03 0.09 0.05 Net realized and unrealized gain 0.42 0.32 1.67 ----------- ---------- ---------- Total income from investment operations 0.45 0.41 1.72 ----------- ---------- ---------- Less dividends and distributions from: Net investment income (0.02) (0.10) - Net realized gain (0.09) (1.08) (0.33) ----------- ---------- ---------- Total dividends and distributions (0.11) (1.18) (0.33) ----------- ---------- ---------- Net asset value, end of period $ 10.96 $ 10.62 $ 11.39 =========== ========== ========== TOTAL RETURN+ 4.28%(1) 3.57% 17.16%(1) RATIOS TO AVERAGE NET ASSETS(3): Expenses 1.32%(2) 1.23% 1.23%(2) Net investment income 0.62%(2) 0.84% 0.47%(2) SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 15,195 $ 15,527 $ 22,141 Portfolio turnover rate 25%(1) 126% 239%(1)
- ---------- * COMMENCEMENT OF OPERATIONS. ++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 48
FOR THE PERIOD FOR THE SIX FOR THE YEAR FEBRUARY 26, 2003* MONTHS ENDED ENDED THROUGH JULY 31, 2005 JANUARY 31, 2005 JANUARY 31, 2004 -------------------- ------------------- -------------------- (UNAUDITED) CLASS B SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 10.54 $ 11.31 $ 10.00 ---------- ---------- ---------- Income (loss) from investment operations: Net investment income (loss)++ (0.01) 0.01 (0.03) Net realized and unrealized gain 0.41 0.31 1.67 ---------- ---------- ---------- Total income from investment operations 0.40 0.32 1.64 ---------- ---------- ---------- Less dividends and distributions from: Net investment income (0.01) (0.01) - Net realized gain (0.09) (1.08) (0.33) ---------- ---------- ---------- Total dividends and distributions (0.10) (1.09) (0.33) ---------- ---------- ---------- Net asset value, end of period $ 10.84 $ 10.54 $ 11.31 ========== ========== ========== TOTAL RETURN+ 3.85%(1) 2.84% 16.36%(1) RATIOS TO AVERAGE NET ASSETS(3): Expenses 2.07%(2) 1.98% 2.02%(2) Net investment income (loss) (0.13)%(2) 0.09% (0.32)%(2) SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 92,739 $ 116,344 $ 157,175 Portfolio turnover rate 25%(1) 126% 239%(1)
- ---------- * COMMENCEMENT OF OPERATIONS. ++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 49
FOR THE PERIOD FOR THE SIX FOR THE YEAR FEBRUARY 26, 2003* MONTHS ENDED ENDED THROUGH JULY 31, 2005 JANUARY 31, 2005 JANUARY 31, 2004 -------------------- ------------------- -------------------- (UNAUDITED) CLASS C SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 10.54 $ 11.31 $ 10.00 ---------- ---------- ---------- Income (loss) from investment operations: Net investment income (loss)++ (0.01) 0.01 (0.03) Net realized and unrealized gain 0.42 0.32 1.67 ---------- ---------- ---------- Total income from investment operations 0.41 0.33 1.64 ---------- ---------- ---------- Less dividends and distributions from: Net investment income (0.02) (0.02) - Net realized gain (0.09) (1.08) (0.33) ---------- ---------- ---------- Total dividends and distributions (0.11) (1.10) (0.33) ---------- ---------- ---------- Net asset value, end of period $ 10.84 $ 10.54 $ 11.31 ========== ========== ========== TOTAL RETURN+ 3.98%(1) 2.76% 16.36%(1) RATIOS TO AVERAGE NET ASSETS(3): Expenses 2.07%(2) 1.96% 2.02%(2) Net investment income (loss) (0.13)%(2) 0.11% (0.32)%(2) SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 14,483 $ 16,920 $ 21,927 Portfolio turnover rate 25%(1) 126% 239%(1)
- ---------- * COMMENCEMENT OF OPERATIONS. ++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 50
FOR THE PERIOD FOR THE SIX FOR THE YEAR FEBRUARY 26, 2003* MONTHS ENDED ENDED THROUGH JULY 31, 2005 JANUARY 31, 2005 JANUARY 31, 2004 -------------------- ------------------- -------------------- (UNAUDITED) CLASS D SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 10.65 $ 11.42 $ 10.00 ---------- ---------- ---------- Income from investment operations: Net investment income++ 0.05 0.12 0.07 Net realized and unrealized gain 0.41 0.32 1.68 ---------- ---------- ---------- Total income from investment operations 0.46 0.44 1.75 ---------- ---------- ---------- Less dividends and distributions from: Net investment income (0.02) (0.13) - Net realized gain (0.09) (1.08) (0.33) ---------- ---------- ---------- Total dividends and distributions (0.11) (1.21) (0.33) ---------- ---------- ---------- Net asset value, end of period $ 11.00 $ 10.65 $ 11.42 ========== ========== ========== TOTAL RETURN+ 4.39%(1) 3.84% 17.46%(1) RATIOS TO AVERAGE NET ASSETS(3): Expenses 1.07%(2) 0.98% 1.02%(2) Net investment income 0.87%(2) 1.09% 0.68%(2) SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 3,497 $ 6,009 $ 13,006 Portfolio turnover rate 25%(1) 126% 239%(1)
- ---------- * COMMENCEMENT OF OPERATIONS. ++ 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) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 51 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 The financial statements included herein have been taken from the records of the Fund without examination by the independent auditors and accordingly they do not express an opinion thereon. This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. (C)2005 Morgan Stanley [MORGAN STANLEY LOGO] 39947RPT-RA05-00757P-Y07/05 [GRAPHIC] MORGAN STANLEY FUNDS MORGAN STANLEY ALLOCATOR FUND SEMIANNUAL REPORT JULY 31, 2005 [MORGAN STANLEY LOGO] Item 2. Code of Ethics. Not applicable for semiannual reports. Item 3. Audit Committee Financial Expert. Not applicable for semiannual reports. Item 4. Principal Accountant Fees and Services Not applicable for semiannual reports. Item 5. Audit Committee of Listed Registrants. Not applicable for semiannual reports. Item 6. Refer to Item 1. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable for semiannual reports. Item 8. Portfolio Managers of Closed-End Management Investment Companies Applicable only to reports filed by closed-end funds. Item 9. Closed-End Fund Repurchases Applicable to reports filed by closed-end funds. Item 10. Submission of Matters to a Vote of Security Holders Not applicable. Item 11. Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the 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) Code of Ethics - Not applicable for semiannual reports. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. 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 Allocator 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.CERT 2 a2163025zex-99_cert.txt EX-99.CERT 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 Allocator 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 Allocator 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 3 a2163025zex-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 Allocator 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 Allocator Fund and will be retained by Morgan Stanley Allocator 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 Allocator 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 Allocator Fund and will be retained by Morgan Stanley Allocator Fund and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----