N-CSR 1 a2149292zn-csr.txt N-CSR [ANNOTATED FORM N-CSR FOR ANNUAL REPORTS] 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: 811-05624 ------------------------------------------------- Morgan Stanley Institutional Fund, Inc. -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 1221 Avenue of the America's 22nd Floor New York, NY 10020 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Ronald E. Robison 1221 Avenue of the Americas, 33rd Floor New York, New York 10020 -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: 1-800-221-6726 ----------------------------------- Date of fiscal year end: 12/31 -------------------------------------------------------------- Date of reporting period: 12/31/04 -------------------------------------------------------------- Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. Section 3507. ITEM 1. REPORTS TO STOCKHOLDERS. The Fund's annual report transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940 is as follows: [MORGAN STANLEY LOGO] 2004 ANNUAL REPORT DECEMBER 31, 2004 MORGAN STANLEY INSTITUTIONAL FUND, INC. GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS ACTIVE INTERNATIONAL ALLOCATION EMERGING MARKETS EUROPEAN REAL ESTATE GLOBAL FRANCHISE GLOBAL VALUE EQUITY INTERNATIONAL EQUITY INTERNATIONAL MAGNUM INTERNATIONAL SMALL CAP U.S. EQUITY PORTFOLIOS EQUITY GROWTH FOCUS EQUITY SMALL COMPANY GROWTH U.S. REAL ESTATE VALUE EQUITY FIXED INCOME PORTFOLIO EMERGING MARKETS DEBT MONEY MARKET PORTFOLIOS MONEY MARKET MUNICIPAL MONEY MARKET 2004 ANNUAL REPORT December 31, 2004 Table of Contents SHAREHOLDER'S LETTER 3 PERFORMANCE SUMMARY 4 INVESTMENT OVERVIEWS AND PORTFOLIOS OF INVESTMENTS GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS: Active International Allocation 6 Emerging Markets 20 European Real Estate 27 Global Franchise 31 Global Value Equity 35 International Equity 40 International Magnum 45 International Small Cap 52 U.S. EQUITY PORTFOLIOS: Equity Growth 57 Focus Equity 62 Small Company Growth 67 U.S. Real Estate 72 Value Equity 77 FIXED INCOME PORTFOLIO: Emerging Markets Debt 82 MONEY MARKET PORTFOLIOS: Money Market 88 Municipal Money Market 91 STATEMENTS OF ASSETS AND LIABILITIES 96 STATEMENTS OF OPERATIONS 100 STATEMENTS OF CHANGES IN NET ASSETS 104 FINANCIAL HIGHLIGHTS 112 NOTES TO FINANCIAL STATEMENTS 127 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 137 FEDERAL INCOME TAX INFORMATION 138 DIRECTOR AND OFFICER INFORMATION 139
THIS REPORT IS AUTHORIZED FOR DISTRIBUTION ONLY WHEN PRECEDED OR ACCOMPANIED BY PROSPECTUSES OF THE MORGAN STANLEY INSTITUTIONAL FUND, INC. TO RECEIVE A PROSPECTUS AND/OR SAI, WHICH CONTAINS MORE COMPLETE INFORMATION SUCH AS INVESTMENT OBJECTIVES, CHARGES, EXPENSES, POLICIES FOR VOTING PROXIES, RISK CONSIDERATIONS, AND DESCRIBES IN DETAIL EACH OF THE PORTFOLIO'S INVESTMENT POLICIES TO THE PROSPECTIVE INVESTOR, PLEASE CALL 1-(800)-548-7786. PLEASE READ THE PROSPECTUSES CAREFULLY BEFORE YOU INVEST OR SEND MONEY. ADDITIONALLY, YOU CAN ACCESS PORTFOLIO INFORMATION INCLUDING PERFORMANCE, CHARACTERISTICS, AND INVESTMENT TEAM COMMENTARY THROUGH MORGAN STANLEY INVESTMENT MANAGEMENT'S WEB-SITE: www.morganstanley.com/im. IS05-001841-Y12/04 1 (This page has been left blank intentionally.) 2 2004 ANNUAL REPORT December 31, 2004 Dear Shareholders: We are pleased to present to you the Fund's Annual Report for the year ended December 31, 2004. Our Fund currently offers 16 portfolios providing investors with a full array of global and domestic equity and fixed-income products. The Fund's portfolios, together with the portfolios of the Morgan Stanley Institutional Fund Trust, provide investors with a means to help them meet specific investment needs and to allocate their investments among equities (e.g., value and growth; small, medium, and large capitalization), fixed income (e.g., short, medium, and long duration; investment grade and high yield) and cash (e.g., money market). Sincerely, /s/ Ronald E. Robison Ronald E. Robison Executive Vice President -- Principal Executive Officer January 2005 3 2004 ANNUAL REPORT December 31, 2004 PERFORMANCE SUMMARY
ONE YEAR INCEPTION DATES TOTAL RETURN ------------------------------------------------------------------- COMPARABLE CLASS A CLASS B CLASS A CLASS B INDICES ------------------------------------------------------------------- GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS: Active International Allocation 1/17/92 1/2/96 16.64% 16.29% 20.25%(1) Emerging Markets 9/25/92 1/2/96 24.09 23.84 25.55 (2) European Real Estate 10/1/97 10/1/97 47.49 47.15 50.60 (3) Global Franchise 11/28/01 11/28/01 13.77 13.56 14.72 (4) Global Value Equity 7/15/92 1/2/96 14.13 13.78 14.72 (4) International Equity 8/4/89 1/2/96 19.96 19.67 20.25 (1) International Magnum 3/15/96 3/15/96 18.45 18.15 20.25 (1) International Small Cap 12/15/92 -- 33.53 -- 30.78 (5) U.S. EQUITY PORTFOLIOS: Equity Growth 4/2/91 1/2/96 7.75 7.45 6.30 (6) Focus Equity 3/8/95 1/2/96 7.00 6.75 6.30 (6) Small Company Growth 11/1/89 1/2/96 19.17 18.79 14.31 (7) U.S. Real Estate 2/24/95 1/2/96 37.28 36.95 31.58 (8) Value Equity 1/31/90 1/2/96 14.56 14.07 16.49 (9) FIXED INCOME PORTFOLIO: Emerging Markets Debt 2/1/94 1/2/96 10.07 9.90 11.73 (10) MONEY MARKET PORTFOLIOS: Money Market 11/15/88 -- -- -- -- Municipal Money Market 2/10/89 -- -- -- --
YIELD INFORMATION AS OF DECEMBER 31, 2004
7 DAY 7 DAY 30 DAY 30 DAY CURRENT EFFECTIVE CURRENT COMPARABLE YIELD+ YIELD+ YIELD++ YIELD ------------------------------------------------------ MONEY MARKET PORTFOLIOS: Money Market 1.96% 1.98% 1.88% 1.73% (11) Municipal Money Market 1.62 1.63 1.41 1.20 (12)
+ The 7 day current yield and 7 day effective yield assume an annualization of the current yield with all dividends reinvested. As with all money market portfolios, yields will fluctuate as market conditions change and the 7 day yields are not necessarily indicative of future performance. ++ The current 30 day yield reflects the net investment income generated by the Portfolio over a specified 30 day period expressed as an annual percentage. Expenses accrued for the 30 day period include any fees charged to all shareholders. Yields will fluctuate as market conditions change and are not necessarily indicative of future performance. 4 2004 ANNUAL REPORT December 31, 2004 PERFORMANCE SUMMARY (CONT'D)
FIVE YEAR TEN YEAR AVERAGE ANNUAL TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN ------------------------------------------------------------------------------- COMPARABLE COMPARABLE CLASS A CLASS B INDICES CLASS A CLASS B INDICES ------------------------------------------------------------------------------- GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS: Active International Allocation (1.03)% 0.04% (1.13)%(1) 6.74% -- 5.62%(1) Emerging Markets 1.21 0.96 4.40 (2) 4.47 -- 3.19 (2) European Real Estate 22.60 22.26 22.55 (3) -- -- -- (3) Global Franchise -- -- -- (4) -- -- -- (4) Global Value Equity 4.54 4.26 (2.45) (4) 10.38 -- 8.09 (4) International Equity 8.57 8.32 (1.13) (1) 12.26 -- 5.62 (1) International Magnum (0.74) (1.00) (1.13) (1) -- -- -- (1) International Small Cap 11.99 -- 8.64 (5) 11.79 -- 3.31 (5) U.S. EQUITY PORTFOLIOS: (5.86) (6.08) (9.29) (6) 11.86 -- 9.59 (6) Equity Growth (5.66) (5.89) (9.29) (6) -- -- -- (6) Focus Equity 1.82 1.58 (3.57) (7) 15.49 -- 7.12 (7) Small Company Growth 21.86 21.49 21.95 (8) -- -- -- (8) U.S. Real Estate 5.75 6.71 5.27 (9) 12.76 -- 13.83 (9) Value Equity FIXED INCOME PORTFOLIO: Emerging Markets Debt 14.44 14.19 12.99 (10) 13.97 -- 14.49(10) MONEY MARKET PORTFOLIOS: Money Market -- -- -- -- -- -- Municipal Money Market -- -- -- -- -- -- SINCE INCEPTION AVERAGE ANNUAL TOTAL RETURN ---------------------------------------------- COMPARABLE COMPARABLE INDICES - INDICES - CLASS A CLASS A CLASS B CLASS B ---------------------------------------------- GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS: Active International Allocation 6.97% 6.54% 7.52% 5.01%(1) Emerging Markets 8.29 7.39 5.70 4.09 (2) European Real Estate 14.68 15.53 14.39 15.53 (3) Global Franchise 17.61 7.33 17.28 7.33 (4) Global Value Equity 11.85 8.51 9.14 6.72 (4) International Equity 11.69 4.52 11.98 5.01 (1) International Magnum 4.64 5.17 4.36 5.17 (1) International Small Cap 13.72 6.15 -- -- (5) U.S. EQUITY PORTFOLIOS: 10.61 8.98 8.37 6.81 (6) Equity Growth 13.10 9.13 9.74 6.81 (6) Focus Equity 13.54 7.56 13.39 4.73 (7) Small Company Growth 17.77 15.03 16.66 14.77 (8) U.S. Real Estate 11.13 12.59 13.46 11.31 (9) Value Equity FIXED INCOME PORTFOLIO: Emerging Markets Debt 11.24 11.03 12.19 13.10 (10) MONEY MARKET PORTFOLIOS: Money Market -- -- -- -- Municipal Money Market -- -- -- --
PERFORMANCE DATA QUOTED ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED AND REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT www.morganstanley.com/im OR CALL 1-800-548-7786. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. INDICES: (1) MSCI EAFE (Europe, Australasia, and Far East) (2) MSCI Emerging Markets Free (3) GPR General Real Estate Securities - Europe (4) MSCI World (5) MSCI EAFE Small Cap Total Return (6) Russell 1000 Growth (7) Russell 2000 Growth (8) National Association of Real Estate Investment Trusts (NAREIT) Equity (9) Russell 1000 Value (10) J.P. Morgan Emerging Markets Global Bond (11) iMoneyNet Money Fund Comparable Yield (12) iMoneyNet Municipal Money Fund Comparable Yield INVESTMENTS IN THE MONEY MARKET OR MUNICIPAL MONEY MARKET PORTFOLIOS ARE NEITHER INSURED NOR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION. ALTHOUGH THE MONEY MARKET AND MUNICIPAL MONEY MARKET PORTFOLIOS SEEK TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THESE PORTFOLIOS. PLEASE READ THE PORTFOLIOS' PROSPECTUSES CAREFULLY BEFORE YOU INVEST OR SEND MONEY. 5 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO [CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
ACTIVE LIPPER INTERNATIONAL INTERNATIONAL FISCAL YEAR ALLOCATION MULTI-CAP ENDED PORTFOLIO - MSCI EAFE CORE FUNDS DECEMBER 31 CLASS A INDEX INDEX 1994 500000 500000 500000 1995 552850 556050 560579 1996 606532 589691 639149 1997 658754 600188 688978 1998 791295 720225 750912 1999 1011452 914398 1099156 2000 860038 784811 960518 2001 708413 616548 809649 2002 615540 518270 710779 2003 823285 718270 938994 2004 960350 863650 1096150
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT
ACTIVE LIPPER INTERNATIONAL INTERNATIONAL FISCAL YEAR ALLOCATION MULTI-CAP ENDED PORTFOLIO - MSCI EAFE CORE FUNDS DECEMBER 31 CLASS B INDEX INDEX ** 100000 100000 100000 1996 110240 106050 114212 1997 120900 107938 123595 1998 147498 129525 135215 1999 188783 164445 194722 2000 163260 141140 168032 2001 136958 110880 138555 2002 120812 93206 119218 2003 165066 129174 163419 2004 191970 155220 194310
* Minimum Investment ** Commenced offering on January 2, 1996. In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1) AND THE LIPPER INTERNATIONAL MULTI-CAP CORE FUNDS INDEX(2)
TOTAL RETURNS(3) -------------------------------------------- AVERAGE ANNUAL ---------------------------------- ONE FIVE TEN SINCE YEAR YEARS YEARS INCEPTION(6) -------------------------------------------------------------------------------- Portfolio - Class A (4) 16.64% (1.03)% 6.74% 6.97% MSCI EAFE Index 20.25 (1.13) 5.62 6.54 Lipper International Multi-Cap Core Funds Index 19.20 0.01 8.17 -- Portfolio - Class B (5) 16.29 0.04 -- 7.52 MSCI EAFE Index 20.25 (1.13) -- 5.01 Lipper International Multi-Cap Core Funds Index 19.20 0.01 -- 7.66
(1) The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. & Canada. The MSCI EAFE Index consists of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. (2) The Lipper International Multi-Cap Core Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper International Multi-Cap Core Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 10 funds represented in this Index. As of the date of this report, the Portfolio is in the Lipper International Multi-Cap Core Funds classification. (3) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (4) Commenced operations on January 17, 1992 (5) Commenced offering on January 2, 1996 (6) For comparative purposes, average annual since inception returns listed for the indexes refer to the inception date or initial offering of the respective share class of the Portfolio, not the inception of the index. 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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO SHARES. The Active International Allocation Portfolio seeks long-term capital appreciation by investing primarily, in accordance with country and sector weightings determined by the Adviser, in equity securities of non-U.S. issuers which, in the aggregate, replicate broad market indices. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental 6 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO supervision and regulation, less liquidity and the potential for market volatility and political instability. PERFORMANCE For the year ended December 31, 2004, the Portfolio had a total return based on net asset value per share of 16.64%, net of fees, for Class A shares and 16.29%, net of fees, for Class B shares compared to 20.25% for the Morgan Stanley Capital International (MSCI) EAFE Index (the "Index"). FACTORS AFFECTING PERFORMANCE - For the full year period, we maintained a fully invested strategy and did not move to a defensive posture. In our opinion, the overall market called to stay fully invested and to keep some exposure to beta (Asia and Emerging Markets) and to materials and resources. - Performance was hurt by Germany's poor showing, by Japan's third and fourth quarter underperformance, a small underweight to technology in the first quarter and by a slight underweight to real estate and some financials. - Nearly every country in the Index had positive performance for 2004, and U.S. based investors were helped by further strength of foreign currencies. In Asia, Australia and Hong Kong each gained over 25%, while in Singapore, the currency rose 17.5%. Japan was aided by the nearly 5% boost in the Japanese yen. - There was some divergence in sector performance for the year, with utilities (34.0%) and energy (24.7%) being the best, and with information technology (6.8%) and health care (14.6%)being the worst. MANAGEMENT STRATEGIES - We remain cautiously optimistic on markets for the next few months at least and continue to favor the higher growth/somewhat cyclical areas of Asia and core Europe over the United Kingdom and late cyclical sectors over staples. - While it is true that markets need to adjust to a still tightening Federal Reserve Policy, some rise in inflation, and slowing global economies, we do not believe the business and market cycles have to abort just yet. While leading economic indicators have been falling since February 2004, manufacturing and business surveys are still mixed-to-positive, long and short interest rates remain low, and corporate and household cash levels quite high. Our work on valuations shows that global equities are cheap almost everywhere versus bond yields. In Europe, most dividend yields are higher than bond yields. This gives support to markets even if economic growth just muddles along. - Japan's economic recovery has slowed - to the point where many investors (such as ourselves) who were hopeful that "this time it was different" are beginning to feel "deja vu all over again." While it is true that Japan's economy remains primarily cyclically driven by growth in the United States and China, we believe that the corporate/micro story has improved and that deflation is nearing its end, which provides a better economic foundation for this slowdown. This is not all bad for the long run and it adds to the operating leverage if there is any surprise in top line growth. We are hopeful there will be. - An issue that has gotten a lot of attention in the past quarter has been the potential ramifications of a decline in the U.S. dollar. Aside from the obvious benefit rising currencies give to U.S. investors in foreign markets - the worry is that a too-rapid U.S. dollar decline could become disorderly; raising U.S. Treasury yields/inflation and choking off economic growth. The dollar decline up to this point has been orderly (about 15% on a trade weighted basis since early 2002), and unlike in 1987, inflation is under control, U.S. Treasury yields remain low, and the Asian buyers of U.S. assets continue to seem inclined to buy. This gives more hope that the slowing of U.S. (at least relative) demand, which is required to bring the U.S. current account deficit back in line, can occur in part by boosting European, Japanese, and Asian domestic growth. If these events occur, the result should benefit international market returns. - While 2004 was a big disappointment on the European economic front (2.0% gross domestic product (GDP) growth vs. 4.4% for U.S., 2.8% for Japan), European markets powered ahead each time the outlook for continued global health cleared. It will be interesting in 2005 to see how these factors play out, but the impetus and acknowledgement of the need for corporate self-help in terms of cost cutting and productivity has been greatly heightened in the past couple years. - The emerging markets remain the fastest growing regions of the world and still the cheapest, in our opinion. Earnings expectations for 2005 are subdued, as return on equities have risen greatly, and no one wants to forecast too optimistically given the uncertainties of China, oil, the U.S. dollar etc. We continue to have positions in Brazil, China, Thailand, Russia and Malaysia. The frustration is how often these markets run at odds to one another. However, as long as the global growth environment remains stable, we believe these markets should add value over time. A positive 7 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO surprise could be that China's growth is solid for another year. EXPENSE EXAMPLES As a shareholder of the Portfolio, you incur ongoing costs, including management fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the six-month period ended December 31, 2004 and held for the entire six-month period. ACTUAL EXPENSES The first line of the tables 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 tables below provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account value 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 costs of investing in the Portfolio 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.
EXPENSES PAID ENDING ACCOUNT DURING PERIOD* BEGINNING VALUE JULY 1, 2004-- ACCOUNT VALUE DECEMBER 31, DECEMBER 31, JULY 1, 2004 2004 2004 -------------------------------------------------------------------------------------- CLASS A Actual $ 1,000.00 $ 1,128.70 $ 4.28 Hypothetical (5% average annual return before expenses) 1,000.00 1,021.11 4.06 CLASS B Actual 1,000.00 1,127.00 5.61 Hypothetical (5% average annual return before expenses) 1,000.00 1,019.86 5.33
* Expenses are equal to Class A and Class B annualized net expense ratios of 0.80% and 1.05%, respectively, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS The following graph depicts the Portfolio's holding by industry, as a percentage of total investments. [CHART] Commercial Banks 12.3% Oil & Gas 6.7% Pharmaceuticals 4.8% Diversified Telecommunication Services 4.1% Other* 49.4% Short-Term Investments 22.7%
* Industries which do not appear in the top 10 industries and industries which represent less than 3% of total investments, if applicable, are included in the category labeled "Other". January 2005 8 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- COMMON STOCKS (84.3%) AUSTRALIA (2.4%) Alumina Ltd. 68,209 $ 317 Amcor Ltd. 51,641 297 AMP Ltd. 33,484 190 Ansell Ltd. 4,383 31 Australia & New Zealand Banking Group Ltd. 36,406 586 Australian Gas Light Co., Ltd. 11,707 125 BHP Billiton Ltd. 221,127 2,654 BlueScope Steel Ltd. 43,080 278 Boral Ltd. 34,501 185 Brambles Industries Ltd. 24,925 136 Centro Properties Group 18,917 86 CFS Gandel Retail Trust 40,762 51 Coca-Cola Amatil Ltd. 12,924 82 Coles Myer Ltd. 27,045 209 Commonwealth Bank of Australia 30,082 755 CSL Ltd. 2,172 50 CSR Ltd. (c)53,898 112 Foster's Group Ltd. 51,400 233 General Property Trust 49,849 146 Insurance Australia Group Ltd. 42,790 215 Investa Property Group 32,296 57 James Hardie Industries N.V. 26,984 141 John Fairfax Holdings Ltd. 25,260 90 Leighton Holdings Ltd. (c)5,438 52 Lend Lease Corp., Ltd. 10,440 108 Macquarie Bank Ltd. 5,261 191 Macquarie Infrastructure Group 48,133 128 Mayne Group Ltd. 22,671 76 Mirvac Group (c)20,222 77 National Australia Bank Ltd. 39,082 881 Newcrest Mining Ltd. 19,326 264 OneSteel Ltd. 32,642 66 Orica Ltd. 15,887 253 Origin Energy Ltd. 7,888 43 PaperlinX Ltd. (c)26,241 97 Patrick Corp., Ltd. 23,518 121 QBE Insurance Group Ltd. (c)16,796 202 Rinker Group Ltd. 55,591 463 Rio Tinto Ltd. (c)18,317 561 Santos Ltd. 15,736 104 Sonic Healthcare Ltd. 4,662 44 Southcorp Ltd. (a)17,933 60 Stockland 29,192 137 Stockland (New) 1,035 5 Suncorp-Metway Ltd. 13,882 189 TABCORP Holdings Ltd. 10,214 138 Telstra Corp., Ltd. 54,349 209 Transurban Group 14,272 75 Wesfarmers Ltd. 9,460 295 Westfield Group (a)(c)27,210 350 Westpac Banking Corp. 42,543 649 WMC Resources Ltd. 68,081 385 Woodside Petroleum Ltd. 12,003 189 Woolworths Ltd. 24,886 $ 292 ---------------------------------------------------------------------------------------------- 13,730 ============================================================================================== AUSTRIA (1.3%) Bank Austria Creditanstalt AG 10,833 977 Boehler-Uddeholm AG 1,904 240 Erste Bank der Oesterreichischen Sparkassen AG 35,060 1,869 Flughafen Wien AG 3,154 238 IMMOFINANZ Immobilien Anlagen AG (a)56,528 540 Mayr-Melnhof Karton AG 1,261 214 OMV AG 3,262 981 RHI AG (a)(c)4,447 135 Telekom Austria AG 58,763 1,112 VA Technologie AG (a)2,483 197 Verbund-Oesterreichische Elektrizitaetswirtschafts AG, Class A 1,049 233 Voestalpine AG (c)6,430 499 Wienerberger AG 9,664 461 ---------------------------------------------------------------------------------------------- 7,696 ============================================================================================== BELGIUM (0.6%) AGFA-Gevaert N.V. 7,790 264 Bekaert S.A. 281 22 Belgacom S.A. (a)3,371 145 Dexia 30,331 696 Electrabel S.A. 708 315 Fortis 45,201 1,248 InBev N.V. 2,208 86 KBC Bancassurance Holding (c)4,183 321 Solvay S.A., Class A 2,252 247 UCB S.A. 3,462 176 Umicore 266 25 ---------------------------------------------------------------------------------------------- 3,545 ============================================================================================== BRAZIL (1.0%) AmBev (Preference) 1,247,000 347 Aracruz Celulose S.A., Class B (Preference) 32,000 122 Banco Bradesco S.A. (Preference) 15,000 363 Banco Itau Holding Financeira S.A. (Preference) 3,075 462 Brasil Telecom Participacoes S.A. (Preference) 17,028,000 129 Caemi Mineracao e Metalurgica S.A. (Preference) (a)119,000 102 CEMIG S.A. (Preference) 7,130,000 174 Cia Brasileira de Distribuicao Grupo Pao de Acucar ADR (Preference) 1,000 26 Cia Siderurgica de Tubarao (Preference) 1,042,000 61 Cia Siderurgica Nacional S.A. 8,000 153 CVRD, Class A (Preference) 42,000 1,014 Electrobras S.A. Class B (Preference) 8,576,000 127 Embraer (Preference) 25,000 209 Embratel Participacoes S.A. (Preference) (a)15,222,000 32 Gerdau S.A. (Preference) 10,000 179 Klabin S.A. (Preference) 44,000 89 Petrobras S.A. (Preference) 40,000 1,463 Sadia S.A. (Preference) 35,000 79 Souza Cruz S.A. 6,000 81 Tele Centro Oeste Celular Participacoes S.A. (Preference) 17,449,729 57
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 9 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- BRAZIL (CONT'D) Tele Norte Leste Participacoes S.A. (Preference) 19,661 $ 329 Telesp Celular Participacoes S.A. (Preference) (a)30,625,000 83 Unibanco GDR 5,700 181 Usiminas S.A., Class A (Preference) 7,000 142 Votorantim Celulose e Papel S.A. (Preference) 5,935 97 ---------------------------------------------------------------------------------------------- 6,101 ============================================================================================== DENMARK (0.3%) Danske Bank A/S 27,045 827 ISS A/S 500 28 Novo-Nordisk A/S, Class B 10,700 583 Novozymes A/S, Class B 914 46 TDC A/S 3,000 127 Vestas Wind Systems A/S (a)(c)1,650 21 ---------------------------------------------------------------------------------------------- 1,632 ============================================================================================== FINLAND (1.4%) Fortum Oyj 23,010 425 Kesko Oyj, Class B 858 21 Kone Oyj, Class B 3,935 305 Metso Oyj 18,330 290 Nokia Oyj 294,790 4,647 Outokumpu Oyj 13,050 233 Sampo Oyj, Class A 18,919 261 Stora Enso Oyj, Class R 39,983 611 TietoEnator Oyj 8,736 277 UPM-Kymmene Oyj 30,244 671 Uponor Oyj 2,504 47 Wartsila Oyj, Class B (c)5,234 111 ---------------------------------------------------------------------------------------------- 7,899 ============================================================================================== FRANCE (8.8%) Accor S.A. 13,788 602 Alcatel S.A. (a)(c)86,594 1,345 Alstom (a)2,427 2 Atos Origin (a)1,223 83 AXA 92,054 2,270 BNP Paribas S.A. (c)63,340 4,580 Bouygues S.A. (c)27,175 1,253 Business Objects S.A. (a)3,599 91 Cap Gemini S.A. (a)(c)10,438 334 Carrefour S.A. 24,196 1,150 Casino Guichard Perrachon S.A. (c)2,675 213 Cie de Saint-Gobain (c)30,221 1,817 Cie Generale d'Optique Essilor International S.A. 2,781 218 CNP Assurances 3,930 281 Credit Agricole S.A. (c)27,291 822 Dassault Systemes S.A. 3,315 167 France Telecom S.A. 93,138 3,078 Gecina S.A. (c)1,319 130 Groupe Danone (c)10,723 988 Imerys S.A. 3,490 292 Klepierre 1,223 108 L'Air Liquide S.A. 8,376 1,545 L'Oreal S.A. (c)1,932 146 Lafarge S.A. 11,577 1,115 Lagardere S.C.A. 8,927 $ 643 LVMH Moet Hennessy Louis Vuitton S.A. (c)27,119 2,073 Michelin (CGDE), Class B 8,664 555 Pernod-Ricard S.A. (c)980 150 Peugeot S.A. (c)12,009 761 Pinault-Printemps-Redoute S.A. 3,336 333 Publicis Groupe (c)6,201 201 Renault S.A. (c)10,906 911 Sagem S.A. 6,485 138 Sanofi-Aventis S.A. (c)38,397 3,063 Schneider Electric S.A. (c)13,755 955 Societe BIC S.A. 3,229 162 Societe Generale (c)24,886 2,513 Societe Television Francaise 1 (c)7,686 250 Sodexho Alliance S.A. (c)7,741 234 Suez S.A. (c)43,895 1,168 Technip S.A. 157 29 Thales S.A. (c)12,914 619 Thomson (c)19,575 516 Total S.A. (c)46,313 10,096 Unibail (c)2,151 338 Valeo S.A. 4,310 180 Veolia Environnement (c)9,054 327 Vinci S.A. (c)5,144 689 Vivendi Universal S.A. (a)62,275 1,984 Zodiac S.A. 458 21 ---------------------------------------------------------------------------------------------- 51,539 ============================================================================================== GERMANY (7.2%) Adidas-Salomon AG 1,813 292 Allianz AG (Registered) 18,885 2,500 Altana AG 2,976 188 BASF AG 33,946 2,441 Bayer AG 41,881 1,417 Bayerische Hypo-und Vereinsbank AG (a)56,012 1,269 Beiersdorf AG 5,684 660 Celesio AG 1,833 149 Commerzbank AG (a)65,866 1,354 Continential AG 8,829 560 DaimlerChrysler AG 53,974 2,582 Deutsche Bank AG (Registered) 57,870 5,128 Deutsche Boerse AG 14,349 862 Deutsche Lufthansa AG (Registered) (a)12,385 177 Deutsche Post AG (Registered) 37,297 855 Deutsche Telekom AG (Registered) (a)182,548 4,123 Douglas Holding AG 1,851 65 E. ON AG 44,245 4,025 Epcos AG (a)(c)3,058 46 Fresenius Medical Care AG 3,032 244 HeidelbergCement AG 2,382 143 Henkel KGaA (Non-Voting Shares) 1,291 112 Infineon Technologies AG (a)32,027 347 KarstadtQuelle AG 814 8 Linde AG 7,449 465 MAN AG 7,748 298 Merck KGaA 2,356 162 Metro AG 5,976 328
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 10 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- GERMANY (CONT'D) Muenchener Rueckversicherungs AG (Registered) 2,773 $ 340 Porsche AG (Non-Voting shares) 626 399 ProSieben SAT.1 Media AG (Non-Voting Shares) 4,021 74 Puma AG Rudolf Dassler Sport 625 171 RWE AG 23,075 1,274 SAP AG 11,463 2,043 Schering AG 6,960 519 Siemens AG (Registered) (c)55,145 4,666 ThyssenKrupp AG (c)24,070 529 TUI AG (c)8,010 189 Volkswagen AG 14,496 656 Volkswagen AG (Non-Voting Shares) 6,688 221 ---------------------------------------------------------------------------------------------- 41,881 ============================================================================================== GREECE (0.1%) Alpha Bank A.E 7,320 255 EFG Eurobank Ergasias S.A. 5,092 175 National Bank of Greece S.A. 10,973 361 Titan Cement Co., S.A. 1,800 53 ---------------------------------------------------------------------------------------------- 844 ============================================================================================== HONG KONG (2.8%) Aluminum Corp. of China Ltd., Class H 302,000 179 Angang New Steel Co. Ltd., Class H (c)82,000 42 Bank of East Asia Ltd. 110,029 342 Beijing Capital International Airport Co., Ltd., Class H 124,000 53 BOC Hong Kong Holdings Ltd. 287,000 548 Byd Co., Ltd., Class H 13,500 36 Cathay Pacific Airways Ltd. 87,000 165 Cheung Kong Holdings Ltd. 118,000 1,177 Cheung Kong Infrastructure Holdings Ltd. 63,000 182 China Life Insurance Co., Ltd. (a)(c)682,000 456 China Oilfield Services Ltd., Class H 140,000 43 China Petroleum & Chemical Corp., Class H 1,538,000 633 China Shipping Container Lines Co., Ltd., Class H (a)195,000 78 China Shipping Development Co., Ltd., Class H 118,000 105 China Southern Airlines Co., Ltd., Class H (a)(c)108,000 43 China Telecom Corp., Ltd., Class H 1,272,000 466 CLP Holdings Ltd. 142,300 818 Datang International Power Generation Co., Ltd., Class H (c)132,000 99 Esprit Holdings Ltd. 59,500 360 Hang Lung Properties Ltd. 110,000 170 Hang Seng Bank Ltd. (c)60,000 834 Henderson Land Development Co., Ltd. 59,000 307 Hong Kong & China Gas Co., Ltd. 294,079 607 Hong Kong Exchanges & Clearing Ltd. 89,000 238 HongKong Electric Holdings Ltd. 111,000 507 Hopewell Holdings Ltd. 50,000 128 Huadian Power International Co., Class H 132,000 39 Huaneng Power International, Inc., Class H 280,000 209 Hutchison Whampoa Ltd. 167,200 1,565 Hysan Development Co., Ltd. 33,324 70 Jiangsu Express Co., Ltd., Class H 112,000 49 Jiangxi Copper Co., Ltd., Class H 106,000 $ 60 Johnson Electric Holdings Ltd. 127,500 124 Li & Fung Ltd. 133,000 224 Maanshan Iron & Steel, Class H 158,000 61 MTR Corp. 113,110 181 New World Development Ltd. 182,179 204 PCCW Ltd. 289,411 183 PetroChina Co., Ltd., Class H 1,612,000 861 PICC Property & Casualty Co., Ltd. (a)316,000 110 Ping An Insurance Group Co. of China Ltd., Class H (a)240,500 408 SCMP Group Ltd. 18,000 7 Shangri-La Asia Ltd. (c)104,427 150 Sino Land Co. (c)46,348 46 Sinopec Shangai Petrochemical Co., Ltd., Class H 214,000 80 Sinopec Zhenhai Refining & Chemical Co., Ltd., Class H 66,000 68 Sinotrans Ltd. 164,000 48 Sun Hung Kai Properties Ltd. (c)104,000 1,040 Swire Pacific Ltd., Class A 74,000 619 Techtronic Industries Co. 76,500 167 Television Broadcasts Ltd. 25,000 116 Weiqiao Textile Co., Class H 31,500 50 Wharf Holdings Ltd. 98,600 345 Yanzhou Coal Mining Co., Ltd., Class H 112,000 160 Yue Yuen Industrial Holdings Ltd. 61,500 169 Zhejiang Expressway Co., Ltd., Class H 132,000 91 ---------------------------------------------------------------------------------------------- 16,120 ============================================================================================== IRELAND (0.4%) Allied Irish Banks plc 35,596 741 Bank of Ireland 41,594 687 CRH plc 1,700 45 CRH plc (London Shares) 7,082 189 DCC plc 1,500 33 Elan Corp. plc (a)16,150 430 Grafton Group plc (a)2,950 32 Independent News & Media plc 8,500 27 Irish Life & Permanent plc 2,300 43 ---------------------------------------------------------------------------------------------- 2,227 ============================================================================================== ITALY (1.9%) Alleanza Assicurazioni S.p.A. 10,315 144 Assicurazioni Generali S.p.A. 15,122 512 Autogrill S.p.A. (a)3,112 52 Autostrade S.p.A. 1,404 37 Banca Antonveneta S.p.A. (a)1,590 42 Banca Fideuram S.p.A. 4,060 21 Banca Intesa S.p.A. 116,790 561 Banca Intesa S.p.A. RNC 16,133 69 Banca Monte dei Paschi di Siena S.p.A. (c)17,656 63 Banca Nazionale del Lavoro S.p.A. (a)(c)19,810 59 Banca Popolare di Milano Scrl (c)5,776 51 Banche Popolari Unite Scrl 2,271 46 Banco Popolare di Verona e Novara Scrl 11,763 239 Benetton Group S.p.A. 2,526 33 Capitalia S.p.A. 10,941 50
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 11 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- ITALY (CONT'D) Enel S.p.A. 57,728 $ 566 ENI S.p.A. 72,317 1,807 Fiat S.p.A. (a)(c)13,567 108 Finmeccanica S.p.A. 118,051 107 Italcementi S.p.A. 1,801 29 Luxottica Group S.p.A. 1,092 22 Mediaset S.p.A. 23,928 303 Mediobanca S.p.A. 10,262 166 Mediolanum S.p.A. (c)3,051 22 Pirelli & C S.p.A. (c)43,723 59 Riunione Adriatica di Sicurta S.p.A. 5,483 124 Sanpaolo IMI S.p.A. 45,873 659 Seat Pagine Gialle S.p.A. (a)60,586 28 Snam Rete Gas S.p.A. 8,919 52 Telecom Italia S.p.A. 418,595 1,709 Telecom Italia S.p.A. RNC 270,455 877 TIM S.p.A. (c)179,601 1,340 Tiscali S.p.A. (a)2,748 10 UniCredito Italiano S.p.A. 147,944 849 ---------------------------------------------------------------------------------------------- 10,816 ============================================================================================== JAPAN (23.2%) Advantest Corp. (c)5,990 514 Aeon Co., Ltd. 30,800 514 Ajinomoto Co., Inc. 50,400 600 Alps Electric Co., Ltd. 13,000 194 Amada Co., Ltd. (c)16,000 88 Asahi Breweries Ltd. 26,000 322 Asahi Glass Co., Ltd. (c)81,800 902 Asahi Kasei Corp. 81,000 406 Asatsu-DK, Inc. 2,800 79 Bellsystem 24, Inc. (c)160 44 Benesse Corp. 3,900 137 Bridgestone Corp. 65,000 1,295 Canon, Inc. 65,000 3,509 Casio Computer Co., Ltd. 29,800 460 Central Japan Railway Co. 104 850 Chubu Electric Power Co., Inc. (c)41,400 994 Chugai Pharmaceutical Co., Ltd. 24,400 404 Citizen Watch Co., Ltd. 23,000 221 Coca-Cola West Japan Co., Ltd. 1,000 26 COMSYS Holdings Corp. 1,000 9 Credit Saison Co., Ltd. 8,600 313 CSK Corp. (c)6,100 276 Dai Nippon Printing Co., Ltd. 30,600 491 Daicel Chemical Industries Ltd. 9,000 51 Daiichi Pharmaceutical Co., Ltd. 18,900 409 Daikin Industries Ltd. 10,600 306 Daimaru, Inc. (c)19,000 156 Dainippon Ink & Chemicals, Inc. 42,000 97 Daito Trust Construction Co., Ltd. (c)7,700 366 Daiwa House Industry Co., Ltd. 40,600 462 Daiwa Securities Group, Inc. 233,000 1,683 Denki Kagaku Kogyo K.K. 28,000 93 Denso Corp. 46,850 1,256 Dowa Mining Co., Ltd. 15,000 98 East Japan Railway Co. 238 $ 1,324 Ebara Corp. (c)24,800 115 Eisai Co., Ltd. 20,300 668 FamilyMart Co., Ltd. 3,700 108 Fanuc Ltd. 12,500 818 Fast Retailing Co., Ltd. 6,500 495 Fuji Photo Film Co., Ltd. 33,000 1,205 Fuji Television Network, Inc. 24 52 Fujikura Ltd. (c)12,000 55 Fujisawa Pharmaceutical Co., Ltd. 19,800 542 Fujitsu Ltd. 141,200 919 Furukawa Electric Co., Ltd. (a)41,800 232 Hankyu Department Stores, Inc. 7,000 51 Hirose Electric Co., Ltd. 2,600 304 Hitachi Ltd. 256,000 1,774 Hokkaido Electric Power Co., Inc. 12,000 236 Honda Motor Co., Ltd. 65,204 3,380 Hoya Corp. 8,200 926 Isetan Co., Ltd. 12,400 145 Ishihara Sangyo Kaisha Ltd. 10,000 23 Ishikawajima-Harima Heavy Industries Co., Ltd. (a)52,000 72 Ito En Ltd. 1,400 73 Ito-Yokado Co., Ltd. 22,000 924 Itochu Corp. (a)(c)79,000 366 Itochu Techno-Science Corp. 2,700 108 Japan Airlines Corp. (a)63,000 183 Japan Real Estate Investment Corp. REIT (c)20 169 Japan Tobacco, Inc. 63 720 JFE Holdings, Inc. (c)28,400 811 JGC Corp. 8,000 73 JS Group Corp. 14,000 254 JSR Corp. 10,000 219 Kajima Corp. 77,400 333 Kaken Pharmaceutical Co., Ltd. 3,000 20 Kaneka Corp. 16,000 181 Kansai Electric Power Co., Inc. (The) 47,500 965 Kao Corp. 42,000 1,074 Kawasaki Heavy Industries Ltd. (c)52,000 85 Kawasaki Kisen Kaisha Ltd. 4,000 26 Keihin Electric Express Railway Co., Ltd. (c)25,000 154 Keio Electric Railway Co., Ltd. 14,000 82 Keyence Corp. 2,500 560 Kikkoman Corp. 8,000 76 Kinden Corp. 1,000 7 Kintetsu Corp. (c)110,200 381 Kirin Brewery Co., Ltd. (c)71,400 703 Kobe Steel Ltd. (c)128,000 196 Kokuyo Co., Ltd. 4,500 54 Komatsu Ltd. 73,400 514 Konami Corp. 7,100 165 Konica Minolta Holdings, Inc. 35,000 465 Kubota Corp. 103,000 511 Kuraray Co., Ltd. 23,000 206 Kurita Water Industries Ltd. 4,500 65 Kyocera Corp. 12,900 994 Kyowa Hakko Kogyo Co., Ltd. 28,600 215
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 12 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- JAPAN (CONT'D) Kyushu Electric Power Co., Inc. 26,500 $ 536 Lawson, Inc. 3,500 129 Mabuchi Motor Co., Ltd. 2,400 173 Marubeni Corp. 78,000 216 Marui Co., Ltd. 27,900 374 Matsushita Electric Industrial Co., Ltd. (c)146,000 2,318 Matsushita Electric Works Ltd. 10,000 87 Meiji Dairies Corp. 12,000 71 Meiji Seika Kaisha Ltd. 15,000 69 Meitec Corp. (c)1,800 67 Millea Holdings, Inc. 90 1,336 Minebea Co., Ltd. 18,000 79 Mitsubishi Chemical Corp. 116,000 353 Mitsubishi Corp. (c)78,000 1,008 Mitsubishi Electric Corp. 134,800 661 Mitsubishi Estate Co., Ltd. (c)107,000 1,254 Mitsubishi Heavy Industries Ltd. 232,000 659 Mitsubishi Logistics Corp. 5,000 49 Mitsubishi Rayon Co., Ltd. 33,000 120 Mitsubishi Tokyo Financial Group, Inc. 583 5,919 Mitsui & Co., Ltd. 91,800 824 Mitsui Chemicals, Inc. 33,000 180 Mitsui Fudosan Co., Ltd. 93,400 1,135 Mitsui Mining & Smelting Co., Ltd. (c)37,000 163 Mitsui OSK Lines Ltd. 11,000 66 Mitsui Sumitomo Insurance Co., Ltd. 171,000 1,486 Mitsui Trust Holdings, Inc. (c)81,545 815 Mitsukoshi Ltd. (c)25,000 122 Mizuho Financial Group, Inc. 1,000 5,038 Murata Manufacturing Co., Ltd. 18,300 1,024 Namco Ltd. 2,400 32 NEC Corp. 128,400 798 NEC Electronics Corp. (c)4,000 195 Net One Systems Co., Ltd. 44 183 NGK Insulators Ltd. 28,600 274 NGK Spark Plug Co., Ltd. 21,000 218 Nidec Corp. (c)3,600 439 Nikko Cordial Corp. 75,000 398 Nikon Corp. (c)24,000 297 Nintendo Co., Ltd. 7,800 980 Nippon Building Fund, Inc. REIT 19 162 Nippon Express Co., Ltd. 59,800 295 Nippon Meat Packers, Inc. 16,600 225 Nippon Mining Holdings, Inc. 16,500 78 Nippon Oil Corp. 109,800 704 Nippon Paper Group, Inc. 53 238 Nippon Sheet Glass Co., Ltd. (c)23,000 95 Nippon Steel Corp. 425,000 1,041 Nippon Telegraph & Telephone Corp. 471 2,115 Nippon Yusen Kabushiki Kaisha 81,000 437 Nissan Chemical Industries Ltd. 9,000 71 Nissan Motor Co., Ltd. (c)194,100 2,111 Nisshin Seifun Group, Inc. 9,000 100 Nisshinbo Industries, Inc. 5,000 37 Nissin Food Products Co., Ltd. 5,000 125 Nitto Denko Corp. 15,200 $ 834 Nomura Holdings, Inc. 139,000 2,027 Nomura Research Institute Ltd. 2,400 225 NSK Ltd. 48,000 241 NTN Corp. 27,000 155 NTT Data Corp. 110 355 NTT DoCoMo, Inc. 608 1,122 Obayashi Corp. 37,000 233 Obic Co., Ltd. 700 139 OJI Paper Co., Ltd. 80,400 462 Oki Electric Industry Co., Ltd. (a)(c)47,000 202 Olympus Corp. 9,000 192 Omron Corp. 16,900 403 Onward Kashiyama Co., Ltd. 12,000 175 Oracle Corp. Japan (c)2,900 150 Oriental Land Co., Ltd. (c)4,900 341 ORIX Corp. 4,300 584 Osaka Gas Co., Ltd. 132,600 414 Pioneer Corp. (c)11,254 220 Ricoh Co., Ltd. 53,000 1,023 Rohm Co., Ltd. 8,400 869 Sanden Corp. 1,000 6 Sankyo Co., Ltd. 40,300 911 Sanyo Electric Co., Ltd. 120,000 415 Sapporo Holdings Ltd. 13,000 62 Secom Co., Ltd. 10,100 404 Seiko Epson Corp. 8,200 365 Sekisui Chemical Co., Ltd. 23,000 168 Sekisui House Ltd. 48,600 567 Seven-Eleven Japan Co., Ltd. (c)26,000 820 Sharp Corp. 59,200 967 Shimachu Co., Ltd. 4,200 104 Shimamura Co., Ltd. 1,500 110 Shimano, Inc. 7,300 208 Shimizu Corp. 59,600 299 Shin-Etsu Chemical Co., Ltd. 28,196 1,156 Shionogi & Co., Ltd. 24,000 332 Shiseido Co., Ltd. 27,000 391 Showa Denko K.K. 46,000 119 Showa Shell Sekiyu K.K. (c)11,400 104 Skylark Co., Ltd. 8,600 148 SMC Corp. 4,300 492 Softbank Corp. 17,700 862 Sompo Japan Insurance, Inc. 61,000 622 Sony Corp. (c)51,397 1,987 Stanley Electric Co., Ltd. (c)4,400 75 Sumitomo Bakelite Co., Ltd. 9,000 57 Sumitomo Chemical Co., Ltd. 94,600 464 Sumitomo Corp. 53,400 461 Sumitomo Electric Industries Ltd. 39,400 429 Sumitomo Metal Industries Ltd. 214,000 290 Sumitomo Metal Mining Co., Ltd. 35,800 256 Sumitomo Realty & Development Co., Ltd. (c)38,000 496 Sumitomo Trust & Banking Co., Ltd. (The) 108,000 781 Taiheiyo Cement Corp. 46,000 115 Taisei Corp. 5,000 19
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 13 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- JAPAN (CONT'D) Taisho Pharmaceutical Co., Ltd. 26,800 $ 583 Taiyo Yuden Co., Ltd. 6,000 70 Takara Holdings, Inc. 8,000 52 Takashimaya Co., Ltd. (c)26,000 250 Takeda Pharmaceutical Co., Ltd. 67,300 3,390 Takefuji Corp. 4,290 290 Takuma Co., Ltd. (c)5,000 39 TDK Corp. 9,700 719 Teijin Ltd. 59,400 258 Teikoku Oil Co., Ltd. 6,000 33 Terumo Corp. 14,200 383 THK Co., Ltd. (c)1,300 26 TIS, Inc. (c)3,204 140 Tobu Railway Co., Ltd. 59,400 226 Toho Co., Ltd. 4,500 71 Tohoku Electric Power Co., Inc. 28,100 505 Tokyo Broadcasting System, Inc. 8,000 130 Tokyo Electric Power Co., Inc. (The) 75,600 1,856 Tokyo Electron Ltd. 13,500 832 Tokyo Gas Co., Ltd. (c)166,600 683 Tokyu Corp. (c)68,400 370 TonenGeneral Sekiyu K.K. 8,000 73 Toppan Printing Co., Ltd. 29,600 329 Toray Industries, Inc. 81,100 380 Toshiba Corp. (c)228,000 979 Tosoh Corp. 31,000 140 Toto Ltd. 36,600 349 Toyo Seikan Kaisha Ltd. 13,000 240 Toyobo Co., Ltd. 5,000 12 Toyoda Gosei Co., Ltd. (c)800 16 Toyota Industries Corp. 6,350 159 Toyota Motor Corp. (c)189,800 7,727 Trend Micro, Inc. (a)(c)7,700 416 UFJ Holdings, Inc. (a)594 3,601 Uni-Charm Corp. 2,800 134 Uniden Corp. 5,000 99 UNY Co., Ltd. 8,000 91 Ushio, Inc. 1,000 19 USS Co., Ltd. 2,000 168 Wacoal Corp. (c)5,000 60 West Japan Railway Co. 24 97 World Co., Ltd. 1,800 63 Yahoo! Japan Corp. (a)132 634 Yakult Honsha Co., Ltd. (c)7,000 125 Yamada Denki Co., Ltd. (c)7,700 330 Yamaha Corp. 6,800 104 Yamaha Motor Co., Ltd. (c)3,000 45 Yamanouchi Pharmaceutical Co., Ltd. 32,400 1,262 Yamato Transport Co., Ltd. 19,000 282 Yamazaki Baking Co., Ltd. 6,000 56 Yokogawa Electric Corp. 17,000 227 ---------------------------------------------------------------------------------------------- 135,531 ============================================================================================== LUXEMBOURG (0.1%) Arcelor 13,699 315 ---------------------------------------------------------------------------------------------- MALAYSIA (0.6%) AMMB Holdings Bhd 122,600 $ 105 Astro All Asia Networks plc (a)90,400 128 Berjaya Sports Toto Bhd 64,800 69 British American Tobacco (Malaysia) Bhd 14,300 172 Commerce Asset Holdings Bhd 117,300 145 Gamuda Bhd 36,800 51 Genting Bhd 31,200 156 Hong Leong Bank Bhd 62,100 90 IOI Corp. Bhd 62,000 155 Kuala Lumpur Kepong Bhd 32,400 59 Magnum Corp. Bhd 54,700 35 Malakoff Bhd 52,000 99 Malayan Banking Bhd 148,700 462 Malaysia International Shipping Corp. Bhd (Foreign) 47,700 192 Maxis Communications Bhd 63,000 155 Media Prima Bhd (a)1 @-- Nestle (Malaysia) Bhd 10,000 61 OYL Industries Bhd 6,600 66 Petronas Gas Bhd 12,000 22 PLUS Expressways Bhd 143,300 106 Proton Holdings Bhd 23,000 55 Public Bank Bhd (Foreign) 87,000 174 Resorts World Bhd 41,000 108 RHB Capital Bhd 116,000 71 Sime Darby Bhd 120,200 190 SP Setia Bhd 66,400 76 Tanjong plc 22,600 84 Telekom Malaysia Bhd 74,000 226 Tenaga Nasional Bhd 76,100 218 YTL Corp. Bhd 72,000 101 ---------------------------------------------------------------------------------------------- 3,631 ============================================================================================== NETHERLANDS (3.9%) ABN AMRO Holding N.V. 79,686 2,107 Aegon N.V. 86,605 1,178 Akzo Nobel N.V. (c)12,798 545 ASML Holding N.V. (a)(c)23,788 381 Corio N.V. REIT 1,857 109 DSM N.V. 2,328 150 Euronext N.V. 4,671 142 European Aeronautic Defense & Space Co. (c)20,250 588 Hagemeyer N.V. (a)4,613 11 Heineken N.V. 36,037 1,199 ING Groep N.V. CVA 91,609 2,766 Koninklijke Philips Electronics N.V. 76,521 2,025 OCE N.V. 4,186 64 Reed Elsevier N.V. 36,718 500 Rodamco Europe N.V. REIT 1,663 132 Royal Dutch Petroleum Co. 97,241 5,586 Royal KPN N.V. 93,870 890 Royal Numico N.V. (a)7,867 283 TPG N.V. 33,998 921 Unilever N.V. CVA 36,128 2,417 Vedior N.V. CVA 9,999 163 VNU N.V. 10,485 309
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 14 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- NETHERLANDS (CONT'D) Wereldhave N.V. REIT 763 $ 83 Wolters Kluwer N.V. CVA 19,575 392 ---------------------------------------------------------------------------------------------- 22,941 ============================================================================================== NEW ZEALAND (0.0%) Carter Holt Harvey Ltd. 37,926 56 Telecom Corp. of New Zealand Ltd. 13,998 62 ---------------------------------------------------------------------------------------------- 118 ============================================================================================== NORWAY (0.2%) DNB NOR ASA 11,099 109 Norsk Hydro ASA 5,919 465 Norske Skogindustrier ASA 4,300 93 Orkla ASA 7,350 241 Statoil ASA 10,000 157 Tandberg ASA (c)900 11 Telenor ASA 14,600 132 Tomra Systems ASA 4,553 25 Yara International ASA (a)(c)7,419 98 ---------------------------------------------------------------------------------------------- 1,331 ============================================================================================== PORTUGAL (0.1%) Banco Commercial Portugues S.A. (Registered) 75,976 195 Energias de Portugal S.A. 15,231 46 Portugal Telecom SGPS S.A. (Registered) 38,617 477 PT Multimedia SGPS S.A. 416 10 ---------------------------------------------------------------------------------------------- 728 ============================================================================================== RUSSIA (0.4%) LUKOIL ADR (c)6,800 826 MMC Norilsk Nickel ADR 4,300 239 OAO Gazprom ADR (Registered) 4,188 149 Rostelecom ADR (c)7,600 83 Surgutneftegaz ADR 5,400 202 Surgutneftegaz ADR (Preference) (c)7,600 414 Tatneft ADR 3,900 113 Unified Energy System ADR 4,700 134 ---------------------------------------------------------------------------------------------- 2,160 ============================================================================================== SINGAPORE (1.2%) Ascendas REIT 69,000 72 CapitaLand Ltd. (c)112,000 146 CapitaMall Trust REIT 62,500 67 Chartered Semiconductor Manufacturing Ltd. (a)(c)123,000 74 City Developments Ltd. 66,719 290 ComfortDelgro Corp., Ltd. 197,477 188 Creative Technology Ltd. 6,270 94 DBS Group Holdings Ltd. 111,612 1,101 Fraser & Neave Ltd. 16,000 160 Keppel Corp., Ltd. (c)57,000 300 Neptune Orient Lines Ltd. 108,000 199 Oversea-Chinese Banking Corp., Ltd. 97,356 805 Overseas Union Enterprise Ltd. 7,468 36 SembCorp Industries Ltd. 96,493 96 Singapore Airlines Ltd. 56,000 391 Singapore Exchange Ltd. 118,539 130 Singapore Post Ltd. 184,000 100 Singapore Press Holdings Ltd. 165,028 465 Singapore Technologies Engineering Ltd. (c)141,296 $ 202 Singapore Telecommunications Ltd. 536,595 783 United Overseas Bank Ltd. 120,389 1,018 United Overseas Land Ltd. (London Shares) 48,851 60 Venture Corp., Ltd. 24,444 238 ---------------------------------------------------------------------------------------------- 7,015 ============================================================================================== SPAIN (2.8%) Abertis Infraestructuras S.A. 18,533 407 Acerinox S.A. (c)8,748 140 ACS S.A. (c)20,916 477 Altadis S.A. (c)11,925 545 Amadeus Global Travel Distribution S.A., Class A (c)21,805 224 Antena 3 de Television S.A. (a)647 46 Banco Bilbao Vizcaya Argentaria S.A. (c)102,567 1,816 Banco Popular Espanol S.A. 5,693 374 Banco Santander Central Hispano S.A. 143,660 1,779 Endesa S.A. (c)35,761 839 Gas Natural SDG S.A. (c)51,329 1,585 Grupo Ferrovial S.A. 4,910 262 Iberdrola S.A. (c)30,933 785 Inditex S.A. (c)2,742 81 Indra Sistemas S.A. 2,154 37 Metrovacesa S.A. 1,527 71 Repsol YPF S.A. (c)37,316 970 Sacyr Vallehermoso S.A. 12,610 208 Sociedad General de Aguas de Barcelona S.A., Class A (c)7,719 161 Telefonica S.A. 286,710 5,390 Union Fenosa S.A. (c)7,982 209 ---------------------------------------------------------------------------------------------- 16,406 ============================================================================================== SWEDEN (1.7%) Alfa Laval AB 950 15 Assa Abloy AB, Class B 12,477 213 Atlas Copco AB, Class A 4,166 188 Atlas Copco AB, Class B 399 17 Electrolux AB, Class B 23,000 526 Eniro AB (c)4,500 46 Holmen AB, Class B (c)4,000 138 Modern Times Group AB, Class B (a)(c)1,200 33 Nordea Bank AB 128,744 1,297 Sandvik AB 9,418 380 Securitas AB, Class B 25,740 441 Skandia Forsakrings AB 22,865 114 Skandinaviska Enskilda Banken AB, Class A 22,266 430 Skanska AB, Class B 38,951 467 SKF AB, Class B 6,266 279 Ssab Svenskt Stal AB, Class A 4,850 117 Svenska Cellulosa AB, Class B 9,122 389 Svenska Handelsbanken, Class A 36,136 940 Swedish Match AB 19,700 228 Tele2 AB, Class B (c)3,658 144 Telefonaktiebolaget LM Ericsson, Class B (a)649,042 2,069 TeliaSonera AB (c)106,587 638 Volvo AB, Class A 2,895 110 Volvo AB, Class B 8,685 344 Wihlborgs Fastigheter AB (c)3,300 70
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 15 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- SWEDEN (CONT'D) Wm-Data AB, Class B 10,675 $ 23 ---------------------------------------------------------------------------------------------- 9,656 ============================================================================================== SWITZERLAND (3.6%) ABB Ltd. (a)21,992 122 Adecco S.A. (Registered) 3,588 180 Ciba Specialty Chemicals AG (Registered) (a)1,814 138 Clariant AG (Registered) 3,489 56 Compagnie Financiere Richemont AG, Class A 7,511 249 Credit Suisse Group (a)34,410 1,443 Geberit AG (Registered) 44 32 Givaudan (Registered) 253 166 Holcim Ltd. (Registered) 3,981 239 Kudelski S.A. (a)322 12 Logitech International S.A. (Registered) (a)1,200 73 Lonza Group AG (Registered) 1,064 60 Nestle S.A. (Registered) 16,228 4,235 Novartis AG (Registered) 101,002 5,076 Roche Holding AG (Genusschein) 29,709 3,411 Schindler Holding AG 88 35 Serono S.A., Class B 549 361 SGS S.A. 272 190 STMicroelectronics N.V. 23,497 457 Sulzer AG (Registered) 39 15 Swatch Group AG (Registered) 897 27 Swatch Group AG, Class B 862 126 Swiss Reinsurance (Registered) 3,383 241 Swisscom AG (Registered) 813 319 Syngenta AG (a)2,866 304 UBS AG (Registered) 35,577 2,976 Valora Holding AG 56 14 Zurich Financial Services AG (a)2,421 403 ---------------------------------------------------------------------------------------------- 20,960 ============================================================================================== THAILAND (0.7%) Advanced Info Sevice PCL (Foreign) (c)(d)193,400 532 Bangkok Bank PCL 76,500 205 Bangkok Bank PCL (Foreign) 147,100 431 BEC World PCL (Foreign) (d)194,600 79 Charoen Pokphand Foods PCL (Foreign) (d)484,652 47 Delta Electronics Thai PCL (Foreign) (d)68,700 29 Electricity Generating PCL 37,156 71 Hana Microelectronics PCL (Foreign) 41,580 21 Kasikornbank PCL (a)123,100 166 Kasikornbank PCL (Foreign) (a)184,461 266 Land & Houses PCL 378,839 98 Land & Houses PCL (Foreign, Registered) 283,236 82 National Finance PCL (Foreign) (d)138,900 49 PTT Exploration & Production PCL (Foreign) (c)(d)22,394 167 PTT PCL (Foreign) (d)161,100 717 Sahaviriya Steel Industry PCL (Foreign) (d)916,000 68 Shin Corp. PCL (Foreign) (d)250,600 256 Siam Cement PCL 36,936 232 Siam Cement PCL (Foreign) 66,700 474 Siam City Cement PCL (Foreign) (d)21,700 136 Siam Commercial Bank PCL (Foreign, Preference) 51,768 $ 67 Siam Commercial Bank PCL (Foreign, Registered) (d)109,000 137 Tisco Finance PCL (Foreign) 83,400 52 ---------------------------------------------------------------------------------------------- 4,382 ============================================================================================== UNITED KINGDOM (17.6%) 3i Group plc 10,052 128 Aegis Group plc 60,287 125 Alliance Unichem plc 4,158 60 Amec plc 9,740 56 Amvescap plc 11,317 70 ARM Holdings plc 43,269 92 AstraZeneca plc 70,786 2,565 Aviva plc 106,444 1,282 BAA plc 14,368 161 BAE Systems plc 174,179 770 Balfour Beatty plc 7,505 45 Barclays plc 297,138 3,340 Barratt Developments plc 14,289 163 BG Group plc 185,604 1,260 BHP Billiton plc 120,873 1,416 BOC Group plc 24,664 470 Boots Group plc 31,872 401 BP plc 1,045,419 10,188 BPB plc 21,675 197 Brambles Industries plc 61,641 308 British Airways plc (a)26,082 118 British American Tobacco plc 74,536 1,283 British Land Co. plc 20,360 350 British Sky Broadcasting plc 75,484 814 BT Group plc 494,165 1,924 Bunzl plc 26,895 224 Cable & Wireless plc 107,616 246 Cadbury Schweppes plc 103,126 959 Capita Group plc 75,169 527 Carnival plc 6,987 426 Centrica plc 123,359 559 Cobham plc 3,996 95 Compass Group plc 91,238 431 Daily Mail & General Trust, Class A 17,009 242 Davis Service Group plc 2,167 17 De La Rue plc 22,562 150 Diageo plc 168,739 2,405 Dixons Group plc 115,920 338 Electrocomponents plc 29,846 163 Emap plc 14,226 223 EMI Group plc 44,900 228 Enterprise Inns plc 14,467 221 Exel plc 20,182 280 FKI plc 7,577 17 Friends Provident plc 78,725 233 GKN plc 51,505 234 GlaxoSmithKline plc 249,941 5,859 Group 4 Securicor plc (a)38,187 103 GUS plc 73,857 1,330
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 16 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- UNITED KINGDOM (CONT'D) Hammerson plc 12,144 $ 202 Hanson plc 35,478 304 Hays plc 176,839 422 HBOS plc 176,390 2,870 Hilton Group plc 65,908 360 HSBC Holdings plc 526,984 8,886 IMI plc 16,321 123 Imperial Chemical Industries plc 58,623 271 Imperial Tobacco Group plc 31,636 866 Intercontinental Hotels Group plc 28,356 352 Invensys plc (a)60,854 18 ITV plc (a)226,210 457 Johnson Matthey plc 11,648 221 Kelda Group plc 28,432 345 Kesa Electricals plc 15,655 85 Kidde plc 22,107 71 Kingfisher plc 70,070 416 Land Securities Group plc 19,831 533 Legal & General Group plc 265,165 560 Liberty International plc 10,596 197 Lloyds TSB Group plc 254,973 2,314 LogicaCMG plc 35,943 133 Man Group plc 3,684 104 Marks & Spencer Group plc 155,287 1,022 MFI Furniture plc 6,439 15 Misys plc 24,343 98 Mitchells & Butlers plc 30,681 200 National Grid Transco plc 174,752 1,663 Next plc 3,638 115 Novar plc 1,596 6 Pearson plc 43,287 522 Peninsular & Oriental Steam Navigation Co. (The) 45,240 258 Persimmon plc 12,995 172 Pilkington plc 26,409 56 Prudential plc 71,742 623 Rank Group plc 26,939 136 Reckitt Benckiser plc 51,873 1,566 Reed Elsevier plc 68,282 629 Rentokil Initial plc 195,393 554 Reuters Group plc 80,258 581 Rexam plc 23,789 210 Rio Tinto plc 52,799 1,553 RMC Group plc 11,141 181 Rolls-Royce Group plc (a)161,782 767 Rolls-Royce Group plc, Class B 5,144,667 10 Royal & Sun Alliance Insurance Group 105,213 156 Royal Bank of Scotland Group plc 137,235 4,613 SABMiller plc 26,725 443 Sage Group plc 70,602 274 Sainsbury (J) plc 56,599 294 Scottish & Newcastle plc 12,647 106 Scottish & Southern Energy plc 48,116 805 Scottish Power plc 104,601 809 Serco Group plc 29,265 135 Severn Trent plc 24,738 459 Shell Transport & Trading Co. plc (Registered) 457,828 $ 3,900 Signet Group plc 28,190 59 Slough Estates plc 18,463 195 Smith & Nephew plc 31,748 325 Smiths Group plc 22,933 362 Tate & Lyle plc 35,920 326 Taylor Woodrow plc 21,723 113 Tesco plc 321,298 1,983 TI Automotive Ltd., Class A (a)(d)1,505 @-- Tomkins plc 29,164 142 Unilever plc 150,711 1,479 United Business Media plc 18,032 166 United Utilities plc 5,482 66 Vodafone Group plc 3,303,091 8,951 Whitbread plc 15,484 251 William Hill plc 22,997 249 Wimpey George plc 15,718 122 Wolseley plc 38,135 712 WPP Group plc 67,384 741 Yell Group plc 26,049 220 ---------------------------------------------------------------------------------------------- 102,599 ============================================================================================== TOTAL COMMON STOCKS (COST $416,521) 491,803 ============================================================================================== NO. OF RIGHTS ---------------------------------------------------------------------------------------------- RIGHTS (0.0%) BRAZIL (0.0%) Banco Bradesco S.A. TOTAL RIGHTS (COST $@--) (a)553 5 ============================================================================================== FACE AMOUNT (000) ---------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS (24.8%) SHORT-TERM DEBT SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (11.3%) Bank of New York, 2.33%, 10/28/05 $ (h)2,475 2,475 Bear Stearns, 2.37%, 4/15/05 (h)1,360 1,360 Beta Finance, Inc., 2.28%, 2/18/05 1,021 1,020 Calyon NY, 2.04%, 3/4/05 (h)2,174 2,174 CIT Group Holdings, 2.17%, 1/31/05 (h)211 211 2.30%, 2/14/05 (h)1,148 1,148 Citigroup, Inc., 2.39%, 9/1/05 (h)725 725 Compass Securitization, 2.38%, 3/17/05 (h)1,057 1,057 Corporate Receivables Corp., 2.46%, 3/14/05 451 450 Discover Card Master Trust, 2.39%, 5/16/05 (h)(i)1,006 1,006 Eni Coordination Center, 2.38%, 8/29/05 (h)755 755 Giro Funding U.S. Corp., 2.37%, 2/7/05 451 451 HBOS Treasury Services plc, N.Y., 2.46%, 3/14/05 906 906 International Lease Finance Corp., 2.51%, 9/22/05 (h)1,164 1,164 Jackson National Life Global Fund, 2.32%, 1/18/05 (h)755 755 K2 (USA) LLC, 2.33%, 10/24/05 (h)2,143 2,143 Landesbank Hessen Thur New York, 2.24%, 2/2/05 (h)762 762 Lehman Brothers, Inc., 2.33%, 1/3/05 18,507 18,507
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 17 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
FACE AMOUNT VALUE (000) (000) ---------------------------------------------------------------------------------------------- SHORT-TERM DEBT SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (CONT'D) Links Finance LLC, 2.33%, 10/27/05 $ (h)1,509 $ 1,509 2.40%, 9/26/05 (h)755 755 Marshall & Ilsley Bank, 2.51%, 12/29/05 (h)2,114 2,113 Nationwide Building Society, 2.58%, 1/2/06 (h)1,751 1,751 Pfizer, Inc., 2.30%, 1/31/06 (h)1,510 1,510 Proctor & Gamble, 2.42%, 1/31/06 (h)619 619 Royal Bank of Canada NY, 2.38%, 6/27/05 (h)1,509 1,509 Sheffield Receivable Corp., 2.21%, 1/12/05 2,119 2,119 Sigma Finance, Inc., 2.38%, 9/15/05 (h)1,510 1,510 SLM Corp., 2.41%, 1/31/06 (h)1,510 1,510 Societe Generale, N.Y., 2.04%, 3/3/05 (h)1,585 1,585 Svenska Handelsbank N.Y., 2.32%, 5/10/05 (h)1,509 1,509 UBS Finance (Delaware), Inc., 2.33%, 1/6/05 2,263 2,263 UBS Securities LLC, 2.30%, 1/3/05 8,452 8,452 ---------------------------------------------------------------------------------------------- 65,783 ============================================================================================== SHARES ---------------------------------------------------------------------------------------------- INVESTMENT COMPANY HELD AS COLLATERAL ON LOANED SECURITIES (0.1%) JPMorgan Securities Lending Collateral Investment Fund 380,419 380 ---------------------------------------------------------------------------------------------- FACE AMOUNT (000) ---------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT (13.4%) J.P. Morgan Securities, Inc., 2.00%, dated 12/31/04, due 1/3/05, repurchase price $78,397 $ (f)78,384 78,384 ---------------------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (COST $144,547) 144,547 ============================================================================================== TOTAL INVESTMENTS (109.1%) (COST $561,068) -- INCLUDING $62,888 OF SECURITIES LOANED 636,355 ============================================================================================== LIABILITIES IN EXCESS OF OTHER ASSETS (-9.1%) (52,881) ============================================================================================== NET ASSETS (100%) $ 583,474 ==============================================================================================
(a) Non-income producing security. (c) All or portion of security on loan at December 31, 2004. (d) Security was valued at fair value -- At December 31, 2004, the Portfolio held $2,217,000 of fair valued securities, representing 0.4% of net assets. (f) Represents the Portfolio's undivided interest in a joint repurchase agreement which has a total value of $1,018,656,000. The repurchase agreement was fully collateralized by U.S. government agency securities at the date of this portfolio of investments as follows: Federal Farm Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist Corp., 8.80%, due 6/10/05. The investment in the repurchase agreement is through participation in a joint account with affiliated parties pursuant to exemptive relief received by the Portfolio from the SEC. (h) Variable/Floating Rate Security -- interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on December 31, 2004. (i) Security's issuer is an affiliate of the adviser. Held as collateral for securities on loan. @ Face Amount/Value is less than $500. ADR American Depositary Receipt GDR Global Depositary Receipt CVA Certificaten Van Aandelen REIT Real Estate Investment Trust RNC Non-Convertible Savings Shares THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 18 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: The Portfolio had the following foreign currency exchange contract(s) open at period end:
NET CURRENCY IN UNREALIZED TO EXCHANGE APPRECIATION DELIVER VALUE SETTLEMENT FOR VALUE (DEPRECIATION) (000) (000) DATE (000) (000) (000) ----------------------------------------------------------------------------------------- EUR 25,989 $ 35,281 3/16/05 US$ 34,582 $ 34,582 $ (699) EUR 4,987 6,770 3/16/05 US$ 6,638 6,638 (132) GBP 3,160 6,036 3/16/05 US$ 6,050 6,050 14 JPY 1,143,230 11,174 1/20/05 US$ 10,470 10,470 (704) JPY 31,271 307 3/16/05 US$ 300 300 (7) JPY 124,000 1,217 3/16/05 US$ 1,187 1,187 (30) US$ 2,944 2,944 3/16/05 AUD 3,910 3,041 97 US$ 2,910 2,910 1/3/05 EUR 2,144 2,908 (2) US$ 2,664 2,664 3/16/05 EUR 2,000 2,715 51 US$ 9,879 9,879 3/16/05 EUR 7,414 10,064 185 US$ 14,823 14,823 3/16/05 EUR 11,137 15,118 295 US$ 15,910 15,910 3/16/05 EUR 11,957 16,232 322 US$ 3,927 3,927 3/16/05 EUR 2,950 4,005 78 US$ 6,770 6,770 3/16/05 EUR 5,079 6,894 124 US$ 25,102 25,102 3/16/05 EUR 18,872 25,619 517 US$ 3,515 3,515 3/16/05 GBP 1,839 3,511 (4) US$ 164 164 3/16/05 GBP 86 164 @-- US$ 441 441 3/16/05 GBP 230 439 (2) US$ 3,849 3,849 3/16/05 GBP 2,012 3,842 (7) US$ 9,150 9,150 3/16/05 GBP 4,781 9,131 (19) US$ 2,848 2,848 3/16/05 GBP 1,495 2,853 5 US$ 10,550 10,550 1/20/05 JPY 1,143,230 11,174 624 US$ 7,631 7,631 3/16/05 JPY 797,445 7,824 193 US$ 6,091 6,091 3/16/05 JPY 637,080 6,251 160 US$ 1,437 1,437 3/16/05 JPY 148,915 1,463 26 US$ 3,724 3,724 3/16/05 SEK 25,050 3,770 46 US$ 2,384 2,384 3/16/05 SGD 3,915 2,404 20 ---------- ---------- -------------- $ 197,498 $ 198,649 $ 1,151 ========== ========== ==============
AUD -- Australian Dollar EUR -- Euro GBP -- British Pound JPY -- Japanese Yen SEK -- Swedish Krona SGD -- Singapore Dollar FUTURES CONTRACTS: The Portfolio had the following futures contract(s) open at period end:
NET UNREALIZED NUMBER APPRECIATION OF VALUE EXPIRATION (DEPRECIATION) CONTRACTS (000) DATE (000) ------------------------------------------------------------------------------- LONG: CAC 40 Index (France) 52 $ 2,692 Jan-05 $ @-- Hang Seng Index (Hong Kong) 56 5,123 Jan-05 11 IBEX 35 Index (Spain) 81 9,940 Jan-05 163 MSCI SING Index (Singapore) 83 2,505 Jan-05 1 OMX 30 Index (Sweden) 350 3,913 Jan-05 47 DAX Index (Germany) 115 16,661 Mar-05 67 DJ Euro STOXX 50 (Germany) 309 12,357 Mar-05 42 FTSE 100 Index (United Kingdom) 161 14,818 Mar-05 103 SPI 200 Index (Australia) 42 3,332 Mar-05 71 TOPIX Index (Japan) 130 14,564 Mar-05 606 ------------ $ 1,111 ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 19 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW EMERGING MARKETS PORTFOLIO [CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
LIPPER EMERGING MSCI EMERGING FISCAL YEAR MARKETS EMERGING MARKETS ENDED PORTFOLIO - MARKETS FREE NET FUNDS DECEMBER 31 CLASS A INDEX INDEX 1994 500000 500000 500000 1995 436175 473950 466120 1996 489362 502529 523043 1997 484346 444286 469480 1998 361250 331704 343314 1999 728944 551989 580090 2000 448847 383025 400848 2001 429031 372990 386821 2002 402281 349976 368948 2003 623857 545333 579016 2004 774150 684750 727850
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT
LIPPER EMERGING MSCI EMERGING FISCAL YEAR MARKETS EMERGING MARKETS ENDED PORTFOLIO - MARKETS FREE FUNDS DECEMBER 31 CLASS B INDEX INDEX ** 100000 100000 100000 1996 109940 106030 112212 1997 107840 93741 100721 1998 78993 69987 73654 1999 158902 116466 124451 2000 97089 80815 85997 2001 92623 78698 82988 2002 85917 73842 79153 2003 132837 115061 124220 2004 164680 143450 154720
* Minimum Investment ** Commenced offering on January 2, 1996. In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS FREE NET INDEX(1) AND THE LIPPER EMERGING MARKETS FUNDS INDEX(2)
TOTAL RETURNS(3) ----------------------------------------- AVERAGE ANNUAL ------------------------------- ONE FIVE TEN SINCE YEAR YEARS YEARS INCEPTION(6) ------------------------------------------------------------------------------------ Portfolio - Class A (4) 24.09% 1.21% 4.47% 8.29% MSCI Emerging Markets Free Net Index 25.55 4.40 3.19 7.39 Lipper Emerging Markets Funds Index 25.70 4.64 3.83 -- Portfolio - Class B (5) 23.84 0.96 -- 5.70 MSCI Emerging Markets Free Net Index 25.55 4.40 -- 4.09 Lipper Emerging Markets Funds Index 25.70 4.64 -- 4.97
(1) The MSCI Emerging Markets Free Net Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The MSCI Emerging Markets Index consists of the following 26 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela. This series approximates the minimum possible dividend reinvestment. The dividend is reinvested after deduction of withholding tax, applying the rate to non-resident individuals who do not benefit from double taxation treaties. (2) The Lipper Emerging Markets Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Emerging Markets 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. As of the date of this report, the Portfolio is in the Lipper Emerging Markets Funds classification. (3) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (4) Commenced operations on September 25, 1992 (5) Commenced offering on January 2, 1996 (6) For comparative purposes, average annual since inception returns listed for the indexes refer to the inception date or initial offering of the respective share class of the Portfolio, not the inception of the index. 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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO SHARES. The Emerging Markets Portfolio seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of issuers in emerging market countries. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. 20 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) EMERGING MARKETS PORTFOLIO In addition, investing in emerging markets may involve a relative higher degree of volatility. PERFORMANCE For the year ended December 31, 2004, the Portfolio had a total return based on net asset value per share of 24.09%, net of fees, for the Class A shares and 23.84%, net of fees, for the Class B shares compared to 25.55% for the Morgan Stanley Capital International (MSCI) Emerging Markets Free Index (the "Index"). FACTORS AFFECTING PERFORMANCE - The largest detractor to relative performance was our modest cash position, which in a rising market can hurt performance. - Stock selection in South Korea and Thailand coupled with negative country allocation scores from our overweight position in Thailand and Russia were the next largest detractors to relative performance. - Our underweight position in the Central European countries of Hungary and the Czech Republic also hurt performance. Hungary and the Czech Republic, despite expensive valuations and weak fundamentals, continue to outperform given continued optimism over the European Union convergence. - Stock selection in Russia was once again the largest contributor to relative performance. Other strong contributors came from our overweight position in the outperforming markets of Egypt, Brazil and Turkey and stock selection in South Africa and Brazil. - Global emerging markets, after gaining more than 50% in 2003, remained among the best performing asset classes in 2004, gaining more than 25%. This marked the first sequential annual gain we have seen in Emerging Markets since 1992-1993 and the fourth straight year the asset class has outperformed world markets. - During the year, the asset class benefited from accelerating global growth, supportive macroeconomic policy, local currency strength, rising corporate earnings and improving economic fundamentals. The dollar lost ground against many emerging markets currencies during the year as many developing countries continued to post current account and fiscal surpluses, as well as solid economic growth. - Led by Latin America, all regions were strong performers. The tragic tsunami disaster that struck Southeast Asia on December 26 did not result in a significant sell-off of assets as many expect minimal impact to major economies. - Egypt, Colombia, Hungary, the Czech Republic, Poland, Indonesia, Mexico, South Africa and Turkey were among the best performers. Thailand, China and Russia, among the top performers in 2003, were among the worst performing markets this year given political and economic concerns. MANAGEMENT STRATEGIES - We maintain our long-term positive outlook for emerging markets given relative valuations and fundamentals. We continue to focus on countries where gross domestic product (GDP) growth, fiscal policy and reform agendas remain strong and on companies that we believe have strong management and earnings visibility. - We have continued to reduce cyclicality in the Portfolio, primarily by reducing our position within South African materials and South Korean technology sectors, specifically in names that have recently performed strongly and now face a headwind as global growth decelerates. We continued to trim our long-term overweight position in the Portfolio in Turkey given the relative out-performance of the country while increasing our overweight position in Brazil given attractive valuations and the improving domestic growth outlook. - In general, we have moved away from cyclical plays and into stocks with secular drivers. The investment ideas about which we have the most conviction have led us to consolidate the Portfolio on both a country and stock level, into those that we expect to benefit from stronger domestic economies, the growing trend towards outsourcing, and new product cycles. - The Portfolio's key overweight positions going into 2005 are Russia, Thailand, Turkey, South Africa, Mexico and Brazil. We are neutral in India and Poland while South Korea, Taiwan, Israel, Malaysia and China are our largest underweight countries. - We believe the emerging markets are in a better position than in past times to withstand the tough global environment. In our opinion, valuations are cheaper while strong fiscal positions and lower interest rates are a boost to growth prospects. In addition, emerging market growth has been both export-driven as well as consumer-led, which marks an improvement from investment-led cycles of the late 1990's. 21 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) EMERGING MARKETS PORTFOLIO EXPENSE EXAMPLES As a shareholder of the Portfolio, you incur ongoing costs, including management fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the six-month period ended December 31, 2004 and held for the entire six-month period. ACTUAL EXPENSES The first line of the tables 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 tables below provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's acctual 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 costs of investing in the Portfolio 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.
EXPENSES PAID ENDING ACCOUNT DURING PERIOD* BEGINNING VALUE JULY 1, 2004 -- ACCOUNT VALUE DECEMBER 31, DECEMBER 31, JULY 1, 2004 2004 2004 -------------------------------------------------------------------------------------- CLASS A Actual $ 1,000.00 $ 1,268.70 $ 8.67 Hypothetical (5% average annual return before expenses) 1,000.00 1,017.50 7.71 CLASS B Actual 1,000.00 1,267.30 10.09 Hypothetical (5% average annual return before expenses) 1,000.00 1,016.24 8.97
* Expenses are equal to Class A and Class B annualized net expense ratios of 1.52% and 1.77%, respectively, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS The following graph depicts the Portfolio's holdings by industry, as a percentage of total investments. [CHART] Commercial Banks 13.2% Wireless Telecommunication Services 10.4% Oil & Gas 9.3% Metals & Mining 6.4% Electronic Equipment & Instruments 4.1% Semiconductors & Semiconductor Equipment 4.0% Insurance 3.2% Food & Staples Retailing 3.7% Diversified Telecommunication Services 3.2% Other* 33.8%
* Industries which do not appear in the top 10 industries and industries which represent less than 3% of total investments, if applicable, are included in the category labeled "Other". January 2005 22 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS EMERGING MARKETS PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- COMMON STOCKS (95.9%) (UNLESS OTHERWISE NOTED) BRAZIL (11.5%) All America Latina Logistica S.A. (Preference) (a)107,700 $ 3,203 Banco Bradesco S.A. (Preference) 317,889 7,687 Banco Bradesco S.A. ADR (Preference) (c)142,840 3,580 Banco Itau Holding Financeira S.A. (Preference) 46,023 6,914 Banco Itau Holding Financeira S.A. ADR (Preference) (c)168,316 12,652 Braskem S.A. (Preference) 41,656,000 2,102 Braskem S.A. ADR 75,200 3,832 CEMIG S.A. (Preference) 250,989,200 6,133 CEMIG S.A. ADR (Preference) 155,000 3,804 Cia Siderurgica de Tubarao (Preference) 21,585,000 1,272 Cia Siderurgica Nacional S.A. 60,479 1,156 Cia Siderurgica Nacional S.A. ADR (c)274,500 5,248 CPFL Energia S.A. ADR (a)34,900 693 CPFL Energia S.A. (a)149,300 1,010 CVRD ADR 18,379 533 CVRD ADR (Preference) 1,117,714 27,250 CVRD, Class A (Preference) 14,021 339 Petrobras S.A. (Preference) 56,883 2,081 Petrobras S.A. ADR 565,675 22,502 Petrobras S.A. ADR (Preference) 498,698 18,058 Telesp Celular Participacoes S.A. (Preference) (a)3,802,128,938 10,293 Telesp Celular Participacoes S.A. ADR (Preference) (a)(c)866,113 5,890 Votorantim Celulose e Papel S.A. ADR (Preference) (c)339,750 5,504 ---------------------------------------------------------------------------------------------- 151,736 ============================================================================================== CHILE (0.9%) Enersis S.A. ADR (a)(c)1,320,100 11,234 ---------------------------------------------------------------------------------------------- CHINA/HONG KONG (5.4%) Air China Ltd., Class H (a)2,543,000 982 Asia Aluminum Holdings Ltd. 29,246,000 3,010 AviChina Industry & Technology Co., Class H (c)10,641,000 999 China Life Insurance Co., Ltd. (a)(c)7,429,000 4,970 China Petroleum & Chemical Corp., Class H 11,558,000 4,758 China Resources Power Holdings Co. 2,539,000 1,380 CNOOC Ltd. 14,747,000 7,921 Fountain Set Holdings Ltd. 4,633,000 3,010 GOME Electrical Appliances Holdings Ltd (a)4,213,000 3,821 Grande Holdings Ltd. 2,119,000 2,072 Hainan Meilan International Airport Co., Ltd., Class H 2,406,000 2,028 Hopewell Highway Infrastructure Ltd. (c)4,809,000 3,960 Huadian Power International Co., Class H 10,605,000 3,138 Kingboard Chemical Holdings Ltd. 1,843,000 3,900 Lianhua Supermarket Holdings Co., Ltd., Class H 2,064,000 2,523 Moulin International Holdings Ltd. (c)2,150,000 1,466 Norstar Founders Group Ltd. (c)5,621,000 1,280 Ping An Insurance Group Co. of China Ltd., Class H (a)3,193,000 $ 5,422 Shougang Concord Century Holdings Ltd. 12,407,000 1,197 Tom Online, Inc. (a)6,364,000 1,195 TPV Technology Ltd. (c)7,530,000 4,545 Victory City International Holdings 3,751,000 1,581 Wumart Stores, Inc. (a)1,033,000 1,661 Yanzhou Coal Mining Co., Ltd., Class H (c)3,014,000 4,304 ZTE Corp., Class H (a)177,000 573 ---------------------------------------------------------------------------------------------- 71,696 ============================================================================================== COLOMBIA (0.4%) BanColombia S.A. ADR 375,300 5,299 ---------------------------------------------------------------------------------------------- EGYPT (1.6%) Eastern Tobacco 185,476 3,974 MobiNil 553,149 11,699 Orascom Construction Industries 447,712 5,350 Orascom Construction Industries GDR 2,608 63 ---------------------------------------------------------------------------------------------- 21,086 ============================================================================================== INDIA (6.4%) ABB Ltd. India 123,500 2,770 Aventis Pharma Ltd. 82,492 2,519 Bharat Heavy Electricals Corp. 512,465 9,122 Cipla Ltd. 509,665 3,739 Container Corp. of India Ltd. 140,919 2,988 GlaxoSmithKline Pharmaceuticals Ltd. 146,500 2,606 Grasim Industries Ltd. 73,000 2,232 HDFC Bank Ltd. 225,000 2,699 Hero Honda Motors Ltd. 391,385 5,168 Hindalco Industries Ltd. 86,480 2,853 Hindustan Lever Ltd. 694,260 2,304 Housing Development Finance Corp. 251,000 4,446 India Info.com PCL (d)393,611 @-- Industrial Development Bank of India Ltd. (a)1,128,000 2,864 Infosys Technologies Ltd. 152,436 7,363 ITC Ltd. 44,000 1,333 ITC Ltd.(Registered) GDR 43,400 1,302 Mahanagar Telephone Nigam Ltd. 1,095,000 3,922 Mahindra & Mahindra Ltd. 284,000 3,575 Morgan Stanley Growth Fund (k)17,282,900 7,712 Oil & Natural Gas Corp., Ltd. 225,200 4,267 Siemens India Ltd. 51,000 1,559 Steel Authority of India Ltd. (a)3,507,082 5,076 Wipro Ltd. 109,500 1,894 ---------------------------------------------------------------------------------------------- 84,313 ============================================================================================== INDONESIA (2.4%) Bank Central Asia Tbk PT 14,798,000 4,743 Bank Internasional Indonesia Tbk PT (a)75,304,000 1,501 Bank Mandiri Persero Tbk PT 19,283,000 3,999 Bank Rakyat Indonesia 16,257,500 5,035 Bumi Resources Tbk PT (a)54,977,000 4,738 Gudang Garam Tbk PT 1,449,000 2,115 Indocement Tunggal Prakarsa Tbk PT (a)13,329,500 4,416 Ramayana Lestari Sentosa Tbk PT 14,125,000 1,179 Telekomunikasi Indonesia Tbk PT 7,005,000 3,641 ---------------------------------------------------------------------------------------------- 31,367 ==============================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 23 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) EMERGING MARKETS PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- ISRAEL (0.9%) Check Point Software Technologies Ltd. (a)(c)484,284 $ 11,928 ---------------------------------------------------------------------------------------------- MALAYSIA (1.4%) Bandar Raya Developments Bhd 660,000 339 Commerce Asset Holdings Bhd 2,074,000 2,565 Magnum Corp. Bhd 4,361,000 2,777 MK Land Holdings Bhd 2,599,000 1,211 Resorts World Bhd 784,000 2,063 SP Setia Bhd 2,839,999 3,229 Tenaga Nasional Bhd 1,671,000 4,793 YTL Corp. Bhd 1,472,000 2,072 ---------------------------------------------------------------------------------------------- 19,049 ============================================================================================== MEXICO (8.5%) America Movil S.A. de C.V., Class L ADR 748,703 39,195 Cemex S.A. de C.V. 47,475 347 Cemex S.A. de C.V. ADR 144,581 5,266 Fomento Economico Mexicano S.A. de C.V. ADR 88,600 4,661 Grupo Financiero Banorte S.A. de C.V., Class O 409,800 2,583 Grupo Televisa S.A. ADR 399,300 24,158 Kimberly-Clark de Mexico S.A. de C.V., Class A 747,700 2,585 Telmex, Class L ADR 53,568 2,053 Wal-Mart de Mexico S.A. de C.V. ADR (c)153,647 5,279 Wal-Mart de Mexico S.A. de C.V., Series V 7,445,054 25,608 ---------------------------------------------------------------------------------------------- 111,735 ============================================================================================== MOROCCO (0.3%) Banque Marocaine du Commerce Exterieur 65,600 4,172 ---------------------------------------------------------------------------------------------- POLAND (2.3%) Agora S.A. (a)70,434 1,328 NFI Empik Media & Fasion S.A. (a)758,047 1,648 Powszechna Kasa Oszczednosci Bank Polski S.A. (a)913,603 8,431 Telekomunikacja Polska S.A. 608,589 4,000 Telekomunikacja Polska S.A. GDR 2,241,200 14,792 ---------------------------------------------------------------------------------------------- 30,199 ============================================================================================== RUSSIA (7.3%) Alliance Cellulose Ltd. (a)(d)592,359 @-- LUKOIL ADR 196,334 23,835 Mobile Telesystems ADR (c)6,800 942 Mobile Telesystems GDR 254,800 8,822 OAO Gazprom ADR (Registered) (c)665,840 23,637 Sberbank RF GDR (a)248,400 13,647 Surgutneftegaz ADR (c)186,889 7,008 Surgutneftegaz ADR (Preference) (c)165,490 9,019 Uralsvyazinform ADR 373,500 2,742 Vimpel-Communications ADR (a)114,600 4,142 VolgaTelecom ADR 489,600 3,182 ---------------------------------------------------------------------------------------------- 96,976 ============================================================================================== SOUTH AFRICA (14.5%) African Bank Investments Ltd. 7,161,900 23,135 African Life Assurance Co., Ltd. 2,430,213 7,915 Anglo American Platinum Corp., Ltd. 74,900 2,737 Anglo American plc (London Shares) 1 $ @-- Aveng Ltd. 2,783,200 5,895 AVI Ltd. 965,800 3,921 Barloworld Ltd. 502,800 9,435 Edgars Consolidated Stores Ltd. 226,600 12,090 Gold Fields Ltd. ADR (c)84,676 1,057 Harmony Gold Mining Co., Ltd. (c)1,089,102 9,843 Harmony Gold Mining Co., Ltd. ADR 364,613 3,380 Impala Platinum Holdings Ltd. 73,038 6,176 Ispat Iscor Ltd. 276,300 3,195 Kumba Resources Ltd. 601,138 4,669 Lewis Group Ltd. (a)785,300 5,406 Massmart Holdings Ltd. 1,488,045 11,896 MTN Group Ltd. 3,570,850 27,419 Sanlam Ltd. 5,397,700 12,386 Shoprite Holdings Ltd. 2,732,909 6,223 Standard Bank Group Ltd. 1,141,404 13,257 Steinhoff International Holdings Ltd. 5,455,621 12,134 Telkom S.A. Ltd. 579,030 10,017 ---------------------------------------------------------------------------------------------- 192,186 ============================================================================================== SOUTH KOREA (12.8%) Cheil Industries, Inc. (a)338,520 5,216 Daishin Securities Co., Ltd. 205,720 2,802 Daishin Securities Co., Ltd. (Preferred) 189,060 1,635 Doosan Heavy Industries and Construction Co., Ltd. (a)363,880 4,148 Handsome Co., Ltd. (a)360,530 2,915 Hankook Tire Co., Ltd. (a)1,121,320 11,049 Hyundai Mobis (a)199,450 12,620 Hyundai Motor Co. (a)65,960 3,536 Hyundai Motor Co. (Preferred) (a)41,910 1,257 Korea Electric Power Corp. (a)100,980 2,619 Korean Airlines Co., Ltd. (a)417,450 7,601 KT&G Corp. (a)233,440 6,979 LG Engineering & Construction Corp. (a)124,690 3,433 LG Investment & Securities Co., Ltd. (a)967,770 7,984 Orion Corp. (a)51,730 5,447 Pusan Bank (a)483,220 3,711 Samsung Electronics Co., Ltd. 77,893 33,898 Samsung Electronics Co., Ltd. (Preferred) 26,600 7,670 Samsung Fire & Marine Insurance Co., Ltd 33,660 2,650 Samsung SDI Co., Ltd. 272,060 29,697 Shinhan Financial Group Co., Ltd. (a)367,330 8,303 STX Shipbuilding Co., Ltd. (a)212,480 3,448 ---------------------------------------------------------------------------------------------- 168,618 ============================================================================================== TAIWAN (10.1%) Acer, Inc. 2,400,217 3,964 Asia Optical Co., Inc. 1,658,272 9,233 Catcher Technology Co., Ltd. 811,800 2,669 Cathay Financial Holding Co., Ltd. 2,637,000 5,392 Cheng Shin Rubber Industry Co., Ltd. 2,024,936 2,580 Chinatrust Financial Holding Co., Ltd. 5,508,422 6,567 CTCI Corp. 5,110,538 3,247 Cyberlink Corp. 705,066 1,763 Delta Electronics, Inc. 2,299,000 4,050
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 24 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) EMERGING MARKETS PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- TAIWAN (CONT'D) Eva Airways Corp. (a)5,421,730 $ 2,661 Far EasTone Telecommunications Co., Ltd. 1,562,000 1,892 Faraday Technology Corp. 862,363 1,506 Fubon Financial Holding Co., Ltd. 3,723,000 3,806 Fubon Financial Holding Co., Ltd. GDR 116,510 1,163 HON HAI Precision Industry Co., Ltd. 2,677,441 12,381 Infortrend Technology, Inc. 1,631,565 3,541 Kaulin Manufacturing Co., Ltd. 1,241,250 1,218 Largan Precision Co., Ltd. 468,138 2,607 MediaTek, Inc. 949,013 6,448 Mega Financial Holding Co., Ltd. 10,640,000 7,330 Phoenixtec Power Co., Ltd. 2,353,355 2,835 Polaris Securities Co., Ltd. 5,867,183 3,285 Richtek Technology Corp. 624,100 1,315 Shin Kong Financial Holding Co., Ltd. 5,625,000 5,414 Springsoft, Inc. 1,584,586 3,390 Sunplus Technology Co., Ltd. 930,200 1,305 Taishin Financial Holdings Co., Ltd. 4,262,256 3,995 Taiwan Cellular Corp. 3,583,000 4,001 Taiwan Cement Corp. 10,837,412 7,125 Taiwan Semiconductor Manufacturing Co., Ltd. 3,297,000 5,237 Tsann Kuen Enterprise Co. 1,918,825 2,215 Waffer Technology Co., Ltd. 1,182,500 1,495 Ya Hsin Industrial Co., Ltd. 7,535,042 7,229 ---------------------------------------------------------------------------------------------- 132,859 ============================================================================================== THAILAND (5.0%) Advanced Info Service PCL (Foreign) (d)3,039,200 8,365 Asian Property Development PCL (d)14,164,700 1,334 Bangkok Bank PCL (Foreign) 3,936,000 11,542 Banpu PCL (Foreign) (d)766,200 2,996 CP Seven Eleven PCL (Foreign) (d)1,799,500 2,639 Italian-Thai Development PCL (Foreign) (c)(d)17,050,800 4,211 Kasikornbank PCL (Foreign) (a)4,098,600 5,904 Kasikornbank PCL NVDR (a)(c)1,825,900 2,466 Lalin Property PCL (Foreign) (d)4,420,600 716 Land & Houses PCL (Foreign, Registered) (c)13,265,300 3,856 MBK PCL (Foreign) (d)765,700 945 PTT PCL (Foreign) (c)(d)1,493,300 6,646 Siam City Bank PCL (Foreign, Registered) (d)4,090,200 2,657 Siam Commercial Bank PCL (Foreign, Registered) (d)2,194,500 2,766 Siam Makro PCL (Foreign) (d)389,600 491 Sino Thai Engineering & Construction PCL (Foreign) (d)3,794,400 825 Total Access Communication PCL (a)1,313,600 4,650 True Corp. PCL (Foreign) (a)(c)(d)14,302,300 2,980 ---------------------------------------------------------------------------------------------- 65,989 ============================================================================================== TURKEY (4.2%) Akbank T.A.S. 1,336,947,411 8,278 Akcansa Cimento A.S. 1,660,271,450 5,860 Arcelik A.S. (a)583,056,550 3,567 Enka Insaat ve Sanayi A.S. 162,485,114 4,488 Hurriyet Gazetecilik ve Matbaacilik A.S. 2,777,255,070 6,549 Trakya Cam Sanayii A.S. 1,532,708,826 $ 4,183 Turkcell Iletisim Hizmetleri A.S. (a)877,641,186 6,118 Turkiye Garanti Bankasi A.S. (a)2,317,360,373 7,321 Yapi Ve Kredi Bankasi A.S. (a)3,095,997,200 9,735 ---------------------------------------------------------------------------------------------- 56,099 ============================================================================================== TOTAL COMMON STOCKS (COST $961,599) 1,266,541 ============================================================================================== NO. OF RIGHTS ---------------------------------------------------------------------------------------------- RIGHTS (0.0%) BRAZIL (0.0%) Banco Bradesco S.A. (COST $@--) (a)13,613 124 ---------------------------------------------------------------------------------------------- FACE AMOUNT (000) ---------------------------------------------------------------------------------------------- FIXED INCOME SECURITIES (0.7%) INDIA (0.0%) Saurashtra Cement & Chemicals Ltd. (expired maturity) INR (b)(d)700 @-- ---------------------------------------------------------------------------------------------- RUSSIA (0.7%) MCSI Holding Ltd. (Secured Notes) $ (d)10,337 8,994 ---------------------------------------------------------------------------------------------- TOTAL FIXED INCOME SECURITIES (COST $11,339) 8,994 ============================================================================================== SHORT-TERM INVESTMENTS (9.2%) SHORT-TERM DEBT SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (5.3%) Bank of New York, 2.33%, 10/28/05 (h)2,609 2,610 Bear Stearns, 2.37%, 4/15/05 (h)1,434 1,434 Beta Finance, Inc., 2.28%, 2/18/05 1,076 1,076 Calyon NY, 2.04%, 3/4/05 (h)2,292 2,292 CIT Group Holdings, 2.17%, 1/31/05 (h)222 222 2.30%, 2/14/05 (h)1,210 1,210 Citigroup, Inc., 2.39%, 9/1/05 (h)764 764 Compass Securitization, 2.38%, 3/17/05 (h)1,114 1,114 Corporate Receivables Corp., 2.46%, 3/14/05 475 475 Discover Card Master Trust, 2.39%, 5/16/05 (h)(i)1,060 1,060 Eni Coordination Center, 2.38%, 8/29/05 (h)796 796 Giro Funding U.S. Corp., 2.37%, 2/7/05 476 476 HBOS Treasury Services plc, N.Y., 2.46%, 3/14/05 955 955 International Lease Finance Corp., 2.51%, 9/22/05 (h)1,227 1,227 Jackson National Life Global Fund, 2.32%, 1/18/05 (h)796 796 K2 (USA) LLC, 2.33%, 10/24/05 (h)2,259 2,260 Landesbank Hessen Thur New York, 2.24%, 2/2/05 (h)803 803 Lehman Brothers, Inc., 2.33%, 1/3/05 19,512 19,512 Links Finance LLC, 2.33%, 10/27/05 (h)1,591 1,591 2.40%, 9/26/05 (h)796 796 Marshall & Ilsley Bank, 2.51%, 12/29/05 (h)2,228 2,228 Nationwide Building Society, 2.58%, 1/2/06 (h)1,846 1,846 Pfizer, Inc., 2.30%, 1/31/06 (h)1,592 1,592 Proctor & Gamble, 2.42%, 1/31/06 (h)653 653
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 25 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) EMERGING MARKETS PORTFOLIO
FACE AMOUNT VALUE (000) (000) ---------------------------------------------------------------------------------------------- SHORT-TERM DEBT SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (CONT'D) Royal Bank of Canada NY, 2.38%, 6/27/05 $ (h)1,591 $ 1,591 Sheffield Receivable Corp., 2.21%, 1/12/05 2,234 2,234 Sigma Finance, Inc., 2.38%, 9/15/05 (h)1,592 1,592 SLM Corp., 2.41%, 1/31/06 (h)1,592 1,592 Societe Generale, N.Y., 2.04%, 3/3/05 (h)1,671 1,671 Svenska Handelsbank N.Y., 2.32%, 5/10/05 (h)1,591 1,591 UBS Finance (Delaware), Inc., 2.33%, 1/6/05 2,386 2,386 UBS Securities LLC, 2.30%, 1/3/05 8,911 8,912 ---------------------------------------------------------------------------------------------- 69,357 ============================================================================================== SHARES ---------------------------------------------------------------------------------------------- INVESTMENT COMPANY HELD AS COLLATERAL ON LOANED SECURITIES (0.0%) JPMorgan Securities Lending Collateral Investment Fund 401,088 401 ---------------------------------------------------------------------------------------------- FACE AMOUNT (000) ---------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT (3.9%) J.P. Morgan Securities, Inc., 2.00%, dated 12/31/04, due 1/3/05, repurchase price $51,379 $ (f)51,370 51,370 ---------------------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (COST $121,128) 121,128 ============================================================================================== TOTAL INVESTMENTS (105.8%) (COST $1,094,066) -- INCLUDING $67,299 OF SECURITIES LOANED 1,396,787 ============================================================================================== LIABILITIES IN EXCESS OF OTHER ASSETS (-5.8%) (76,234) ---------------------------------------------------------------------------------------------- NET ASSETS (100%) $ 1,320,553 ==============================================================================================
(a) Non-income producing security. (b) Issuer is in default. (c) All or portion of security on loan at December 31, 2004. (d) Security was valued at fair value -- At December 31, 2004, the Portfolio held $46,565,000 of fair valued securities, representing 3.5% of net assets. (f) Represents the Portfolio's undivided interest in a joint repurchase agreement which has a total value of $1,018,656,000. The repurchase agreement was fully collateralized by U.S. government agency securities at the date of this portfolio of investments as follows: Federal Farm Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist Corp., 8.80%, due 6/10/05. The investment in the repurchase agreement is through participation in a joint account with affiliated parties pursuant to exemptive relief received by the Portfolio from the SEC. (h) Variable/Floating Rate Security -- interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on December 31, 2004. (i) Security's securities on loan. (k) Investments of Securities of Affiliated issuer -- The Morgan Stanley Growth Fund, acquired at a cost of $3,415,000, is advised by an affiliate of the Adviser. During the year ended December 31, 2004, the Portfolio had no purchases or sales of this security. The Portfolio derived $572,000 of income from this security during the year ended December 31, 2004. @ Face Amount/Value is less than $500. ADR American Depositary Receipts GDR Global Depositary Receipts INR Indian Rupee NVDR Non Voting Depositary Receipts FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: The Portfolio had the following foreign currency exchange contract(s) open at period end:
NET CURRENCY IN UNREALIZED TO EXCHANGE APPRECIATION DELIVER VALUE SETTLEMENT FOR VALUE (DEPRECIATION) (000) (000) DATE (000) (000) (000) ----------------------------------------------------------------------------------------- US$ 26 $ 26 1/3/05 BRL 70 $ 26 $ @-- US$ 159 159 1/3/05 PLN 475 157 (2) US$ 39 39 1/5/05 ZAR 223 39 @-- ZAR 113,448 19,593 6/27/05 US$ 16,710 16,710 (2,883) ZAR 90,524 15,591 7/22/05 US$ 13,812 13,812 (1,779) ---------- ---------- -------------- $ 35,408 $ 30,744 $ (4,664) ========== ========== ==============
BRL -- Brazil Real PLN -- Polish Zloty ZAR -- South African Rand THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 26 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW EUROPEAN REAL ESTATE PORTFOLIO [CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
GPR GENERAL LIPPER EUROPEAN REAL REAL ESTATE REAL FISCAL YEAR ESTATE SECURITIES ESTATE ENDED PORTFOLIO - INDEX - FUNDS DECEMBER 31 CLASS A EUROPE INDEX ** 500000 500000 500000 1997 476400 500445 495386 1998 499029 497993 411141 1999 487252 514925 396468 2000 559901 561525 497800 2001 515949 532606 548683 2002 642460 651591 568575 2003 914927 945002 780166 2004 1349450 1423450 1030800
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
GPR GENERAL LIPPER EUROPEAN REAL REAL ESTATE REAL FISCAL YEAR ESTATE SECURITIES ESTATE ENDED PORTFOLIO - INDEX - FUNDS DECEMBER 31 CLASS B EUROPE INDEX *** 100000 100000 100000 1997 95240 100089 99077 1998 99621 99599 82228 1999 97021 102985 79294 2000 111138 112305 99560 2001 102158 106521 109737 2002 126788 130318 113715 2003 180115 189000 156033 2004 265030 284690 206160
* Minimum Investment ** Commenced operations on October 1, 1997 *** Commenced offering on October 1, 1997 In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. PERFORMANCE COMPARED TO THE GPR GENERAL REAL ESTATE SECURITIES INDEX - EUROPE(1) AND THE LIPPER REAL ESTATE FUNDS INDEX(2)
TOTAL RETURNS(3) ------------------------------- AVERAGE ANNUAL --------------------- ONE FIVE SINCE YEAR YEARS INCEPTION(6) -------------------------------------------------------------------------- Portfolio - Class A (4) 47.49% 22.60% 14.68% Portfolio - Class B (5) 47.15 22.26 14.39 GPR General Real Estate Securities Index - Europe 50.60 22.55 15.53 Lipper Real Estate Funds Index 32.12 21.04 10.49
(1) The GPR General Real Estate Securities Index - Europe is a market capitalization weighted index of listed property/real estate securities in Europe measuring total return. (2) The Lipper Real Estate Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Real Estate 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. As of the date of this report, the Portfolio is in the Lipper Real Estate Funds classification. (3) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (4) Commenced operations on October 1, 1997 (5) Commenced offering on October 1, 1997 (6) For comparative purposes, average annual since inception returns listed for the indexes refer to the inception date or initial offering of the respective share class of the Portfolio, not the inception of the index. 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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO SHARES. The European Real Estate Portfolio seeks to provide current income and long-term capital appreciation by investing primarily in equity securities of companies in the European real estate industry. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. The Portfolio's concentration in the real estate sector makes it subject to greater risk and volatility than other portfolios that are more diversified and the value of its shares may be substantially affected by economic events in the real estate industry. 27 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) EUROPEAN REAL ESTATE PORTFOLIO PERFORMANCE For the year ended December 31, 2004, the Portfolio had a total return of 47.49% for the Class A shares, net of fees, and 47.15% for the Class B shares, net of fees, compared to 50.60% for the GPR General Real Estate Securities Index - Europe (the "Index"). FACTORS AFFECTING PERFORMANCE - Following the strong performance in 2004, European real estate securities have now outperformed the broader equity markets for the fifth consecutive year. - The best performing listed property markets for the year were Spain, the U.K. and Sweden returning 63.1%, 58.2% and 56.3% in euros, respectively. The weakest relative performing markets for the year were Austria, Belgium and Switzerland with euro returns of 18.8%, 21.7% and 30.4%, respectively. - A country overweight in Spain and underweights in Austria and Belgium had a positive impact on relative performance, but this was offset by the negative effect from an overweight in Finland and an underweight in Sweden. Stock selection in France and Sweden added to returns, but stock selection in Italy and The Netherlands negatively affected performance. MANAGEMENT STRATEGIES - The European office market appeared to have bottomed in the majority of locations across Europe by the end of 2004. Vacancy rates have stabilized in most markets, and they have even started to decline in a select number of markets. Prime rents have also stopped falling, although rents for secondary assets remain under pressure. Prospects for a recovery have therefore improved markedly, although we expect that it will take time before rents start to show significant improvements given the current high vacancy level and modest economic growth forecasts. We also expect retail capital growth to be more in line with offices during 2005 after a sustained period of outperformance in recent years. - In our opinion, the real estate investment market remains very liquid across Europe, as demand from both debt-backed and institutional buyers outstripped the limited number of available assets for sale. This high demand has resulted in falling property yields and rising capital values. Looking forward, we expect buying interest to remain high during 2005, given that interest rates are not forecast to rise materially and institutional interest in the asset class is also expected to continue. In our experience, this should result in increasing capital values, although we do not expect to see a similar drop in yields during 2005 as we have seen in 2004. Improving NAV's, combined with increasing premiums to NAV as a result of a strong capital flows into the public markets, could possibly result in price appreciation for property shares. This price appreciation, combined with a secure dividend yield, should lead to attractive returns, albeit lower than the strong returns seen over the last several years. EXPENSE EXAMPLES As a shareholder of the Portfolio, you incur ongoing costs, including management fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the six-month period ended December 31, 2004 and held for the entire six-month period. ACTUAL EXPENSES The first line of the tables 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 tables below provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio'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 costs of investing in the Portfolio 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. 28 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) EUROPEAN REAL ESTATE PORTFOLIO
EXPENSES PAID ENDING ACCOUNT DURING PERIOD* BEGINNING VALUE JULY 1, 2004-- ACCOUNT VALUE DECEMBER 31, DECEMBER 31, JULY 1, 2004 2004 2004 -------------------------------------------------------------------------------------- CLASS A Actual $ 1,000.00 $ 1,305.70 $ 5.80 Hypothetical (5% average annual return before expenses) 1,000.00 1,020.11 5.08 CLASS B Actual 1,000.00 1,303.20 7.24 Hypothetical (5% average annual return before expenses) 1,000.00 1,018.85 6.34
* Expenses are equal to Class A and Class B annualized net expense ratios of 1.00% and 1.25%, respectively, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS The following graph depicts the Portfolio's holdings by industry, as a percentage of total investments. [CHART] Short-Term Investment 4.0% Diversified 56.6% Office & Industrial 23.4% Office Buildings 5.0% Apartments 4.4% Shopping Centers 3.1% Other* 3.5%
* Industries which do not appear in the top 10 industries and industries which represent less than 3% of total investments, if applicable, are included in the category labeled "Other". January 2005 29 2004 ANNUAL REPORT December 31, 2004 Portfolio of Investments EUROPEAN REAL ESTATE PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- COMMON STOCKS (95.9%) BELGIUM (1.2%) Cofinimmo REIT 3,736 $ 610 ---------------------------------------------------------------------------------------------- FINLAND (3.7%) Citycon Oyj 48,258 160 Sponda Oyj 180,361 1,756 ---------------------------------------------------------------------------------------------- 1,916 ============================================================================================== FRANCE (14.6%) Bail Investissement Fonciere 12,827 540 Gecina S.A. 39,376 3,894 Klepierre 9,922 877 Silic 2,681 269 Unibail 12,421 1,951 ---------------------------------------------------------------------------------------------- 7,531 ============================================================================================== GERMANY (1.9%) IVG Immobilien AG 59,904 971 ---------------------------------------------------------------------------------------------- ITALY (5.8%) Aedes S.p.A. (a)127,370 678 Beni Stabili S.p.A. 2,269,725 2,309 ---------------------------------------------------------------------------------------------- 2,987 ============================================================================================== NETHERLANDS (11.7%) AM N.V. 75,911 735 Corio N.V. REIT 15,171 887 Eurocommercial Properties N.V. CVA REIT 35,636 1,265 Rodamco Europe N.V. REIT 31,516 2,497 Vastned Offices/Industrial N.V. REIT 7,780 241 Wereldhave N.V. REIT 3,732 405 ---------------------------------------------------------------------------------------------- 6,030 ============================================================================================== NORWAY (0.9%) Steen & Strom ASA 20,500 480 ---------------------------------------------------------------------------------------------- SPAIN (7.4%) Inmobiliaria Colonial S.A. 37,812 1,518 Inmobiliaria Urbis S.A. 71,047 1,029 Metrovacesa S.A. 26,627 1,236 ---------------------------------------------------------------------------------------------- 3,783 ============================================================================================== SWEDEN (0.1%) Castellum AB 1,616 58 ---------------------------------------------------------------------------------------------- SWITZERLAND (3.5%) PSP Swiss Property AG 41,312 1,790 ---------------------------------------------------------------------------------------------- UNITED KINGDOM (45.1%) British Land Co. plc 238,431 4,098 Brixton plc 95,800 645 Capital & Regional plc 69,612 928 CLS Holdings plc (a)65,995 516 Derwent Valley Holdings plc 11,646 251 Freeport plc 141,913 1,078 Great Portland Estates plc 24,720 156 Hammerson plc (a)150,142 2,502 Land Securities Group plc 182,250 4,895 Liberty International plc 144,112 2,683 London Merchant Securities plc 118,011 510 Minerva plc 219,473 1,179 Pillar Property plc 28,338 444 Shaftesbury plc 62,142 441 Slough Estates plc 144,996 $ 1,530 Unite Group plc 227,794 1,320 ---------------------------------------------------------------------------------------------- 23,176 ============================================================================================== TOTAL COMMON STOCKS (COST $33,568) 49,332 ============================================================================================== FACE AMOUNT (000) ---------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (4.0%) REPURCHASE AGREEMENT (4.0%) J.P. Morgan Securities, Inc., 2.00%, dated 12/31/04, due 1/3/05, repurchase price $2,048 (COST $2,048) $ (f)2,048 2,048 ---------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (99.9%) (COST $35,616) 51,380 ============================================================================================== OTHER ASSETS IN EXCESS OF LIABILITIES (0.1%) 67 ============================================================================================== NET ASSETS (100%) $ 51,447 ==============================================================================================
(a) Non-income producing security. (f) Represents the Portfolio's undivided interest in a joint repurchase agreement which has a total value of $1,018,656,000. The repurchase agreement was fully collateralized by U.S. government agency securities at the date of this portfolio of investments as follows: Federal Farm Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist Corp., 8.80%, due 6/10/05. The investment in the repurchase agreement is through participation in a joint account with affiliated parties pursuant to exemptive relief received by the Portfolio from the SEC. CVA Certificaten Van Aandelen REIT Real Estate Investment Trust THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 30 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW GLOBAL FRANCHISE PORTFOLIO [CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT SINCE INCEPTION
LIPPER GLOBAL FISCAL YEAR GLOBAL FRANCHISE MULTI-CAP ENDED PORTFOLIO - MSCI GROWTH FUNDS DECEMBER 31 CLASS A WORLD INDEX INDEX ** 500000 500000 500000 2001 524000 503100 510500 2002 566968 407511 397016 2003 725379 542438 540656 2004 825350 622150 621000
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
LIPPER GLOBAL FISCAL YEAR GLOBAL FRANCHISE MULTI-CAP ENDED PORTFOLIO - MSCI GROWTH FUNDS DECEMBER 31 CLASS B WORLD INDEX INDEX *** 100000 100000 100000 2001 104700 100620 102100 2002 112898 81502 79403 2003 144103 108488 108131 2004 163660 124430 124200
* Minimum Investment ** Commenced operations on November 28, 2001 *** Commenced offering on November 28, 2001 In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX(1) AND THE LIPPER GLOBAL MULTI-CAP GROWTH FUNDS INDEX(2)
TOTAL RETURNS(3) ------------------------- AVERAGE ANNUAL ONE SINCE YEAR INCEPTION(6) -------------------------------------------------------------------------------- Portfolio - Class A (4) 13.77% 17.61% Portfolio - Class B (5) 13.56 17.28 MSCI World Index 14.72 7.33 Lipper Global Multi-Cap Growth Funds Index 14.85 7.26
(1) The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance. The MSCI World Index consists of the following 23 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. (2) The Lipper Global Multi-Cap Growth Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Global Multi-Cap Growth Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 10 funds represented in this Index. As of the date of this report, the Portfolio is in the Lipper Global Multi-Cap Growth Funds classification. (3) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (4) Commenced operations on November 28, 2001 (5) Commenced offering on November 28, 2001 (6) For comparative purposes, average annual since inception returns listed for the indexes refer to the inception date or initial offering of the respective share class of the Portfolio, not the inception of the index. 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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO SHARES. The Global Franchise Portfolio seeks long-term capital appreciation by investing primarily in equity securities of issuers located throughout the world, that it believes have, among other things, resilient business franchises and growth potential. This Portfolio's concentration of its assets in a smaller number of companies may subject it to greater investment risk than a portfolio with a larger number of companies. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. 31 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) GLOBAL FRANCHISE PORTFOLIO PERFORMANCE For the year ended December 31, 2004, the Portfolio had a total return based on net asset value per share of 13.77%, net of fees, for the Class A shares and 13.56%, net of fees, for the Class B shares, compared to 14.72% for the Morgan Stanley Capital International (MSCI) World Index (the "Index"). FACTORS AFFECTING PERFORMANCE - In the year marked by record high oil prices, it is no surprise that the market has been driven by positive sector performance in utilities (+29%), energy (+29%) and industrials (+20%). The three worst performing sectors for the year were information technology (+3%), health care (+6%) and consumer staples (+12%). - For the year, we continued to adhere to the Portfolio's buy-and-hold investment strategy. - During the fourth quarter, the Portfolio had two noteworthy transactions. The Portfolio added to its position in a major pharmaceutical company; and we completed the final sale of a conglomerate in the Portfolio. - In the first case, we met with the management and updated our model. We concluded that the firm offers both resilient franchise and good value. We are confident in the company's long-term prospects, and we believe that the market is not giving it credit for both its new drug pipeline and financial strength. - The Portfolio's sale of our stake in the conglomerate was consistent with our long-only investment philosophy and valuation discipline. The Portfolio first initiated a position in this stock in July 1999. At that time, it offered a free cash flow yield in excess of 8%. When the Portfolio sold the stock in December, the free cash flow yield was below 5%. MANAGEMENT STRATEGIES - We continue our dialogue with a number of companies and are researching new ideas. - We remain focused on the global brands philosophy of exceptional quality at compelling value. We continue to seek investment opportunities in companies with strong business franchises protected by a dominant intangible asset. Additionally, we demand sound management, substantial free cash flow and growth potential. We invest in these high quality companies only when we can identify compelling value as measured by a current free cash flow yield in excess of the risk-free bond yield. We seek to deliver attractive returns while striving to minimize business risk and valuation risk. EXPENSE EXAMPLES As a shareholder of the Portfolio, you incur ongoing costs, including management fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the six-month period ended December 31, 2004 and held for the entire six-month period. ACTUAL EXPENSES The first line of the tables 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 tables below provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio'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 costs of investing in the Portfolio 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.
EXPENSES PAID ENDING ACCOUNT DURING PERIOD* BEGINNING VALUE JULY 1, 2004-- ACCOUNT VALUE DECEMBER 31, DECEMBER 31, JULY 1, 2004 2004 2004 -------------------------------------------------------------------------------------- CLASS A Actual $ 1,000.00 $ 1,076.00 $ 5.27 Hypothetical (5% average annual return before expenses) 1,000.00 1,020.06 5.13 CLASS B Actual 1,000.00 1,075.10 6.57 Hypothetical (5% average annual return before expenses) 1,000.00 1,018.80 6.39
* Expenses are equal to Class A and Class B annualized net expense ratios of 1.00% and 1.25%, respectively, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). 32 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) GLOBAL FRANCHISE PORTFOLIO GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS The following graph depicts the industry, as a percentage of total investments. [CHART] Short-Term Investment 3.6% Tobacco 23.0% Food Products 18.2% Pharmaceuticals 16.3% Media 15.0% Beverages 9.7% Household Products 7.2% Machinery 7.0%
January 2005 33 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS GLOBAL FRANCHISE PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- COMMON STOCKS (97.6%) CANADA (2.3%) Torstar Corp., Class B 79,635 $ 1,458 ---------------------------------------------------------------------------------------------- FINLAND (5.5%) Kone Oyj, Class B 43,858 3,397 ---------------------------------------------------------------------------------------------- FRANCE (6.6%) Groupe Danone 29,116 2,684 Sanofi-Aventis S.A. 17,990 1,435 ---------------------------------------------------------------------------------------------- 4,119 ============================================================================================== NETHERLANDS (6.8%) Reed Elsevier N.V. 122,214 1,663 Royal Numico N.V. (a)57,623 2,073 Wolters Kluwer N.V. CVA 23,847 478 ---------------------------------------------------------------------------------------------- 4,214 ============================================================================================== SPAIN (4.7%) Altadis S.A. 42,576 1,946 Zardoya Otis S.A. 39,420 1,009 ---------------------------------------------------------------------------------------------- 2,955 ============================================================================================== SWEDEN (4.7%) Swedish Match AB 250,674 2,903 ---------------------------------------------------------------------------------------------- SWITZERLAND (8.1%) Nestle S.A. (Registered) 10,750 2,805 Novartis AG (Registered) 43,865 2,205 ---------------------------------------------------------------------------------------------- 5,010 ============================================================================================== UNITED KINGDOM (41.2%) Allied Domecq plc 289,100 2,845 British American Tobacco plc 272,434 4,691 Cadbury Schweppes plc 418,980 3,898 Capital Radio plc 135,627 1,145 Diageo plc 181,756 2,591 GlaxoSmithKline plc 112,337 2,634 Imperial Tobacco Group plc 80,887 2,214 Reckitt Benckiser plc 101,891 3,077 SMG plc 673,377 1,379 WPP Group plc 103,661 1,139 ---------------------------------------------------------------------------------------------- 25,613 ============================================================================================== UNITED STATES (17.7%) Altria Group, Inc. 44,470 2,717 Bristol-Myers Squibb Co. 66,856 1,713 Brown-Forman Corp., Class B 13,633 664 Kimberly-Clark Corp. 22,011 1,448 Merck & Co., Inc. 70,820 2,276 Neenah Paper, Inc. (a)693 23 New York Times Co. (The), Class A 53,443 2,180 ---------------------------------------------------------------------------------------------- 11,021 ============================================================================================== TOTAL COMMON STOCKS (COST $42,893) 60,690 ============================================================================================== FACE AMOUNT VALUE (000) (000) ---------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (3.6%) REPURCHASE AGREEMENT (3.6%) J.P. Morgan Securities, Inc., 2.00%, dated 12/31/04, due 1/3/05, repurchase price $2,248 (COST $2,248) $ (f)2,248 $ 2,248 ---------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (101.2%) (COST $45,141) 62,938 ============================================================================================== LIABILITIES IN EXCESS OF OTHER ASSETS (-1.2%) (774) ============================================================================================== NET ASSETS (100%) $ 62,164 ==============================================================================================
(a) Non-income producing security. (f) Represents the Portfolio's undivided interest in a joint repurchase agreement which has a total value of $1,018,656,000. The repurchase agreement was fully collateralized by U.S. government agency securities at the date of this portfolio of investments as follows: Federal Farm Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist Corp., 8.80%, due 6/10/05. The investment in the repurchase agreement is through participation in a joint account with affiliated parties pursuant to exemptive relief received by the Portfolio from the SEC. CVA Certificaten Van Aandelen FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: The Portfolio had the following foreign currency exchange contract(s) open at period end:
NET CURRENCY IN UNREALIZED TO EXCHANGE APPRECIATION DELIVER VALUE SETTLEMENT FOR VALUE (DEPRECIATION) (000) (000) DATE (000) (000) (000) ----------------------------------------------------------------------------------------- GBP 6,570 $ 12,588 1/21/05 US$ 11,719 $ 11,719 $ (869) US$ 16 16 1/3/05 EUR 12 16 @-- US$ 4 4 1/4/05 EUR 3 4 @-- ---------- ---------- -------------- $ 12,608 $ 11,739 $ (869) ========== ========== ==============
EUR -- Euro GBP -- British Pound @ -- Amount is less than $500. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 34 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW GLOBAL VALUE EQUITY PORTFOLIO [CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
GLOBAL LIPPER VALUE GLOBAL FISCAL EQUITY MSCI LARGE-CAP YEAR PORTFOLIO - WORLD VALUE FUNDS ENDED 31 CLASS A INDEX INDEX 1994 500000 500000 500000 1995 593320 603600 666214 1996 728799 684965 806553 1997 901918 792916 1036211 1998 1033634 985912 1225222 1999 1075124 1231798 1357292 2000 1201386 1069423 1383822 2001 1100986 889546 1265153 2002 909976 712616 1016213 2003 1175780 948563 1300726 2004 1341950 1088200 1320500
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
GLOBAL LIPPER VALUE GLOBAL FISCAL YEAR EQUITY MSCI LARGE-CAP ENDED PORTFOLIO - WORLD VALUE FUNDS DECEMBER 31 CLASS B INDEX INDEX ** 100000 100000 100000 1996 122040 113480 120291 1997 150561 131364 154543 1998 171865 163339 182733 1999 178310 204075 202430 2000 198851 177174 206387 2001 181790 147374 188688 2002 149740 118061 151561 2003 193090 157151 193994 2004 219690 179490 217263
* Minimum Investment ** Commenced offering on January 2, 1996 In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX(1) AND THE LIPPER GLOBAL LARGE-CAP VALUE FUNDS INDEX(2)
TOTAL RETURNS(3) ----------------------------------------- AVERAGE ANNUAL ------------------------------- ONE FIVE TEN SINCE YEAR YEARS YEARS INCEPTION(6) ------------------------------------------------------------------------------------ Portfolio - Class A (4) 14.13% 4.54% 10.38% 11.85% MSCI World Index 14.72 (2.45) 8.09 8.51 Lipper Global Large-Cap Value Funds Index 14.31 2.55 10.28 -- Portfolio - Class B (5) 13.78 4.26 -- 9.14 MSCI World Index 14.72 (2.45) -- 6.72 Lipper Global Large-Cap Value Funds Index 14.31 2.55 -- --
(1) The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance. The MSCI World Index consists of the following 23 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. (2) The Lipper Global Large-Cap Value Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Global Large-Cap Value Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. As of the date of this report, the Portfolio is in the Lipper Global Large-Cap Value Funds classification. (3) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (4) Commenced operations on July 15, 1992 (5) Commenced offering on January 2, 1996 (6) For comparative purposes, average annual since inception returns listed for the indexes refer to the inception date or initial offering of the respective share class of the Portfolio, not the inception of the index. 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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO SHARES. The Global Value Equity Portfolio seeks long-term capital appreciation by investing primarily in equity securities of issuers throughout the world, including U.S. issuers. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. PERFORMANCE For the year ended December 31, 2004, the Portfolio had a total return based on net asset value per share of 14.13% for the Class A shares, net of fees, and 13.78% for the Class B 35 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) GLOBAL VALUE EQUITY PORTFOLIO shares, net of fees, compared to 14.72% for the Morgan Stanley Capital International (MSCI) World Index (the "Index"). FACTORS AFFECTING PERFORMANCE - Equity markets around the world ended the year on a positive note and although the gains were not spectacular, there were very few negatives to be seen. Much of the good news came from strong market performance following the United States elections and although some concerns linger, there is an expectation of continued growth in the major global economies in 2005. On an absolute basis returns for the Portfolio were positive across all sectors. - On a relative basis, stock selection in information technology was the strongest contributor over the twelve month period for the Portfolio. However, information technology was the weakest performing sector for the benchmark and, therefore, the Portfolio's underweight in the sector was also positive. Stocks within the consumer staples sector also performed well as food, beverage and tobacco holdings all had strong returns. - Stock selection in the financials sector was the main detractor from relative performance. The underperformance in this sector can be largely attributed to holdings in the insurance sector, particularly one U.S. holding which fell dramatically as the market reacted to a reserve increase to cover adverse developments in some insurance business they had previously written. We reviewed the capital position and relative merits of this stock and decided to sell it from the Portfolio. - Although there were a number of stock changes in the Portfolio over the year, the key sector over and underweights remained the same. MANAGEMENT STRATEGIES - The Portfolio's management team continued to find value in consumer staples, telecommunication services and pharmaceuticals sectors and remain overweight in those. As mentioned, the Portfolio is underweight in the information technology sector and also financials. The Portfolio also continues to be significantly underweight relative to the benchmark to the U.S., as we find that the price we have to pay for stocks there, in most cases, is expensive relative to the price demanded for similar quality peers in Europe or Asia. - Our outlook is cautious. The U.S. is burdened with lingering economic issues such as the balance of trade and budget deficit. In tandem, while global economic growth is expected to continue in 2005 it is generally anticipated that it will be slower than it was in the past twelve months. As bottom up investors stock selection is key and we continue to focus our research efforts on identifying investment opportunities which meet our strict quality and valuation criteria. EXPENSE EXAMPLES As a shareholder of the Portfolio, you incur ongoing costs, including management fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the six-month period ended December 31, 2004 and held for the entire six-month period. ACTUAL EXPENSES The first line of the tables 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 tables below provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio'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 costs of investing in the Portfolio 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
EXPENSES PAID ENDING ACCOUNT DURING PERIOD* BEGINNING VALUE JULY 1, 2004-- ACCOUNT VALUE DECEMBER 31, DECEMBER 31, JULY 1, 2004 2004 2004 -------------------------------------------------------------------------------------- CLASS A Actual $ 1,000.00 $ 1,090.40 $ 5.25 Hypothetical (5% average annual return before expenses) 1,000.00 1,020.11 5.08 CLASS B Actual 1,000.00 1,088.60 6.56 Hypothetical (5% average annual return before expenses) 1,000.00 1,018.85 6.34
* Expenses are equal to Class A and Class B annualized net expense ratios of 1.00% and 1.25%, respectively, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). 36 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW GLOBAL VALUE EQUITY PORTFOLIO (CONT'D) GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS The following graph depicts the Portfolio's holding by industry, as a percentage of total investments. [CHART] Pharmaceuticals 13.6% Oil & Gas 6.8% Commercial Banks 6.5% Diversified Telecommunication Services 6.0% Food Products 5.6% Aerospace & Defense 5.1% Media 4.8% Insurance 4.7% Tobacco 4.5% Capital Markets 3.8% Other* 34.8% Short-Term Investment 3.8%
* Industries which do not appear in the top 10 industries and industries which represent less than 3% of total investments, if applicable, are included in the category labeled "Other". January 2005 37 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS GLOBAL VALUE EQUITY PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- COMMON STOCKS (96.4%) AUSTRALIA (1.5%) Foster's Group Ltd. 139,298 $ 631 National Australia Bank Ltd. 40,028 903 ---------------------------------------------------------------------------------------------- 1,534 ============================================================================================== BERMUDA (2.0%) Tyco International Ltd. 28,250 1,009 XL Capital Ltd., Class A 12,516 972 ---------------------------------------------------------------------------------------------- 1,981 ============================================================================================== FRANCE (6.0%) BNP Paribas S.A. 18,166 1,314 Groupe Danone 6,230 574 Lafarge S.A. 12,680 1,221 Sanofi-Aventis S.A. 17,230 1,374 Total S.A. 6,637 1,447 ---------------------------------------------------------------------------------------------- 5,930 ============================================================================================== GERMANY (1.6%) BASF AG 14,931 1,073 Bayerische Motoren Werke AG 10,580 477 ---------------------------------------------------------------------------------------------- 1,550 ============================================================================================== HONG KONG (0.5%) HongKong Electric Holdings Ltd. 113,180 517 ---------------------------------------------------------------------------------------------- IRELAND (1.8%) Bank of Ireland (London Shares) 73,474 1,213 Kerry Group plc, Class A 3,136 580 ---------------------------------------------------------------------------------------------- 1,793 ============================================================================================== ITALY (3.3%) ENI S.p.A 70,443 1,760 Telecom Italia S.p.A. RNC 453,080 1,469 ---------------------------------------------------------------------------------------------- 3,229 ============================================================================================== JAPAN (10.8%) Canon, Inc. 20,200 1,091 Fuji Photo Film Co., Ltd. 39,400 1,439 Kao Corp. 46,000 1,177 Mitsui Sumitomo Insurance Co., Ltd. 53,000 460 Nippon Telegraph & Telephone Corp. 143 642 Rohm Co., Ltd. 5,400 559 Sankyo Co., Ltd. 23,100 522 Sekisui House Ltd. 72,000 839 Sumitomo Electric Industries Ltd. 86,000 936 Takeda Pharmaceutical Co., Ltd. 30,400 1,531 Toyota Motor Corp. 10,900 444 Yamanouchi Pharmaceutical Co., Ltd. 28,100 1,095 ---------------------------------------------------------------------------------------------- 10,735 ============================================================================================== NETHERLANDS (3.4%) Koninklijke Philips Electronics N.V. 15,693 415 Royal Dutch Petroleum Co. (NY Shares) 36,038 2,068 Unilever N.V. CVA 14,068 941 ---------------------------------------------------------------------------------------------- 3,424 ============================================================================================== SOUTH KOREA (0.9%) SK Telecom Co., Ltd. ADR 39,378 876 ---------------------------------------------------------------------------------------------- SPAIN (1.2%) Telefonica S.A. 61,442 1,155 ---------------------------------------------------------------------------------------------- SWITZERLAND (6.3%) Holcim Ltd. (Registered) 9,919 $ 596 Nestle S.A. (Registered) 7,139 1,863 Novartis AG (Registered) 21,329 1,072 Roche Holding AG (Genusschein) 4,696 539 Syngenta AG (a)10,284 1,090 UBS AG (Registered) 12,783 1,069 ---------------------------------------------------------------------------------------------- 6,229 ============================================================================================== UNITED KINGDOM (20.4%) Allied Domecq plc 100,682 991 Amvescap plc 76,931 473 BAA plc 61,244 686 Barclays plc 104,981 1,180 Cadbury Schweppes plc 176,553 1,643 Diageo plc 80,369 1,146 GlaxoSmithKline plc 110,159 2,582 Imperial Tobacco Group plc 63,914 1,750 Prudential plc 67,347 585 Reed Elsevier plc 238,036 2,194 Rentokil Initial plc 143,142 406 Rolls-Royce Group plc (a)249,041 1,180 Rolls-Royce Group plc, Class B 7,665,072 15 Royal Bank of Scotland Group plc 53,910 1,812 Scottish & Southern Energy plc 65,224 1,092 Vodafone Group plc 696,202 1,887 WPP Group plc 51,625 567 ---------------------------------------------------------------------------------------------- 20,189 ============================================================================================== UNITED STATES (36.7%) Alcoa, Inc. 27,565 866 Altria Group, Inc. 32,076 1,960 American Electric Power Co., Inc. 27,682 951 BJ's Wholesale Club, Inc. (a)30,595 891 Boeing Co. (The) 27,563 1,427 Bristol-Myers Squibb Co. 50,584 1,296 ChevronTexaco Corp. 14,212 746 Citigroup, Inc. 45,706 2,202 Coca Cola Co. (The) 10,497 437 DuPont (E.I.) De Nemours & Co. 5,494 269 Emerson Electric Co. 4,993 350 Exxon Mobil Corp. 13,469 690 First Data Corp. 25,493 1,084 Gap, Inc. (The) 23,344 493 General Dynamics Corp. 9,394 983 Georgia-Pacific Corp. 19,096 716 Hewlett-Packard Co. 46,786 981 International Business Machines Corp. 21,688 2,138 Kroger Co. (The) (a)41,852 734 Loews Corp. - Carolina Group 25,642 742 MBIA, Inc. 9,674 612 McDonald's Corp. 36,286 1,163 Mellon Financial Corp. 36,982 1,150 Merck & Co., Inc. 12,690 408 Merrill Lynch & Co., Inc. 17,780 1,063 New York Times Co. (The), Class A 24,769 1,011 Northrop Grumman Corp. 15,224 828
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 38 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) GLOBAL VALUE EQUITY PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- UNITED STATES (CONT'D) Pfizer, Inc. 38,814 $ 1,044 Prudential Financial, Inc. 17,811 979 SBC Communications, Inc. 46,473 1,198 St. Paul Travelers Cos., Inc. (The) 29,758 1,103 United Technologies Corp. 5,640 583 Verizon Communications, Inc. 35,714 1,447 Viacom, Inc., Class B 27,824 1,012 Wyeth 48,738 2,076 Xerox Corp. (a)42,135 717 ---------------------------------------------------------------------------------------------- 36,350 ============================================================================================== TOTAL COMMON STOCKS (COST $78,806) 95,492 ============================================================================================== FACE AMOUNT (000) ---------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (3.8%) REPURCHASE AGREEMENT (3.8%) J.P. Morgan Securities, Inc., 2.00%, dated 12/31/04, due 1/3/05, repurchase price $3,767 (COST $3,766) $ (f)3,766 3,766 ---------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.2%) (COST $82,572) 99,258 ============================================================================================== LIABILITIES IN EXCESS OF OTHER ASSETS (-0.2%) (155) ============================================================================================== NET ASSETS (100%) $ 99,103 ==============================================================================================
(a) Non-income producing security. (f) Represents the Portfolio's undivided interest in a joint repurchase agreement which has a total value of $1,018,656,000. The repurchase agreement was fully collateralized by U.S. government agency securities at the date of this portfolio of investments as follows: Federal Farm Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist Corp., 8.80%, due 6/10/05. The investment in the repurchase agreement is through participation in a joint account with affiliated parties pursuant to exemptive relief received by the Portfolio from the SEC. ADR American Depositary Receipts CVA Certificaten Van Aandelen RNC Non-Convertible Savings Shares THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 39 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW INTERNATIONAL EQUITY PORTFOLIO [CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
LIPPER INTERNATIONAL INTERNATIONAL FISCAL YEAR EQUITY MSCI LARGE-CAP ENDED PORTFOLIO - EAFE CORE FUNDS DECEMBER 31 CLASS A INDEX INDEX 1994 500000 500000 500000 1995 558750 556050 558303 1996 668489 589691 638165 1997 761475 600188 702015 1998 900825 720201 805948 1999 1053155 914367 1119884 2000 1150993 784765 994772 2001 1038840 616480 792539 2002 997079 518213 677207 2003 1324320 718191 898643 2004 1588750 863650 1053000
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
LIPPER INTERNATIONAL INTERNATIONAL FISCAL YEAR EQUITY MSCI LARGE-CAP ENDED PORTFOLIO - EAFE CORE FUNDS DECEMBER 31 CLASS B INDEX INDEX ** 100000 100000 100000 1996 118580 106050 113554 1997 134671 107938 124916 1998 159087 129521 143409 1999 185623 164440 199271 2000 202218 141132 177009 2001 182340 110868 141023 2002 174590 93195 120501 2003 231262 129159 159904 2004 276780 155220 187370
* Minimum Investment ** Commenced offering on January 2, 1996 In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1) AND THE LIPPER INTERNATIONAL LARGE-CAP CORE FUNDS INDEX(2)
TOTAL RETURNS(3) -------------------------------------------- AVERAGE ANNUAL ---------------------------------- ONE FIVE TEN SINCE YEAR YEARS YEARS INCEPTION(6) -------------------------------------------------------------------------------- Portfolio - Class A (4) 19.96% 8.57% 12.26% 11.69% MSCI EAFE Index 20.25 (1.13) 5.62 4.52 Lipper International Large-Cap Core Funds Index 17.18 (1.22) 7.73 -- Portfolio - Class B (5) 19.67 8.32 -- 11.98 MSCI EAFE Index 20.25 (1.13) -- 5.01 Lipper International Large-Cap Core Funds Index 17.18 (1.22) -- 7.23
(1) The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. & Canada. The MSCI EAFE Index consists of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. (2) The Lipper International Large-Cap Core Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper International Large-Cap Core Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 10 funds represented in this Index. As of the date of this report, the Portfolio is in the Lipper International Large-Cap Core Funds classification. (3) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (4) Commenced operations on August 4, 1989 (5) Commenced offering on January 2, 1996 (6) For comparative purposes, average annual since inception returns listed for the indexes refer to the inception date or initial offering of the respective share class of the Portfolio, not the inception of the index. 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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO SHARES. The International Equity Portfolio seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. 40 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) INTERNATIONAL EQUITY PORTFOLIO PERFORMANCE For the year ended December 31, 2004, the Portfolio had a total return based on net asset value per share of 19.96% for the Class A shares, net of fees, and 19.67% for the Class B shares, net of fees, compared to 20.25% for the Morgan Stanley Capital International (MSCI) EAFE Index (the "Index"). FACTORS AFFECTING PERFORMANCE - Currency was once again a major factor driving returns with the U.S. dollar declining 16.8% against the Euro, 10% against the British pound and 9.7% against the Japanese yen. The fall against the commodity linked currencies of Australia, South Africa and New Zealand was even more pronounced at over 20%. - Portfolio returns for the year broadly matched those of the Index with strong outperformance from stock selection in telecoms, consumer staples (despite the disappointing performance of the food manufacturers), health care and materials, offset by poor stock selection in the utilities and consumer discretionary sectors (mainly autos and media) and the large underweight position in financials. - On a country basis, stock selection in the United Kingdom (consumer staples, particularly tobacco), France (telecom and health care) and Italy (telecoms) were positive contributors, while poor stock selection in Japan (information technology, consumer discretionary, telecoms) and underweight exposure to the strongly performing Australian currency and local market were the two largest negative factors. MANAGEMENT STRATEGIES - 2004 was a year where investors were generally handsomely rewarded for taking risk across virtually every asset class whether one looks at the narrowing of spreads in corporate and emerging market debt, to speculative commodity positions or to the seemingly universal fall in property yields. However, as we enter 2005, risk aversion may become the watch word if the economic imbalances and geopolitical uncertainties evident throughout 2004 start to have a more pronounced effect on economic growth in 2005. This is the case with the knock-on effects from the U.S. authorities' tacit change in U.S. dollar policy. So far equity markets have responded in a remarkably benign and almost complacent fashion to this significant change in U.S. policy, no more so than the Euro bloc markets whose already fragile economies we believe will undoubtedly suffer from a loss of competitiveness. In our opinion, politicians and equity investors' resolve will surely be severely tested if the dollar repeats its performance again this year. - An emerging theme in equity markets has been the hunt for high and sustainable dividend yielding companies (hence the outperformance of utilities). We believe with free cash flows at or very near a cyclical high, and corporate balance sheets in good standing after three years of balance sheet repair (a decade or more for Japanese companies) the prospects for significant dividend growth look sound, making dividend yield an increasingly meaningful contributor to total return. We expect the search for yield will continue to be a major theme in 2005 and will spread to companies with the prospect of converting high free cash flow yields into tangible dividend yields. EXPENSE EXAMPLES As a shareholder of the Portfolio, you incur ongoing costs, including management fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the six-month period ended December 31, 2004 and held for the entire six-month period. ACTUAL EXPENSES The first line of the tables 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 tables below provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio'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 costs of investing 41 2004 ANNUAL REPORT DECEMBER 31, 2004 INVESTMENT OVERVIEW (CONT'D) INTERNATIONAL EQUITY PORTFOLIO in the Portfolio 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.
EXPENSES PAID ENDING ACCOUNT DURING PERIOD* BEGINNING VALUE JULY 1, 2004-- ACCOUNT VALUE DECEMBER 31, DECEMBER 31, JULY 1, 2004 2004 2004 -------------------------------------------------------------------------------------- CLASS A Actual $ 1,000.00 $ 1,134.10 $ 5.20 Hypothetical (5% average annual return before expenses) 1,000.00 1,020.26 4.93 CLASS B Actual 1,000.00 1,132.80 6.54 Hypothetical (5% average annual return before expenses) 1,000.00 1,019.00 6.19
* Expenses are equal to Class A and Class B annualized net expense ratios of 0.97% and 1.22%, respectively, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS The following graph depicts the Portfolio's holdings by industry, as a percentage of total investments. [CHART] Diversified Telecommunication Services 13.0% Commercial Banks 7.5% Food Products 7.4% Oil & Gas 6.5% Pharmaceuticals 5.8% Tobacco 4.1% Commercial Services & Supplies 3.5% Chemicals 3.1% Other* 37.5% Short-Term Investments 11.6%
* Industries which do not appear in the top 10 industries and industries which represent less than 3% of total investments, if applicable, are included in the category labeled "Other". January 2005 42 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS INTERNATIONAL EQUITY PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- COMMON STOCKS (97.0%) AUSTRALIA (1.4%) National Australia Bank Ltd. (c)1,865,064 $ 42,055 Telstra Corp., Ltd. 19,202,388 73,768 ---------------------------------------------------------------------------------------------- 115,823 ============================================================================================== AUSTRIA (1.2%) Telekom Austria AG 5,451,798 103,165 ---------------------------------------------------------------------------------------------- BELGIUM (0.7%) Fortis (a)(c)1,964,038 54,270 ---------------------------------------------------------------------------------------------- CANADA (0.7%) Royal Bank of Canada (c)1,020,595 54,581 ---------------------------------------------------------------------------------------------- FINLAND (0.5%) Nokia Oyj 2,355,989 37,136 ---------------------------------------------------------------------------------------------- FRANCE (9.1%) BNP Paribas S.A. (c)721,827 52,189 France Telecom S.A. (c)10,558,414 348,896 Renault S.A. (c)672,956 56,187 Sanofi-Aventis S.A. (c)1,012,481 80,758 Societe Generale 516,311 52,143 Total S.A. (c)729,559 159,036 ---------------------------------------------------------------------------------------------- 749,209 ============================================================================================== GERMANY (6.2%) Bayer AG 1,342,283 45,411 Bayerische Motoren Werke AG 1,395,115 62,830 Deutsche Telekom AG (Registered) (a)(c)5,716,970 129,122 Linde AG 704,784 44,035 Muenchener Rueckversicherungs AG (Registered) (c)435,985 53,493 Porsche AG (Non-Voting Shares) (c)123,937 78,933 Siemens AG (Registered) (c)1,212,439 102,595 ---------------------------------------------------------------------------------------------- 516,419 ============================================================================================== ITALY (4.4%) ENI S.p.A. 3,398,820 84,925 Telecom Italia S.p.A. RNC (c)53,025,809 171,912 UniCredito Italiano S.p.A. 19,186,952 110,095 ---------------------------------------------------------------------------------------------- 366,932 ============================================================================================== JAPAN (18.2%) Asatsu-DK, Inc. (c)686,600 19,339 Canon, Inc. (c)2,519,600 136,028 Central Japan Railway Co. (c)1,330 10,868 Dai Nippon Printing Co., Ltd. (c)9,958,000 159,826 Daiwa Securities Group, Inc. 1,363,000 9,847 Fuji Photo Film Co., Ltd. (c)4,716,600 172,216 Fuji Television Network, Inc. 7,930 17,187 Japan Tobacco, Inc. 2,262 25,838 Kansai Electric Power Co., Inc. (The) 5,871,700 119,234 Kao Corp. 4,996,000 127,790 Kyocera Corp. 1,111,800 85,640 Lawson, Inc. 1,031,300 38,058 Millea Holdings, Inc. 2,776 41,194 Mitsubishi Estate Co., Ltd. (c)5,154,400 60,385 Mitsui Sumitomo Insurance Co., Ltd. 4,952,000 43,027 Nippon Telegraph & Telephone Corp. 8,511 38,222 NTT DoCoMo, Inc. 23,074 42,575 Oriental Land Co., Ltd. (c)941,000 $ 65,410 Osaka Gas Co., Ltd. 13,953,000 43,590 Rohm Co., Ltd. 783,500 81,081 Tokyo Gas Co., Ltd. (c)20,077,200 82,324 Yamanouchi Pharmaceutical Co., Ltd. 2,099,200 81,771 ---------------------------------------------------------------------------------------------- 1,501,450 ============================================================================================== NETHERLANDS (8.7%) ABN AMRO Holding N.V. 2,087,638 55,193 Akzo Nobel N.V. (c)1,911,883 81,383 CSM N.V. CVA 1,070,076 33,270 ING Groep N.V. CVA 3,041,036 91,826 Royal Dutch Petroleum Co. (c)2,691,603 154,627 Royal KPN N.V. 3,576,517 33,912 Unilever N.V. CVA 4,005,250 268,016 ---------------------------------------------------------------------------------------------- 718,227 ============================================================================================== NEW ZEALAND (0.7%) Telecom Corp. of New Zealand Ltd. (c)13,924,564 61,491 ---------------------------------------------------------------------------------------------- SOUTH KOREA (1.4%) Samsung Electronics Co., Ltd. GDR (Registered) 544,776 119,306 ---------------------------------------------------------------------------------------------- SPAIN (2.1%) Telefonica S.A. 9,265,273 174,197 ---------------------------------------------------------------------------------------------- SWEDEN (1.4%) Nordea Bank AB 6,884,824 69,369 SKF AB, Class B 1,093,571 48,679 ---------------------------------------------------------------------------------------------- 118,048 ============================================================================================== SWITZERLAND (9.7%) Credit Suisse Group (a)1,592,047 66,751 Holcim Ltd. (Registered) 1,777,283 106,788 Nestle S.A. (Registered) 1,045,825 272,912 Novartis AG (Registered) 3,243,593 163,026 Roche Holding AG (Genusschein) 421,719 48,422 UBS AG (Registered) 1,730,417 144,726 ---------------------------------------------------------------------------------------------- 802,625 ============================================================================================== TAIWAN (0.7%) Chunghwa Telecom Co., Ltd. ADR 2,613,621 55,017 ---------------------------------------------------------------------------------------------- UNITED KINGDOM (29.9%) Allied Domecq plc 16,649,456 163,854 BAA plc 2,505,509 28,070 Barclays plc 15,121,024 169,988 BHP Billiton plc 8,559,722 100,250 BOC Group plc 5,850,778 111,512 BP plc 20,298,805 197,821 British American Tobacco plc 8,283,759 142,627 Bunzl plc 5,262,341 43,864 Cadbury Schweppes plc 10,375,095 96,532 DX Services plc (a)1,661,730 11,667 GlaxoSmithKline plc 6,654,169 155,992 GUS plc 3,157,308 56,845 Hays plc 33,234,604 79,218 Imperial Tobacco Group plc 7,554,303 206,803 ITV plc 18,385,150 37,122 National Grid Transco plc 12,411,286 118,097 Prudential plc 11,776,049 102,338
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 43 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) INTERNATIONAL EQUITY PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- UNITED KINGDOM (CONT'D) Reckitt Benckiser plc 3,240,633 $ 97,853 Reed Elsevier plc 16,101,273 148,420 Rentokil Initial plc 13,199,734 37,414 Rolls-Royce Group plc (a)11,823,515 56,025 Rolls-Royce Group plc, Class B 390,324,138 764 Royal Bank of Scotland Group plc 2,472,054 83,087 Vodafone Group plc 65,948,260 178,702 Wolseley plc 2,802,162 52,332 ---------------------------------------------------------------------------------------------- 2,477,197 ============================================================================================== TOTAL COMMON STOCKS (COST $6,303,049) 8,025,093 ============================================================================================== FACE AMOUNT (000) ---------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS (13.5%) SHORT-TERM DEBT SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (12.7%) Bank of New York, 2.33%, 10/28/05 $ (h)39,612 39,612 Bear Stearns, 2.37%, 4/15/05 (h)21,766 21,766 Beta Finance, Inc., 2.28%, 2/18/05 16,333 16,333 Calyon NY, 2.04%, 3/4/05 (h)34,790 34,790 CIT Group Holdings, 2.17%, 1/31/05 (h)3,371 3,371 2.30%, 2/14/05 (h)18,374 18,374 Citigroup, Inc., 2.39%, 9/1/05 (h)11,602 11,602 Compass Securitization, 2.38%, 3/17/05 (h)16,912 16,912 Corporate Receivables Corp., 2.46%, 3/14/05 7,211 7,211 Discover Card Master Trust, 2.39%, 5/16/05 (h)(i)16,096 16,096 Eni Coordination Center, 2.38%, 8/29/05 12,081 12,081 Giro Funding U.S. Corp., 2.37%, 2/7/05 7,222 7,222 HBOS Treasury Services plc, N.Y., 2.46%, 3/14/05 14,502 14,502 International Lease Finance Corp., 2.51%, 9/22/05 (h)18,625 18,625 Jackson National Life Global Fund, 2.32%, 1/18/05 (h)12,087 12,087 K2 (USA) LLC, 2.33%, 10/24/05 (h)34,298 34,298 Landesbank Hessen Thur New York, 2.24%, 2/2/05 (h)12,193 12,193 Lehman Brothers, Inc., 2.33%, 1/3/05 296,201 296,201 Links Finance LLC, 2.33%, 10/27/05 (h)24,154 24,154 2.40%, 9/26/05 (h)12,081 12,081 Marshall & Ilsley Bank, 2.51%, 12/29/05 (h)33,828 33,828 Nationwide Building Society, 2.58%, 1/2/06 (h)28,027 28,027 Pfizer, Inc., 2.30%, 1/31/06 (h)24,161 24,161 Proctor & Gamble, 2.42%, 1/31/06 (h)9,906 9,906 Royal Bank of Canada NY, 2.38%, 6/27/05 (h)24,158 24,157 Sheffield Receivable Corp., 2.21%, 1/12/05 33,910 33,910 Sigma Finance, Inc., 2.38%, 9/15/05 (h)24,163 24,163 SLM Corp., 2.41%, 1/31/06 (h)24,161 24,161 Societe Generale, N.Y., 2.04%, 3/3/05 (h)25,368 25,368 Svenska Handelsbank N.Y., 2.32%, 5/10/05 (h)24,157 24,157 UBS Finance (Delaware), Inc., 2.33%, 1/6/05 36,225 36,225 UBS Securities LLC, 2.30%, 1/3/05 135,277 135,277 ---------------------------------------------------------------------------------------------- 1,052,851 ============================================================================================== VALUE SHARES (000) ---------------------------------------------------------------------------------------------- INVESTMENT COMPANY HELD AS COLLATERAL ON LOANED SECURITIES (0.1%) JPMorgan Securities Lending Collateral Investment Fund 6,088,591 $ 6,089 FACE AMOUNT (000) ---------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT (0.7%) J.P. Morgan Securities, Inc., 2.00%, dated 12/31/04, due 1/3/05, repurchase price $55,923 $ (f)55,914 55,914 ---------------------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (COST $1,114,854) 1,114,854 ============================================================================================== TOTAL INVESTMENTS (110.5%) (COST $7,417,903)-- INCLUDING $1,006,675 OF SECURITIES LOANED 9,139,947 ============================================================================================== LIABILITIES IN EXCESS OF OTHER ASSETS (-10.5%) (866,063) ============================================================================================== NET ASSETS (100%) $ 8,273,884 ==============================================================================================
(a) Non-income producing security. (c) All or portion of security on loan at December 31, 2004. (f) Represents the Portfolio's undivided interest in a joint repurchase agreement which has a total value of $1,018,656,000. The repurchase agreement was fully collateralized by U.S. government agency securities at the date of this portfolio of investments as follows: Federal Farm Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist Corp., 8.80%, due 6/10/05. The investment in the repurchase agreement is through participation in a joint account with affiliated parties pursuant to exemptive relief received by the Portfolio from the SEC. (h) Variable/Floating Rate Security -- interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on December 31, 2004. (i) Security's issuer is an affiliate of the adviser. Held as collateral for securities on loan. ADR American Depositary Receipts CVA Certificaten Van Aandelen GDR Global Depositary Receipts RNC Non-Convertible Savings Shares FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: The Portfolio had the following foreign currency exchange contract(s) open at period end:
NET CURRENCY IN UNREALIZED TO EXCHANGE APPRECIATION DELIVER VALUE SETTLEMENT FOR VALUE (DEPRECIATION) (000) (000) DATE (000) (000) (000) ----------------------------------------------------------------------------------------- EUR 481 $ 653 1/5/05 JPY 68,018 $ 664 $ 11 EUR 413 560 1/6/05 JPY 57,788 564 4 GBP 330 634 1/5/05 EUR 467 634 @-- GBP 121,000 231,789 1/24/05 EUR 172,698 234,297 2,508 GBP 141,200 270,484 1/24/05 JPY 27,320,153 267,109 (3,375) ---------- ---------- -------------- $ 504,120 $ 503,268 $ (852) ========== ========== ==============
EUR -- Euro GBP -- British Pound JPY -- Japanese Yen @ -- Amount is less than $500. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 44 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW INTERNATIONAL MAGNUM PORTFOLIO [CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
LIPPER INTERNATIONAL INTERNATIONAL FISCAL YEAR MAGNUM MSCI MULTI-CAP ENDED PORTFOLIO - EAFE CORE FUNDS DECEMBER 31 CLASS A INDEX INDEX ** 500000 500000 500000 1996 541250 526300 564097 1997 576864 535668 611118 1998 619148 642802 669245 1999 773130 816101 964110 2000 691951 700377 831874 2001 562487 550217 685289 2002 487339 467134 589468 2003 629008 647401 809267 2004 745100 779050 964700
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
LIPPER INTERNATIONAL INTERNATIONAL FISCAL YEAR MAGNUM MSCI MULTI-CAP ENDED PORTFOLIO - EAFE CORE FUNDS DECEMBER 31 CLASS B INDEX INDEX *** 100000 100000 100000 1996 107900 105260 112819 1997 114730 107134 122224 1998 122910 128560 133849 1999 153121 163220 192822 2000 136569 140075 166375 2001 110798 110043 137058 2002 95851 93427 117894 2003 123159 129480 161853 2004 145500 155810 192940
* Minimum Investment ** Commenced operations on March 15, 1996 *** Commenced offering on March 15, 1996 In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE INDEX(1) AND THE LIPPER INTERNATIONAL MULTI-CAP CORE FUNDS INDEX(2)
TOTAL RETURNS(3) -------------------------------- AVERAGE ANNUAL ---------------------- ONE FIVE SINCE YEAR YEARS INCEPTION(6) ---------------------------------------------------------------------------- Portfolio - Class A (4) 18.45% (0.74)% 4.64% Portfolio - Class B (5) 18.15 (1.00) 4.36 MSCI EAFE Index 20.25 (1.13) 5.17 Lipper International Multi-Cap Core Funds Index 19.20 0.01 7.76
(1) The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. & Canada. The MSCI EAFE Index consists of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. (2) The Lipper International Multi-Cap Core Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper International Multi-Cap Core Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 10 funds represented in this Index. As of the date of this report, the Portfolio is in the Lipper International Multi-Cap Core Funds classification. (3) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (4) Commenced operations on March 15, 1996 (5) Commenced offering on March 15, 1996 (6) For comparative purposes, average annual since inception returns listed for the indexes refer to the inception date or initial offering of the respective share class of the Portfolio, not the inception of the index. 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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO SHARES. The International Magnum Portfolio seeks long-term capital appreciation by investing primarily in equity securities of non-U.S. issuers domiciled in EAFE countries. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. 45 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) INTERNATIONAL MAGNUM PORTFOLIO PERFORMANCE For the year ended December 31, 2004, the Portfolio had a total return based on net asset value per share of 18.45%, net of fees, for the Class A shares and 18.15%, net of fees, for the Class B shares compared to 20.25% for the Morgan Stanley Capital International (MSCI) EAFE Index (the "Index"). FACTORS AFFECTING PERFORMANCE - The first half of 2004 saw a continuation of economic growth, albeit at a more moderate pace. Global equity markets advanced, reflecting investors' belief that growth in corporate profits was sustainable. - As we entered the second half of the year, soaring oil prices and heightened geo-political fears weighed heavily on world equity markets. A dip in the United States (U.S.) leading economic indicators, an abrupt slowdown in Japan's gross domestic product (GDP) growth, and tepid domestic activity in Europe pointed to a softening of the global economic expansion. After a correction in July and August, markets began to reverse course in September and completed the year on a high note reflecting improved sentiment and a return of confidence in growth. For the year, non-U.S. markets significantly outperformed the U.S. markets based on a combination of better valuations and a stronger local currency. - From a regional allocation perspective, the Portfolio did not benefit from its underweight to Europe and Asia ex-Japan and overweight to Japan. Europe ended the year with a positive return in U.S. dollar terms (+12.2% in local terms) on the back of strong performance from the financial sector, particularly the banks. - Asia ex-Japan was the best performing region during the year, driven largely by the performance of Australia. Japan, while showing strong absolute performance in U.S. dollar terms, was the worst performing region, underperforming the Index for the year. - The largest detractor from performance came from within Europe. Security selection within european financials, consumer discretionary, energy and industrials coupled with the Portfolio's underweight to the european utility and energy sectors detracted from results. Also causing a significant drag on performance was the Portfolio's underweight to financials and information technology (Japan) and security selection within industrials (Asia ex-Japan). - Offsetting the negatives was the Portfolio's security selection within european telecommunications, materials and consumer staples. Also helping the Portfolio's absolute returns was security selection within Asia ex-Japan financials and Japanese materials, health care and consumer staples. MANAGEMENT STRATEGIES - The Portfolio has maintained an overweight position to Japan and an underweight position to Europe and Asia ex-Japan during the year. Within Europe, the Portfolio is overweight to the euro zone region and an underweight to the United Kingdom (U.K.). We believe, the euro zone is likely to benefit from good global growth, better relative value and an improved earnings forecast. By contrast, the U.K. has become cyclically divergent from both the U.S. and continental Europe, at least in the short term. In our opinion, interest rates are very likely to have peaked, which puts the U.K. in a very different position of its major trading partners. Within the Pacific Rim we continue to be overweight to Japan, Hong Kong and Singapore and underweight to Australia and New Zealand. - From a sector allocation perspective, we continue to see better relative value within the cyclical sectors including industrials (Europe & Japan), information technology (Japan) and consumer discretionary (Pacific Rim). We are underweight to financials (Europe & Japan), utilities (all regions), and energy (all regions). - Going forward in 2005, we anticipate global economic growth to decelerate. In our opinion, the impact of higher oil prices, the fading effect of fiscal stimulus, reduced pace of corporate profit gains and rising interest rates may cause growth to slow to historical trends. We believe the U.S. market is highly vulnerable to future disappointing earnings. In addition, the potential of inflation exceeding expectations could lead the Fed to alter course and raise interest rates at a more aggressive rather than "measured" pace. We are concerned about rapidly rising interest rates because the U.S. economy is more highly leveraged today than during past tightening cycles, especially for households. EXPENSE EXAMPLES As a shareholder of the Portfolio, you incur ongoing costs, including management fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. 46 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) INTERNATIONAL MAGNUM PORTFOLIO The examples are based on an investment of $1,000 invested at the beginning of the six-month period ended December 31, 2004 and held for the entire six-month period. ACTUAL EXPENSES The first line of the tables 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 tables below provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio'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 costs of investing in the Portfolio 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.
EXPENSES PAID ENDING ACCOUNT DURING PERIOD* BEGINNING VALUE JULY 1, 2004-- ACCOUNT VALUE DECEMBER 31, DECEMBER 31, JULY 1, 2004 2004 2004 -------------------------------------------------------------------------------------- CLASS A Actual $ 1,000.00 $ 1,130.20 $ 5.35 Hypothetical (5% average annual return before expenses) 1,000.00 1,020.11 5.08 CLASS B Actual 1,000.00 1,128.30 6.69 Hypothetical (5% average annual return before expenses) 1,000.00 1,018.85 6.34
* Expenses are equal to Class A and Class B annualized net expense ratios of 1.00% and 1.25%, respectively, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS The following graph depicts the Portfolio's holding by industry, as a percentage of total investments. [CHART] Commercial Banks 9.1% Pharmaceuticals 7.4% Diversified Telecommunication Services 6.0% Oil & Gas 5.7% Insurance 5.1% Chemicals 4.2% Food Products 3.3% Other* 43.4% Short-Terms Investments 15.8%
* Industries which do not appear in the top 10 industries and industries which represent less than 3% of total investments, if applicable, are included in the category labeled "Other". January 2005 47 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS INTERNATIONAL MAGNUM PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- COMMON STOCKS (91.7%) AUSTRALIA (2.8%) AMP Ltd. 75,100 $ 427 Australia & New Zealand Banking Group Ltd. 10,508 169 BHP Billiton Ltd. 40,489 486 Coles Myer Ltd. 11,700 90 Gunns Ltd. 51,800 192 National Australia Bank Ltd. 8,480 191 Newcrest Mining Ltd. 13,350 182 Qantas Airways Ltd. 29,400 86 QBE Insurance Group Ltd. 15,400 185 Rio Tinto Ltd. (c)14,050 430 Westpac Banking Corp. 14,700 224 ---------------------------------------------------------------------------------------------- 2,662 ============================================================================================== AUSTRIA (0.5%) Telekom Austria AG 25,863 489 ---------------------------------------------------------------------------------------------- BELGIUM (1.1%) AGFA-Gevaert N.V. 13,836 468 Fortis (a)6,824 189 Solvay S.A., Class A 4,055 446 ---------------------------------------------------------------------------------------------- 1,103 ============================================================================================== DENMARK (0.6%) Carlsberg A/S, Class B 6,158 311 Novo-Nordisk A/S, Class B 4,409 240 ---------------------------------------------------------------------------------------------- 551 ============================================================================================== FINLAND (1.1%) Nokia Oyj 13,725 216 Pohjola Group plc, Class D 9,267 107 Sampo Oyj, Class A 55,443 764 ---------------------------------------------------------------------------------------------- 1,087 ============================================================================================== FRANCE (10.1%) Atos Origin (a)5,923 401 AXA 28,981 715 BNP Paribas S.A. (c)18,562 1,342 Business Objects S.A. (a)5,185 131 Cap Gemini S.A. (a)(c)5,782 185 Carrefour S.A. 6,705 319 France Telecom S.A. 56,975 1,883 Groupe Danone (c)2,138 197 M6-Metropole Television 6,213 176 Neopost S.A. 3,450 268 Sanofi-Aventis S.A. (c)8,796 701 Schneider Electric S.A. (c)13,638 947 Societe Generale (c)4,838 489 Total S.A. (c)7,420 1,617 Vinci S.A. (c)2,956 396 ---------------------------------------------------------------------------------------------- 9,767 ============================================================================================== GERMANY (6.1%) Allianz AG (Registered) 6,886 912 Bayerische Motoren Werke AG 19,111 861 Deutsche Bank AG (Registered) 2,408 213 Deutsche Boerse AG 3,410 205 Deutsche Telekom AG (Registered) (a)55,854 1,261 Fresenius Medical Care AG (c)2,809 225 Linde AG 3,256 $ 203 Muenchener Rueckversicherungs AG (Registered) 3,519 432 Siemens AG (Registered) 15,939 1,349 Volkswagen AG 5,518 250 ---------------------------------------------------------------------------------------------- 5,911 ============================================================================================== HONG KONG (3.1%) Cheung Kong Holdings Ltd. (c)13,000 130 Esprit Holdings Ltd. 67,800 410 Great Eagle Holdings Co. 194,000 502 Henderson Land Development Co., Ltd. 113,000 587 Hutchison Whampoa Ltd. 14,000 131 Hysan Development Co., Ltd. (c)141,000 297 Kerry Properties Ltd. (c)85,000 181 Li & Fung Ltd. 105,000 177 New World Development Ltd. 413,000 462 Sun Hung Kai Properties Ltd. 7,000 70 Techtronic Industries Co. 40,000 87 ---------------------------------------------------------------------------------------------- 3,034 ============================================================================================== IRELAND (0.7%) Bank of Ireland 25,150 419 Kerry Group plc, Class A 9,188 220 ---------------------------------------------------------------------------------------------- 639 ============================================================================================== ITALY (3.7%) ENI S.p.A. 31,171 779 Sanpaolo IMI S.p.A. 29,539 425 Telecom Italia S.p.A. 81,368 332 Telecom Italia S.p.A. RNC 220,979 717 TIM S.p.A. (c)71,208 531 UniCredito Italiano S.p.A. 133,320 765 ---------------------------------------------------------------------------------------------- 3,549 ============================================================================================== JAPAN (21.2%) Amada Co., Ltd. (c)34,000 188 Canon, Inc. 12,000 648 Casio Computer Co., Ltd. (c)28,000 432 Dai Nippon Printing Co., Ltd. 18,000 289 Daicel Chemical Industries Ltd. 70,000 396 Daifuku Co., Ltd. (c)42,000 272 Daikin Industries Ltd. 18,000 520 Denki Kagaku Kogyo K.K. 80,000 266 East Japan Railway Co. 68 378 FamilyMart Co., Ltd. (c)11,300 329 Fuji Machine Manufacturing Co., Ltd. 6,500 64 Fuji Photo Film Co., Ltd. 14,000 511 Fujitec Co., Ltd. 21,000 111 Fujitsu Ltd. 81,000 527 Furukawa Electric Co., Ltd. (a)35,000 194 Hitachi Capital Corp. (c)18,200 376 Hitachi High-Technologies Corp. 6,900 98 Hitachi Ltd. 71,000 492 House Foods Corp. (c)9,200 133 Kaneka Corp. 42,000 476 Kurita Water Industries Ltd. (c)23,600 340 Kyocera Corp. 5,100 393 Kyudenko Corp. 6,000 32
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 48 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) INTERNATIONAL MAGNUM PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- JAPAN (CONT'D) Lintec Corp. 10,000 $ 152 Matsushita Electric Industrial Co., Ltd. 40,000 635 Minebea Co., Ltd. 48,000 209 Mitsubishi Chemical Corp. (c)112,000 341 Mitsubishi Corp. (c)41,000 530 Mitsubishi Estate Co., Ltd. 23,000 269 Mitsubishi Heavy Industries Ltd. 127,000 361 Mitsubishi Logistics Corp. (c)9,000 89 Mitsumi Electric Co., Ltd. (c)18,100 207 Nagase & Co., Ltd. (c)13,000 112 NEC Corp. 66,000 410 Nifco, Inc. (c)16,000 268 Nintendo Co., Ltd. 4,700 591 Nippon Meat Packers, Inc. 17,000 231 Nippon Telegraph & Telephone Corp. 60 269 Nissan Motor Co., Ltd. (c)54,600 594 Nissha Printing Co., Ltd. 6,000 83 Nisshinbo Industries, Inc. (c)24,000 180 Obayashi Corp. 42,000 265 Ono Pharmaceutical Co., Ltd. 7,800 438 Ricoh Co., Ltd. 25,000 483 Rinnai Corp. 5,600 150 Rohm Co., Ltd. 2,000 207 Ryosan Co., Ltd. (c)8,700 201 Sangetsu Co., Ltd. 300 7 Sanki Engineering Co., Ltd. 4,000 29 Sankyo Co., Ltd. 19,700 445 Sanwa Shutter Corp. 29,000 163 Sekisui Chemical Co., Ltd. 43,000 314 Sekisui House Ltd. 26,000 303 Shin-Etsu Polymer Co., Ltd. 25,000 180 Sony Corp. 10,000 387 Suzuki Motor Corp. (c)21,200 387 TDK Corp. 5,400 400 Teijin Ltd. (c)25,000 109 Toho Co., Ltd. 7,400 117 Tokyo Electric Power Co., Inc. (The) 10,600 260 Toshiba Corp. (c)119,000 511 Toyo INK MFG Co., Ltd. 31,000 124 Toyota Motor Corp. 17,400 708 Tsubakimoto Chain Co. 57,000 220 Yamaha Corp. 23,100 353 Yamaha Motor Co., Ltd. (c)18,000 270 Yamanouchi Pharmaceutical Co., Ltd. 12,600 491 ---------------------------------------------------------------------------------------------- 20,518 ============================================================================================== NETHERLANDS (7.1%) ASML Holding N.V. (a)(c)25,941 416 ING Groep N.V. CVA 15,406 465 Koninklijke Ahold N.V. (a)61,616 476 Royal Dutch Petroleum Co. 25,823 1,484 Royal Numico N.V. (a)12,448 448 TPG N.V. 27,466 744 Unilever N.V. CVA 17,978 1,203 VNU N.V. 14,188 418 Wolters Kluwer N.V. CVA 62,877 $ 1,260 ---------------------------------------------------------------------------------------------- 6,914 ============================================================================================== POLAND (0.3%) Telekomunikacja Polska S.A. 42,863 282 ---------------------------------------------------------------------------------------------- SINGAPORE (1.5%) CapitaCommercial Trust REIT (a)(c)45,400 36 CapitaLand Ltd. (c)227,000 296 City Developments Ltd. 60,000 261 Oversea-Chinese Banking Corp., Ltd. 25,000 207 SembCorp Industries Ltd. 122,000 121 Singapore Airlines Ltd. 53,000 370 Venture Corp., Ltd. 20,000 195 ---------------------------------------------------------------------------------------------- 1,486 ============================================================================================== SPAIN (3.0%) Altadis S.A. 23,146 1,058 Banco Bilbao Vizcaya Argentaria S.A. (c)23,622 418 Banco Santander Central Hispano S.A. 29,179 361 Telefonica S.A. 54,925 1,033 ---------------------------------------------------------------------------------------------- 2,870 ============================================================================================== SWEDEN (1.1%) Nordea Bank AB 23,464 236 Sandvik AB 8,513 343 SKF AB, Class B 10,577 471 ---------------------------------------------------------------------------------------------- 1,050 ============================================================================================== SWITZERLAND (6.8%) Ciba Specialty Chemicals AG (Registered) (a)5,422 411 Nestle S.A. (Registered) 2,597 678 Novartis AG (Registered) 49,780 2,502 Schindler Holding AG (Registered) 730 304 STMicroelectronics N.V. 11,622 226 Swiss Reinsurance (Registered) 8,456 602 UBS AG (Registered) 19,686 1,647 Zurich Financial Services AG (a)1,157 192 ---------------------------------------------------------------------------------------------- 6,562 ============================================================================================== UNITED KINGDOM (20.9%) Allied Domecq plc 40,683 400 Amvescap plc 43,245 266 AstraZeneca plc 19,742 715 Barclays plc 62,701 705 BOC Group plc 43,520 829 BP plc 67,662 659 British American Tobacco plc 11,674 201 British Sky Broadcasting plc 49,964 539 Bunzl plc 22,583 188 Cadbury Schweppes plc 24,235 226 Carnival plc 4,328 264 Diageo plc 16,379 233 DX Services plc (a)17,289 121 GlaxoSmithKline plc 95,281 2,234 Hays plc 193,033 460 HSBC Holdings plc 80,543 1,358 Imperial Chemical Industries plc 56,380 261 International Power plc (a)59,562 177 Lloyds TSB Group plc 45,603 414
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 49 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) INTERNATIONAL MAGNUM PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- UNITED KINGDOM (CONT'D) Man Group plc 6,637 $ 187 National Grid Transco plc 20,131 192 Prudential plc 122,948 1,069 Reed Elsevier plc 35,927 331 Rentokil Initial plc 63,613 180 Rexam plc 42,105 371 Rolls-Royce Group plc (a)53,340 253 Rolls-Royce Group plc, Class B 1,671,885 3 Royal Bank of Scotland Group plc 51,852 1,743 Scottish & Southern Energy plc 14,386 241 Shell Transport & Trading Co. plc (Registered) 168,595 1,436 Smith & Nephew plc 26,787 274 Smiths Group plc 44,513 702 Stagecoach Group plc 85,654 187 Standard Chartered plc 5,499 102 Tesco plc 39,533 244 Unilever plc 17,940 176 Vedanta Resources plc 31,120 236 Vodafone Group plc 754,474 2,044 ---------------------------------------------------------------------------------------------- 20,221 ============================================================================================== TOTAL COMMON STOCKS (COST $71,501) 88,695 ============================================================================================== FACE AMOUNT (000) ---------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS (17.2%) SHORT-TERM DEBT SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (11.0%) Bank of New York, 2.33%, 10/28/05 $ (h)400 400 Bear Stearns, 2.37%, 4/15/05 (h)220 220 Beta Finance, Inc., 2.28%, 2/18/05 165 165 Calyon NY, 2.04%, 3/4/05 (h)352 352 CIT Group Holdings, 2.17%, 1/31/05 (h)34 34 2.30%, 2/14/05 (h)186 186 Citigroup, Inc., 2.39%, 9/1/05 (h)117 117 Compass Securitization, 2.38%, 3/17/05 (h)171 171 Corporate Receivables Corp., 2.46%, 3/14/05 73 73 Discover Card Master Trust, 2.39%, 5/16/05 (h)(i)163 163 Eni Coordination Center, 2.38%, 8/29/05 (h)122 122 Giro Funding U.S. Corp., 2.37%, 2/7/05 73 73 HBOS Treasury Services plc, N.Y., 2.46%, 3/14/05 147 147 International Lease Finance Corp., 2.51%, 9/22/05 (h)188 188 Jackson National Life Global Fund, 2.32%, 1/18/05 (h)122 122 K2 (USA) LLC, 2.33%, 10/24/05 (h)347 347 Landesbank Hessen Thur New York, 2.24%, 2/2/05 (h)123 123 Lehman Brothers, Inc., 2.33%, 1/3/05 2,994 2,994 Links Finance LLC, 2.33%, 10/27/05 (h)244 244 2.40%, 9/26/05 (h)122 122 Marshall & Ilsley Bank, 2.51%, 12/29/05 (h)342 342 Nationwide Building Society, 2.58%, 1/2/06 (h)283 283 FACE AMOUNT VALUE (000) (000) ---------------------------------------------------------------------------------------------- Pfizer, Inc., 2.30%, 1/31/06 $ (h)244 $ 244 Proctor & Gamble, 2.42%, 1/31/06 (h)100 100 Royal Bank of Canada NY, 2.38%, 6/27/05 (h)244 244 Sheffield Receivable Corp., 2.21%, 1/12/05 343 343 Sigma Finance, Inc., 2.38%, 9/15/05 (h)244 244 SLM Corp., 2.41%, 1/31/06 (h)244 244 Societe Generale, N.Y., 2.04%, 3/3/05 (h)256 257 Svenska Handelsbank N.Y., 2.32%, 5/10/05 (h)244 244 UBS Finance (Delaware), Inc., 2.33%, 1/6/05 366 366 UBS Securities LLC, 2.30%, 1/3/05 1,367 1,367 ---------------------------------------------------------------------------------------------- 10,641 ============================================================================================== SHARES ---------------------------------------------------------------------------------------------- INVESTMENT COMPANY HELD AS COLLATERAL ON LOANED SECURITIES (0.0%) JPMorgan Securities Lending Collateral Investment Fund 61,540 62 ---------------------------------------------------------------------------------------------- FACE AMOUNT (000) ---------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT (6.2%) J.P. Morgan Securities, Inc., 2.00%, dated 12/31/04, due 1/3/05, repurchase price $5,974 $ (f)5,973 5,973 ---------------------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (COST $16,676) 16,676 ============================================================================================== TOTAL INVESTMENTS (108.9%) (COST $88,177)-- INCLUDING $10,169 OF SECURITIES LOANED 105,371 ============================================================================================== LIABILITIES IN EXCESS OF OTHER ASSETS (-8.9%) (8,604) ============================================================================================== NET ASSETS (100%) $ 96,767 ==============================================================================================
(a) Non-income producing security. (c) All or portion of security on loan at December 31, 2004. (f) Represents the Portfolio's undivided interest in a joint repurchase agreement which has a total value of $1,018,656,000. The repurchase agreement was fully collateralized by U.S. government agency securities at the date of this portfolio of investments as follows: Federal Farm Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist Corp., 8.80%, due 6/10/05. The investment in the repurchase agreement is through participation in a joint account with affiliated parties pursuant to exemptive relief received by the Portfolio from the SEC. (h) Variable/Floating Rate Security -- interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on December 31, 2004. (i) Security's issuer is an affiliate of the adviser. Held as collateral for securities on loan. @ Face Amount/Value is less than $500. CVA Certificaten Van Aandelen REIT Real Estate Investment Trust RNC Non-Convertible Savings Shares THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 50 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) INTERNATIONAL MAGNUM PORTFOLIO FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: The Portfolio had the following foreign currency exchange contract(s) open at period end:
NET CURRENCY IN UNREALIZED TO EXCHANGE APPRECIATION DELIVER VALUE SETTLEMENT FOR VALUE (DEPRECIATION) (000) (000) DATE (000) (000) (000) ----------------------------------------------------------------------------------------- EUR 6,908 $ 9,378 3/16/05 US$ 9,192 $ 9,192 $ (186) GBP 46 88 3/16/05 US$ 88 88 @-- GBP 143 274 3/16/05 US$ 275 275 1 GBP 340 650 3/16/05 US$ 651 651 1 GBP 692 1,321 3/16/05 US$ 1,325 1,325 4 HKD 20 3 1/3/05 US$ 3 3 @-- HKD 20 3 1/4/05 US$ 3 3 @-- JPY 797,066 7,820 3/16/05 US$ 7,627 7,627 (193) JPY 55,925 549 3/16/05 US$ 533 533 (16) US$ 2,034 2,034 3/16/05 AUD 2,695 2,097 63 US$ 2,068 2,068 3/16/05 EUR 1,553 2,109 41 US$ 1,911 1,911 3/16/05 EUR 1,437 1,950 39 US$ 1,217 1,217 3/16/05 EUR 915 1,242 25 US$ 6,731 6,731 3/16/05 EUR 5,057 6,865 134 US$ 1,580 1,580 3/16/05 GBP 825 1,577 (3) US$ 920 920 3/16/05 GBP 481 918 (2) US$ 859 859 3/16/05 GBP 449 856 (3) US$ 3,063 3,063 3/16/05 GBP 1,602 3,059 (4) US$ 6,994 6,994 3/16/05 JPY 731,552 7,178 184 US$ 257 257 3/16/05 JPY 26,786 263 6 US$ 1,262 1,262 3/16/05 JPY 131,925 1,294 32 US$ 386 386 3/16/05 JPY 40,385 396 10 ---------- ---------- -------------- $ 49,368 $ 49,501 $ 133 ========== ========== ==============
AUD -- Australian Dollar EUR -- Euro GBP -- British Pound HKD -- Hong Kong Dollar JPY -- Japanese Yen FUTURES CONTRACTS: The Portfolio had the following futures contract(s) open at period end:
NET UNREALIZED NUMBER APPRECIATION OF VALUE EXPIRATION (DEPRECIATION) CONTRACTS (000) DATE (000) ------------------------------------------------------------------------------- LONG: DJ EURO STOXX 50 (Germany) 83 $ 3,319 Mar-05 $ 11 FTSE 100 Index (United Kingdom) 23 2,117 Mar-05 21 SPI 200 Index (Australia) 6 476 Mar-05 10 TOPIX Index (Japan) 17 1,904 Mar-05 88 -------------- $ 130 ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 51 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW INTERNATIONAL SMALL CAP PORTFOLIO [CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
MSCI EAFE LIPPER INTERNATIONAL SMALL CAP INTERNATIONAL FISCAL YEAR SMALL CAP TOTAL SMALL/MID-CAP ENDED PORTFOLIO - RETURN CORE FUNDS DECEMBER 31 CLASS A INDEX INDEX 1994 500000 500000 500000 1995 513000 480250 512600 1996 599364 479554 598845 1997 596067 361368 595521 1998 622056 381026 620831 1999 867456 448372 865066 2000 842821 406674 839806 2001 793263 355766 790392 2002 769624 327945 766759 2003 1141660 529206 986950 2004 1524650 692200 1461911
* Minimum Investment In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. PERFORMANCE COMPARED TO THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE SMALL CAP TOTAL RETURN INDEX(1) AND THE LIPPER INTERNATIONAL SMALL/MID-CAP CORE FUNDS INDEX(2)
TOTAL RETURNS(3) -------------------------------------------- AVERAGE ANNUAL ---------------------------------- ONE FIVE TEN SINCE YEAR YEARS YEARS INCEPTION(5) -------------------------------------------------------------------------------- Portfolio - Class A (4) 33.53% 11.99% 11.79% 13.72% MSCI EAFE Small Cap Total Return Index 30.78 8.64 3.31 6.15 Lipper International Small/Mid-Cap Core Funds Index 25.52 7.76 10.53 --
(1) The MSCI EAFE Small Cap Total Return Index is an unmanaged, market value weighted average of the performance of over 900 securities of companies listed on the stock exchanges of countries in Europe, Australasia and the Far East, including price performance and income from dividend payments. (2) The Lipper International Small/Mid-Cap Core Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper International Small/Mid-Cap Core Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 10 funds represented in this Index. As of the date of this report, the Portfolio is in the Lipper International Small/Mid-Cap Core Funds classification. (3) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (4) Commenced operations on December 15, 1992 (5) For comparative purposes, average annual since inception returns listed for the indexes refer to the inception date or initial offering of the respective share class of the Portfolio, not the inception of the index. 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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO SHARES. The International Small Cap Portfolio seeks long-term capital appreciation by investing primarily in equity securities of small non-U.S. companies. Investments in small sized corporations are more vulnerable to financial risks and other risks than larger corporations and may involve a higher degree of price volatility than investments in the general equity markets. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. PERFORMANCE For the year ended December 31, 2004, the Portfolio had a total return of 33.53%, net of fees, compared to 30.78% for the Morgan Stanley Capital International (MSCI) EAFE Small Cap Total Return Index (the "Index"). FACTORS AFFECTING PERFORMANCE - For the second year in a row, the U.S. investor was helped by the U.S. dollar weakening approximately 17% against the Euro and 10% against the Japanese yen and the British pound. - On a regional basis, Nordic countries generally experienced a better macro environment in part due to higher energy prices which positively impacted performance at a country and sector level. Consequently, Nordic countries rose 47.9% to become the Index's best performing region for the year. - In the Pacific region, Japan rose 22.2% in the first quarter alone on the back of positive economic news. However, weaker economic indicators such as softer gross domestic product (GDP) growth figures, lower machinery orders and slowing of economic activity in China, led to reduced enthusiasm for Japanese small cap stocks. - Most core European markets experienced lackluster performances during the first three quarters of the year on the back of concerns over slower economic growth and the prospect of higher inflation given the stronger 52 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) INTERNATIONAL SMALL CAP PORTFOLIO euro. However, a bit of life came to the European markets in the final quarter and the region posted a return of 32.7% for the full year. - There was a consistent theme to Index sector performance during 2004. Energy, which represents 2.5% of the benchmark, rose 87.6% as energy equipment and oil and gas companies benefited from higher commodity prices. The second best performing sector, utilities, also benefited from higher oil prices and rose 49.8%. Financials (+39.8%) were also strong due to a rebound in real estate and consumer finance companies. The year's worst performing sector, information technology, rose a mere 6.4%, as investors grew skeptical of the prospects for semiconductor and software companies. - Stock selection in the industrial sector was the primary contributor to performance. In addition, stock selection in the information technology (hardware), health care (equipment), consumer discretionary (media and restaurants) and financials sectors (real estate, consumer finance) also added value in 2004. For the full year, stock selection in consumer staples was the biggest single detractor from performance. The Portfolio's underweight to the utility and energy sectors coupled with poor stock selection in the energy sector also detracted over the year. Value added at a country level was also fairly broad but the three most significant contributions came from Japan (financials), Germany (industrials, consumer discretionary) and France (hardware). Stock selection in the Netherlands was the most significant detractor due to consumer staples and energy holdings. MANAGEMENT STRATEGIES - Weakness in the U.S. dollar, most noticeably against the euro, has been whittling away at the competitive position of European exporters, making stronger growth a difficult task in 2005. In our opinion, the cautious Euro zone consumer appears unlikely to come to the rescue. In Asia, arguably, prospects look brighter. After a decade of deflation in Japan, we believe signs are appearing that this era is ending. However the fate of this economy, as well as of the broader Asian region, is clearly tied to a continued growth of the U.S. and Chinese economies as well as their respective currency evolutions. - Small caps in the EAFE region are now trading in line with their large cap counterparts. However, they remain inexpensive compared with U.S. equities while still offering relatively attractive growth prospects. Furthermore, we believe investors continue to perceive them as relatively immune from the dollar's volatility. Finally, it is our view that small cap stocks remain less efficiently priced than more researched asset classes and remain what we view as a privileged hunting ground of experienced stock pickers. EXPENSE EXAMPLES As a shareholder of the Portfolio, you incur ongoing costs, including management fees and other Portfolio expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the six-month period ended December 31, 2004 and held for the entire six-month period. ACTUAL EXPENSES The first line of the tables 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 tables below provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio'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 costs of investing in the Portfolio 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.
EXPENSES PAID ENDING ACCOUNT DURING PERIOD* BEGINNING VALUE JULY 1, 2004 -- ACCOUNT VALUE DECEMBER 31, DECEMBER 31, JULY 1, 2004 2004 2004 -------------------------------------------------------------------------------------- CLASS A Actual $ 1,000.00 $ 1,148.90 $ 6.21 Hypothetical (5% average annual return before expenses) 1,000.00 1,019.36 5.84
* Expenses are equal to Class A annualized net expense ratios of 1.15%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). 53 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) INTERNATIONAL SMALL CAP PORTFOLIO GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS The following graph depicts the Portfolio's holdings by industry, as a percentage of total investments. [CHART] Machinery 13.1% Media 7.8% Hotels, Restaurants & Leisure 5.9% Commercial Services & Supplies 5.8% Consumer Finance 5.6% Health Care Equipment & Supplies 5.5% Building Products 5.1% Food Products 4.8% Real Estate 4.2% Construction Materials 3.4% Other* 38.5% Short-Term Investment 0.3%
* Industries which do not appear in the top 10 industries and industries which represent less than 3% of total investments, if applicable, are included in the category labeled "Other". January 2005 54 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS INTERNATIONAL SMALL CAP PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- COMMON STOCKS (99.8%) AUSTRALIA (3.6%) Infomedia Ltd. 13,285,608 $ 7,900 John Fairfax Holdings Ltd. 4,734,417 16,854 MYOB Ltd. 5,177,977 5,469 Pacific Brands Ltd. 3,206,915 8,004 Ramsay Health Care Ltd. 1,496,375 8,336 ---------------------------------------------------------------------------------------------- 46,563 ============================================================================================== AUSTRIA (1.3%) Andritz AG 218,439 16,623 ---------------------------------------------------------------------------------------------- BELGIUM (1.6%) Omega Pharma S.A. 425,147 20,329 ---------------------------------------------------------------------------------------------- BERMUDA (0.5%) Catlin Group Ltd. 995,628 6,260 ---------------------------------------------------------------------------------------------- DENMARK (2.1%) Carlsberg A/S, Class B 210,013 10,609 Danisco A/S 138,336 8,426 Kobenhavns Lufthavne A/S 38,405 8,146 ---------------------------------------------------------------------------------------------- 27,181 ============================================================================================== FINLAND (3.6%) KCI Konecranes Oyj 321,942 14,197 Kone Oyj, Class B 193,303 14,970 Pohjola Group plc, Class D 953,488 10,981 Uponor Oyj 327,118 6,106 ---------------------------------------------------------------------------------------------- 46,254 ============================================================================================== FRANCE (4.4%) Autoroutes du Sud de la France 181,874 9,128 Europeenne D'extincteurs (a)(d)131,043 @-- Neopost S.A. 307,730 23,877 NRJ Group 429,564 9,411 Zodiac S.A. 302,469 14,053 ---------------------------------------------------------------------------------------------- 56,469 ============================================================================================== GERMANY (6.2%) Beru AG 67,638 6,285 Celesio AG 81,526 6,618 GFK AG 71,548 2,780 Hugo Boss AG (Non-Voting Shares) 318,742 10,593 K&S AG 408,597 21,672 Rational AG 41,133 3,820 Sartorius AG (Non-Voting Shares) 328,639 6,794 SCS Standard Computersysteme AG (a)(d)21,289 @-- Techem AG (a)518,210 18,804 WMF Wuerttembergische Metallwarenfabrik AG (Non-Voting Shares) 80,517 1,283 ---------------------------------------------------------------------------------------------- 78,649 ============================================================================================== GREECE (0.3%) OPAP S.A. 129,759 3,584 ---------------------------------------------------------------------------------------------- HONG KONG (1.6%) Asia Satellite Telecommunications Holdings Ltd. 5,477,500 10,430 Solomon Systech International Ltd. 22,593,900 5,581 Weichai Power Co., Ltd., Class H 1,845,400 5,116 ---------------------------------------------------------------------------------------------- 21,127 ============================================================================================== IRELAND (3.3%) Independent News & Media plc 4,356,148 $ 13,709 Kerry Group plc, Class A 649,680 15,555 Kingspan Group plc 1,363,073 13,035 ---------------------------------------------------------------------------------------------- 42,299 ============================================================================================== ITALY (4.5%) Buzzi Unicem S.p.A. 1,311,505 19,107 Cassa di Risparmio di Firenze S.p.A. 3,200,089 7,814 Davide Campari-Milano S.p.A. 233,615 15,037 SAES Getters S.p.A. 194,358 4,748 SAES Getters S.p.A. RNC 334,706 5,312 Sogefi S.p.A. 1,081,113 5,250 ---------------------------------------------------------------------------------------------- 57,268 ============================================================================================== JAPAN (27.2%) Aiful Corp. 58,500 6,437 Ariake Japan Co., Ltd. 713,500 17,205 Asatsu-DK, Inc. 218,900 6,165 Asia Securities Printing Co., Ltd. 722,000 6,555 Daibiru Corp. 3,647,500 28,844 Fujimi, Inc. 367,600 9,618 HS Securities Co., Ltd. (a)330,700 3,987 Hurxley Corp. 355,437 5,798 Ito En Ltd. 307,100 15,950 Jaccs Co., Ltd. 4,352,000 26,172 Mani, Inc. 7,800 327 Megane TOP Co., Ltd. 297,100 2,929 Nakanishi, Inc. 219,400 14,994 Nihon Trim Co., Ltd. 161,650 11,363 Nisshin Fire & Marine Insurance Co. Ltd. (The) 2,761,200 10,190 Nitta Corp. 385,900 6,201 Sanrio Co., Ltd. 1,214,300 10,907 Sanyo Electric Credit Co., Ltd. 813,700 17,119 Shinkawa Ltd. 571,100 11,235 Snow Brand Milk Products Co., Ltd. (a)554,500 1,705 Sumitomo Osaka Cement Co., Ltd. 9,749,000 23,889 Taisei Lamick Co., Ltd. 239,300 6,133 Takuma Co., Ltd. 1,375,000 10,833 Tenma Corp. 346,000 6,313 TOC Co., Ltd. 2,631,000 25,301 Tokyo Tomin Bank Ltd. (The) 569,800 11,877 Tomy Co., Ltd. 634,800 9,866 Toppan Forms Co., Ltd. 747,400 9,121 TV Asahi Corp. 1,779 3,613 Union Tool Co. 206,100 7,284 Yamaichi Electronics Co., Ltd. 655,600 7,546 Yomiuri Land Co., Ltd. 2,385,000 7,777 Zentek Technology Japan, Inc. (a)1,683 4,108 ---------------------------------------------------------------------------------------------- 347,362 ============================================================================================== NETHERLANDS (1.8%) Laurus N.V. (a)905,962 5,014 Nutreco Holding N.V. 404,930 11,112 Van Lanschot N.V. CVA 98,341 6,430 ---------------------------------------------------------------------------------------------- 22,556 ==============================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 55 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) INTERNATIONAL SMALL CAP PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- NEW ZEALAND (3.3%) Fisher & Paykel Appliances Holdings Ltd. 1,450,109 $ 4,478 Fisher & Paykel Healthcare Corp., Ltd. 10,501,231 24,431 Sky City Entertainment Group Ltd. 3,463,616 13,380 ---------------------------------------------------------------------------------------------- 42,289 ============================================================================================== NORWAY (3.6%) DNB NOR ASA 1,339,634 13,193 Schibsted Group ASA 974,741 27,633 Visma ASA CVA 377,707 4,762 ---------------------------------------------------------------------------------------------- 45,588 ============================================================================================== SOUTH KOREA (1.7%) KT&G Corp. (a)723,780 21,639 ---------------------------------------------------------------------------------------------- SPAIN (1.3%) Miquel y Costas & Miquel S.A. 343,189 16,527 ---------------------------------------------------------------------------------------------- SWEDEN (2.2%) D. Carnegie AB 514,475 6,654 Intrum Justitia AB (a)941,223 7,289 Swedish Match AB 1,206,360 13,969 ---------------------------------------------------------------------------------------------- 27,912 ============================================================================================== SWITZERLAND (8.2%) Edipresse S.A. (Bearer), Class B 25,416 13,153 Galenica Holding AG (Registered) 36,037 6,591 Kaba Holding AG, Class B (Registered) 61,865 19,129 Schindler Holding AG 56,300 22,272 SIG Holding AG (Registered) 117,164 26,720 Valora Holding AG 25,100 6,165 Zehnder Group AG, Class B 7,400 10,061 ---------------------------------------------------------------------------------------------- 104,091 ============================================================================================== UNITED KINGDOM (17.5%) British Vita plc 1,871,128 9,692 Capital Radio plc 1,022,659 8,632 Cattles plc 3,116,438 21,941 De La Rue plc 1,553,150 10,339 Devro plc 3,192,880 7,657 DX Services plc (a)1,392,257 9,776 FKI plc 2,832,198 6,330 Keller Group plc 1,650,701 7,568 Luminar plc 2,732,002 29,271 Novar plc 3,348,602 12,093 Regent Inns plc 3,787,088 5,485 Rotork plc 1,584,929 12,573 SIG plc 1,482,413 16,637 Spirax-Sarco Engineering plc 1,182,654 14,690 SSL International plc 1,583,253 9,568 Stagecoach Group plc 5,748,819 12,545 William Hill plc 986,584 10,675 Wincanton plc 3,316,232 17,606 ---------------------------------------------------------------------------------------------- 223,078 ============================================================================================== TOTAL COMMON STOCKS (COST $913,351) 1,273,648 ============================================================================================== FACE AMOUNT VALUE (000) (000) ---------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (0.3%) REPURCHASE AGREEMENT (0.3%) J.P. Morgan Securities, Inc., 2.00%, dated 12/31/04, due 1/3/05, repurchase price $3,390 (COST $3,389) $ (f)3,389 $ 3,389 ============================================================================================== TOTAL INVESTMENTS (100.1%) (COST $916,740) 1,277,037 ============================================================================================== LIABILITIES IN EXCESS OF OTHER ASSETS (-0.1%) (954) ============================================================================================== NET ASSETS (100%) $ 1,276,083 ==============================================================================================
(a) Non-income producing security. (d) Security was valued at fair value -- At December 31, 2004, the Portfolio held fair valued securities, each valued at less than $500, representing less than 0.05% of net assets. (f) Represents the Portfolio's undivided interest in a joint repurchase agreement which has a total value of $1,018,656,000. The repurchase agreement was fully collateralized by U.S. government agency securities at the date of this portfolio of investments as follows: Federal Farm Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist Corp., 8.80%, due 6/10/05. The investment in the repurchase agreement is through participation in a joint account with affiliated parties pursuant to exemptive relief received by the Portfolio from the SEC. @ Face Amount/Value is less than $500. CVA Certificaten Van Aandelen RNC Non-Convertible Savings Shares FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION: The Portfolio had the following foreign currency exchange contract(s) open at period end:
NET CURRENCY IN UNREALIZED TO EXCHANGE APPRECIATION DELIVER VALUE SETTLEMENT FOR VALUE (DEPRECIATION) (000) (000) DATE (000) (000) (000) ----------------------------------------------------------------------------------------- EUR 46 $ 63 1/5/05 US$ 63 $ 63 $ @-- JPY 25,358 247 1/5/05 US$ 244 244 (3) JPY 4,338 42 1/6/05 US$ 42 42 @-- US$ 322 322 1/4/05 DKK 1,760 321 (1) US$ 350 350 1/3/05 HKD 2,723 350 @-- US$ 4 4 1/4/05 JPY 441 4 @-- ---------- ---------- -------------- $ 1,028 $ 1,024 $ (4) ========== ========== ==============
DKK -- Danish Krone EUR -- Euro HKD -- Hong Kong Dollar JPY -- Japanese Yen THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 56 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW EQUITY GROWTH PORTFOLIO [CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
FISCAL YEAR EQUITY GROWTH LIPPER LARGE-CAP ENDED PORTFOLIO - RUSSELL 1000 S&P 500 GROWTH FUNDS DECEMBER 31 CLASS A GROWTH INDEX INDEX INDEX 1994 500000 500000 500000 500000 1995 725050 685900 687720 674597 1996 949525 844480 845648 813296 1997 1246949 1101962 1127790 1037692 1998 1484406 1528532 1450045 1416166 1999 2076387 2035393 1755192 1909240 2000 1831581 1579058 1595206 1533525 2001 1557210 1256614 1405776 1167498 2002 1126641 906144 1095310 839286 2003 1424075 1175632 1409445 1065581 2004 1534300 1249700 1562950 1145000
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
FISCAL YEAR EQUITY GROWTH LIPPER LARGE-CAP ENDED PORTFOLIO - RUSSELL 1000 S&P 500 GROWTH FUNDS DECEMBER 31 CLASS B GROWTH INDEX INDEX INDEX ** 100000 100000 100000 100000 1996 129920 122190 122964 120280 1997 170260 159446 163990 153467 1998 202116 221167 210848 209440 1999 282174 294506 255219 282362 2000 248285 228478 231956 226797 2001 210397 181823 204411 172664 2002 152012 131131 159267 124124 2003 191732 170142 204945 157591 2004 206020 180830 225430 169340
* Minimum Investment ** Commenced offering on January 2, 1996 In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. PERFORMANCE COMPARED TO THE RUSSELL 1000 GROWTH INDEX(1), THE S&P 500 INDEX(2) AND THE LIPPER LARGE-CAP GROWTH FUNDS INDEX(3)
TOTAL RETURNS(4) -------------------------------------------- AVERAGE ANNUAL ---------------------------------- ONE FIVE TEN SINCE YEAR YEARS YEARS INCEPTION(7) -------------------------------------------------------------------------------- Portfolio - Class A (5) 7.75% (5.86)% 11.86% 10.61% Russell 1000 Growth Index 6.30 (9.29) 9.59 8.98 S&P 500 Index 10.88 (2.30) 12.07 10.97 Lipper Large-Cap Growth Funds Index 7.45 (9.72) 8.64 8.61 Portfolio - Class B (6) 7.45 (6.08) -- 8.37 Russell 1000 Growth Index 6.30 (9.29) -- 6.81 S&P 500 Index 10.88 (2.30) -- 9.46 Lipper Large-Cap Growth Funds Index 7.45 (9.72) -- 6.03
(1) Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. (2) The S&P 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. (3) The Lipper Large-Cap Growth Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Large-Cap Growth Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. As of the date of this report, the Portfolio is in the Lipper Large-Cap Growth Funds classification. (4) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (5) Commenced operations on April 2, 1991 (6) Commenced offering on January 2, 1996 (7) For comparative purposes, average annual since inception returns listed for the indexes refer to the inception date or initial offering of the respective share class of the Portfolio, not the inception of the index. 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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO SHARES. The Equity Growth Portfolio seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of large capitalization companies. PERFORMANCE For the year ended December 31, 2004, the Portfolios Class A shares had a total return of 7.75%, net of fees, and 7.45% for the Class B shares, net of fees, compared to 10.88% for the S&P 500 Index and 6.30% for the Russell 1000 Growth Index (the "Index"). Effective June 30, 2004, the Portfolio's 57 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) EQUITY GROWTH PORTFOLIO benchmark was changed from the S&P 500 Index to the Russell 1000 Growth Index. Based on the Portfolio's asset composition and investment strategy, the Adviser believes the Russell 1000 Growth Index is a more appropriate benchmark than the S&P 500 Index for the Portfolio. FACTORS AFFECTING PERFORMANCE - Stock selection in the healthcare sector was the largest positive contributor to relative results for the year. Although healthcare was one of the weaker performing index sectors, the Portfolio's holdings far outpaced healthcare stocks within the Index. The Portfolio's healthcare underweight also added to relative return. - Stock selection in technology was a positive factor, although the technology sector performed poorly during the year, suffering from concerns about excess inventory in the semi-conductor industry and uncertainty about sustainable gains in corporate spending. Technology stocks gained some momentum in the final quarter of 2004, but still lagged the Index return for the full year. - Stock selection was weak in the consumer discretionary sector, but this was more than offset by the favorable impact of the Portfolio's substantial overweight in the strong performing sector. Stock selection in the consumer staples, financial services, and energy sectors detracted, as did stock selection in producer durables. - An overweight in integrated oils added to relative return. MANAGEMENT STRATEGIES - The U.S. Growth team assumed responsibility for the Portfolio at the beginning of the third quarter. The Portfolio transition was completed by August 6th. As a result of the Portfolio's stock selection process, the most significant changes were an increase to consumer discretionary names and a decrease to the Portfolio's technology exposure. We also increased the Portfolio's energy position. - Our goal is to add value relative to the Index primarily through stock selection. We seek what we believe are high quality growth companies that have distinct and sustainable competitive advantages. EXPENSE EXAMPLES As a shareholder of the Portfolio, you incur ongoing costs, including management fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the six-month period ended December 31, 2004 and held for the entire six-month period. ACTUAL EXPENSES The first line of the tables 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 tables below provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio'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 costs of investing in the Portfolio 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.
EXPENSES PAID ENDING ACCOUNT DURING PERIOD* BEGINNING VALUE JULY 1, 2004 -- ACCOUNT VALUE DECEMBER 31, DECEMBER 31, JULY 1, 2004 2004 2004 -------------------------------------------------------------------------------------- CLASS A Actual $ 1,000.00 $ 1,050.80 $ 3.81 Hypothetical (5% average annual return before expenses) 1,000.00 1,021.42 3.76 CLASS B Actual 1,000.00 1,049.50 5.10 Hypothetical (5% average annual return before expenses) 1,000.00 1,020.16 5.03
* Expenses are equal to Class A and Class B annualized net expense ratios of 0.74% and 0.99%, respectively, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). 58 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) EQUITY GROWTH PORTFOLIO GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS The following graph depicts the Portfolio's holdings by industry, as a percentage of total investments. [CHART] Retail 7.9% Computer Services Software & Systems 6.2% Communications Technology 5.7% Drugs & Pharmaceuticals 5.7% Financial - Miscellaneous 5.7% Services : Commercial 5.6% Consumer Electronics 5.4% Casinos & Gambling 4.4% Energy - Miscellaneous 3.6% Leisure Time 3.5% Other* 44.9% Short-Term Investment 1.4%
* Industries which do not appear in the top 10 industries and industries which represent less than 3% of total investments, if applicable, are included in the category labeled "Other". January 2005 59 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS EQUITY GROWTH PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- COMMON STOCKS (99.1%) ADVERTISING AGENCIES (0.7%) Lamar Advertising Co., Class A (a)116,200 $ 4,971 ---------------------------------------------------------------------------------------------- BEVERAGES: SOFT DRINKS (1.0%) PepsiCo., Inc. 140,610 7,340 ---------------------------------------------------------------------------------------------- BIOTECHNOLOGY RESEARCH & PRODUCTION (2.3%) Amgen, Inc. (a)88,842 5,699 Biogen Idec, Inc. (a)58,300 3,883 Genentech, Inc. (a)149,900 8,161 ---------------------------------------------------------------------------------------------- 17,743 ============================================================================================== CASINOS & GAMBLING (4.5%) GTECH Holdings Corp. 158,880 4,123 International Game Technology 380,100 13,068 Las Vegas Sands Corp. (a)81,300 3,902 Station Casinos, Inc. 136,100 7,442 Wynn Resorts Ltd. (a)79,055 5,290 ---------------------------------------------------------------------------------------------- 33,825 ============================================================================================== COAL (0.7%) Peabody Energy Corp. 63,700 5,154 ---------------------------------------------------------------------------------------------- COMMUNICATIONS & MEDIA (1.5%) News Corp., Class B 388,140 7,452 Time Warner, Inc. (a)204,800 3,982 ---------------------------------------------------------------------------------------------- 11,434 ============================================================================================== COMMUNICATIONS TECHNOLOGY (5.7%) America Movil S.A. de C.V., Class L ADR 170,200 8,910 Cisco Systems, Inc. (a)358,050 6,910 Crown Castle International Corp. (a)326,532 5,434 QUALCOMM, Inc. 520,682 22,077 ---------------------------------------------------------------------------------------------- 43,331 ============================================================================================== COMPUTER SERVICES SOFTWARE & SYSTEMS (6.3%) Adobe Systems, Inc. 113,100 7,096 Google, Inc., Class A (a)22,200 4,287 Infosys Technologies Ltd. ADR 54,100 3,750 Juniper Networks, Inc. (a)88,500 2,406 Microsoft Corp. 1,030,726 27,531 Symantec Corp. (a)89,100 2,295 ---------------------------------------------------------------------------------------------- 47,365 ============================================================================================== COMPUTER TECHNOLOGY (3.4%) Dell, Inc. (a)544,725 22,955 Seagate Technology, Inc. (a)(d)186,100 @-- Shanda Interactive Entertainment Ltd. ADR (a)67,400 2,864 ---------------------------------------------------------------------------------------------- 25,819 ============================================================================================== CONSUMER ELECTRONICS (5.5%) Electronic Arts, Inc. (a)303,300 18,708 Yahoo!, Inc. (a)601,440 22,662 ---------------------------------------------------------------------------------------------- 41,370 ============================================================================================== CONSUMER PRODUCTS (1.0%) Gillette Co. (The) 165,800 7,425 ---------------------------------------------------------------------------------------------- CONTAINERS & PACKAGING: PAPER & PLASTIC (0.3%) Sealed Air Corp. (a)49,200 2,621 ---------------------------------------------------------------------------------------------- DRUGS & PHARMACEUTICALS (5.7%) Genzyme Corp. (a)65,200 3,786 Gilead Sciences, Inc. (a)239,360 $ 8,375 Johnson & Johnson 371,500 23,561 Novartis AG ADR 150,300 7,596 ---------------------------------------------------------------------------------------------- 43,318 ============================================================================================== EDUCATION SERVICES (2.2%) Apollo Group, Inc., Class A (a)203,500 16,424 ---------------------------------------------------------------------------------------------- ELECTRONICS: INSTRUMENTS GAUGES & METERS (0.8%) Fisher Scientific International, Inc. (a)96,600 6,026 ---------------------------------------------------------------------------------------------- ELECTRONICS: MEDICAL SYSTEMS (1.3%) Medtronic, Inc. 195,400 9,705 ---------------------------------------------------------------------------------------------- ELECTRONICS: SEMI-CONDUCTORS/COMPONENTS (2.1%) Intel Corp. 152,013 3,555 Linear Technology Corp. 95,450 3,700 Marvell Technology Group Ltd. (a)248,640 8,819 ---------------------------------------------------------------------------------------------- 16,074 ============================================================================================== ENERGY EQUIPMENT (0.9%) Halliburton Co. 88,700 3,481 Schlumberger Ltd. 55,000 3,682 ---------------------------------------------------------------------------------------------- 7,163 ============================================================================================== ENERGY -- MISCELLANEOUS (3.6%) EnCana Corp. 68,500 3,909 Suncor Energy, Inc. 286,400 10,139 Ultra Petroleum Corp. (a)283,530 13,646 ---------------------------------------------------------------------------------------------- 27,694 ============================================================================================== FINANCIAL DATA PROCESSING SERVICES & SYSTEMS (1.9%) First Data Corp. 167,200 7,113 Paychex, Inc. 220,610 7,518 ---------------------------------------------------------------------------------------------- 14,631 ============================================================================================== FINANCIAL -- MISCELLANEOUS (5.7%) American Express Co. 110,350 6,220 Berkshire Hathaway, Inc., Class B (a)3,817 11,207 Brascan Corp., Class A 311,700 11,224 Moody's Corp. 95,400 8,285 SLM Corp. 114,400 6,108 ---------------------------------------------------------------------------------------------- 43,044 ============================================================================================== FOODS (1.5%) Wrigley (W.M.) Jr. Co. 159,200 11,015 ---------------------------------------------------------------------------------------------- HEALTH CARE MANAGEMENT SERVICES (0.5%) Patterson Cos., Inc. (a)93,600 4,061 ---------------------------------------------------------------------------------------------- HEALTH CARE -- MISCELLANEOUS (3.1%) Alcon, Inc. 192,400 15,507 Caremark Rx, Inc. (a)200,250 7,896 ---------------------------------------------------------------------------------------------- 23,403 ============================================================================================== HEALTH CARE SERVICES (2.6%) UnitedHealth Group, Inc. 221,800 19,525 ---------------------------------------------------------------------------------------------- INVESTMENT MANAGEMENT COMPANIES (2.0%) Citigroup, Inc. 76,179 3,670 Franklin Resources, Inc. 165,800 11,548 ---------------------------------------------------------------------------------------------- 15,218 ============================================================================================== LEISURE TIME (3.5%) Carnival Corp. 460,000 26,510 ---------------------------------------------------------------------------------------------- MANUFACTURING (1.0%) Tyco International Ltd. 208,300 7,445 ----------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 60 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) EQUITY GROWTH PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- MATERIALS & PROCESSING -- MISCELLANEOUS (3.2%) Newmont Mining Corp. 537,900 $ 23,888 ---------------------------------------------------------------------------------------------- MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (2.2%) Kinetic Concepts, Inc. (a)77,194 5,890 Zimmer Holdings, Inc. (a)134,800 10,800 ---------------------------------------------------------------------------------------------- 16,690 ============================================================================================== MISCELLANEOUS (0.8%) Monsanto Co. 106,600 5,922 ---------------------------------------------------------------------------------------------- MULTI-SECTOR COMPANIES (0.8%) 3M Co. 70,200 5,761 ---------------------------------------------------------------------------------------------- RADIO & TV BROADCASTERS (1.0%) Univision Communications, Inc., Class A (a)249,885 7,314 ---------------------------------------------------------------------------------------------- RESTAURANTS (0.5%) Starbucks Corp. (a)60,300 3,760 ---------------------------------------------------------------------------------------------- RETAIL (7.9%) Amazon.com, Inc. (a)89,200 3,951 Chico's FAS, Inc. (a)90,820 4,135 Costco Wholesale Corp. 77,600 3,757 Home Depot, Inc. 256,300 10,954 Kmart Holding Corp. (a)76,200 7,540 Petsmart, Inc. 208,210 7,398 Wal-Mart Stores, Inc. 423,638 22,376 ---------------------------------------------------------------------------------------------- 60,111 ============================================================================================== SECURITIES BROKERAGE & SERVICES (0.5%) Ameritrade Holding Corp. (a)271,500 3,861 ---------------------------------------------------------------------------------------------- SERVICES: COMMERCIAL (5.6%) ChoicePoint, Inc. (a)77,600 3,569 Corporate Executive Board Co. 82,000 5,489 eBay, Inc. (a)252,525 29,364 IAC/InterActiveCorp (a)137,800 3,806 ---------------------------------------------------------------------------------------------- 42,228 ============================================================================================== SOAPS & HOUSEHOLD CHEMICALS (0.7%) Procter & Gamble Co. 99,676 5,490 ---------------------------------------------------------------------------------------------- TEXTILE APPAREL MANUFACTURERS (0.8%) Coach, Inc. (a)103,490 5,837 ---------------------------------------------------------------------------------------------- TOBACCO (0.5%) Altria Group, Inc. 63,600 3,886 ---------------------------------------------------------------------------------------------- TRANSPORTATION -- MISCELLANEOUS (0.8%) C.H. Robinson Worldwide, Inc. 109,125 6,059 ---------------------------------------------------------------------------------------------- UTILITIES: GAS PIPELINES (1.0%) Questar Corp. 150,300 7,659 ---------------------------------------------------------------------------------------------- UTILITIES: TELECOMMUNICATIONS (1.5%) Nextel Communications, Inc., Class A (a)262,900 7,887 NTL, Inc. (a)52,300 3,816 ---------------------------------------------------------------------------------------------- 11,703 ============================================================================================== TOTAL COMMON STOCKS (COST $672,716) 749,823 ============================================================================================== FACE AMOUNT VALUE (000) (000) ---------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (1.4%) REPURCHASE AGREEMENT (1.4%) J.P. Morgan Securities, Inc., 2.00%, dated 12/31/04, due 1/3/05, repurchase price $10,641 (COST $10,639) $ (f)10,639 $ 10,639 ============================================================================================== TOTAL INVESTMENTS (100.5%) (COST $683,355) 760,462 ============================================================================================== LIABILITIES IN EXCESS OF OTHER ASSETS (-0.5%) (3,472) ============================================================================================== NET ASSETS (100%) $ 756,990 ==============================================================================================
(a) Non-income producing security. (d) Security was valued at fair value -- At December 31, 2004, the Portfolio held a fair valued security, valued at less than $500, representing less than 0.05% of net assets. (f) Represents the Portfolio's undivided interest in a joint repurchase agreement which has a total value of $1,018,656,000. The repurchase agreement was fully collateralized by U.S. government agency securities at the date of this portfolio of investments as follows: Federal Farm Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist Corp., 8.80%, due 6/10/05. The investment in the repurchase agreement is through participation in a joint account with affiliated parties pursuant to exemptive relief received by the Portfolio from the SEC. @ Face Amount/Value is less than $500. ADR American Depositary Receipts THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 61 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW FOCUS EQUITY PORTFOLIO [CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT SINCE INCEPTION
LIPPER FISCAL YEAR FOCUS EQUITY LARGE-CAP ENDED PORTFOLIO - RUSSELL 1000 GROWTH DECEMBER 31 CLASS A GROWTH INDEX S&P 500 INDEX FUNDS INDEX ** 500000 500000 500000 500000 1995 706250 646950 650860 649796 1996 995106 796525 800285 783396 1997 1326576 1039385 1067260 999542 1998 1530205 1441731 1372176 1364101 1999 2240832 1919809 1660883 1839047 2000 1979551 1489388 1509410 1477146 2001 1678263 1185255 1330092 1124575 2002 1194755 854806 1036142 808430 2003 1565010 1109025 1333203 1026405 2004 1674500 1178800 1478250 1102900
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
LIPPER FISCAL YEAR FOCUS EQUITY LARGE-CAP ENDED PORTFOLIO - RUSSELL 1000 GROWTH DECEMBER 31 CLASS B GROWTH INDEX S&P 500 INDEX FUNDS INDEX *** 100000 100000 100000 100000 1996 139720 122190 122958 120280 1997 185688 159446 163976 153467 1998 213820 221167 210825 209440 1999 312455 294506 255182 282362 2000 275304 228478 231910 226797 2001 232769 181823 204359 172664 2002 165452 131131 159195 124124 2003 216114 170142 204837 157591 2004 230730 180830 225430 169340
* Minimum Investment ** Commenced operations on March 8, 1995 *** Commenced offering on January 2, 1996 In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. PERFORMANCE COMPARED TO THE RUSSELL 1000 GROWTH INDEX(1), THE S&P 500 INDEX(2) AND THE LIPPER LARGE-CAP GROWTH FUNDS INDEX(3)
TOTAL RETURNS(4) ------------------------------- AVERAGE ANNUAL --------------------- ONE FIVE SINCE YEAR YEARS INCEPTION(7) -------------------------------------------------------------------------- Portfolio - Class A (5) 7.00% (5.66)% 13.10% Russell 1000 Growth Index 6.30 (9.29) 9.13 S&P 500 Index 10.88 (2.30) 11.68 Lipper Large-Cap Growth Funds Index 7.45 (9.72) 8.39 Portfolio - Class B (6) 6.75 (5.89) 9.74 Russell 1000 Growth Index 6.30 (9.29) 6.81 S&P 500 Index 10.88 (2.30) 9.46 Lipper Large-Cap Growth Funds Index 7.45 (9.72) 6.03
(1) Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. (2) The S&P 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. (3) The Lipper Large-Cap Growth Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Large-Cap Growth Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. As of the date of this report, the Portfolio is in the Lipper Large-Cap Growth Funds classification. (4) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (5) Commenced operations on March 8, 1995 (6) Commenced offering on January 2, 1996 (7) For comparative purposes, average annual since inception returns listed for the indexes refer to the inception date or initial offering of the respective share class of the Portfolio, not the inception of the index. 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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO SHARES. The Focus Equity Portfolio seeks capital appreciation by investing primarily in growth-oriented equity securities of large capitalization companies. The Portfolio's Concentration of its assets in a small number of issuers will subject it to greater risks. PERFORMANCE For the year ended December 31, 2004, the Portfolio's Class A shares had a total return of 7.00%, net of fees, and 6.75% for 62 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) FOCUS EQUITY PORTFOLIO the Class B shares, net of fees, compared to 10.88% for the S&P 500 Index and 6.30% for the Russell 1000 Growth Index (the "Index"). Effective June 30, 2004, the Portfolio's benchmark was changed from the S&P 500 Index to the Russell 1000 Growth Index. Based on the Portfolio's asset composition and investment strategy, the Adviser believes the Russell 1000 Growth Index is a more appropriate benchmark than the S&P 500 Index for the Portfolio. FACTORS AFFECTING PERFORMANCE - Stock selection in the healthcare sector was the largest positive contributor to relative results for the year. Although healthcare was one of the weaker performing index sectors, the Portfolio's holdings far outpaced healthcare stocks within the Index. The Portfolio's healthcare underweight also added to relative return. - Stock selection in technology added to relative return, although the technology sector performed poorly during the year, suffering from concerns about excess inventory in the semi-conductor industry and uncertainty about sustainable gains in corporate spending. Technology stocks gained some momentum in the final quarter of 2004, but still lagged the Index return for the full year. - Stock selection was weak in the consumer discretionary sector, but this was nearly offset by the favorable impact of the Portfolio's substantial overweight in the strong performing sector. Stock selection in the consumer staples, financial services, and energy sectors detracted, as did stock selection and an underweight in autos and transportation. - From a sector allocation standpoint, additional positive contributors included overweights in integrated oils and financial services, and an underweight in consumer staples. MANAGEMENT STRATEGIES - The U.S. Growth team assumed responsibility for the Portfolio at the beginning of the third quarter. The Portfolio transition was completed by August 6th. As a result of the Portfolio's stock selection process, the most significant changes were an increase to consumer discretionary names and a decrease to the Portfolio's technology exposure. We also increased the Portfolio's energy position. - Our goal is to add value relative to the Index primarily through stock selection. We seek what we believe to be high quality growth companies that have distinct and sustainable competitive advantages. EXPENSE EXAMPLES As a shareholder of the Portfolio, you incur ongoing costs, including management fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the six-month period ended December 31, 2004 and held for the entire six-month period. ACTUAL EXPENSES The first line of the tables 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 tables below provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio'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 costs of investing in the Portfolio 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.
EXPENSES PAID ENDING ACCOUNT DURING PERIOD* BEGINNING VALUE JULY 1, 2004 -- ACCOUNT VALUE DECEMBER 31, DECEMBER 31, JULY 1, 2004 2004 2004 -------------------------------------------------------------------------------------- CLASS A Actual $ 1,000.00 $ 1,051.20 $ 5.16 Hypothetical (5% average annual return before expenses) 1,000.00 1,020.11 5.08 CLASS B Actual 1,000.00 1,049.30 6.44 Hypothetical (5% average annual return before expenses) 1,000.00 1,018.85 6.34
* Expenses are equal to Class A and Class B annualized net expense ratios of 1.00% and 1.25%, respectively, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). 63 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) FOCUS EQUITY PORTFOLIO GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS The following graph depicts the Portfolio's holdings by industry, as a percentage of total investments. [CHART] Retail 8.1% Consumer Electronics 7.6% Communications Technology 7.6% Services: Commercial 6.7% Financial - Miscellaneous 6.1% Casinos & Gambling 5.7% Energy - Miscellaneous 5.5% Leisure Time 5.4% Computer Services Software & Systems 5.2% Health Care - Miscellaneous 3.9% Other* 36.3% Short-Term Investment 1.9%
* Industries which do not appear in the top 10 industries and industries which represent less than 3% of total investments, if applicable, are included in the category labeled "Other". January 2005 64 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS FOCUS EQUITY PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- COMMON STOCKS (97.7%) ADVERTISING AGENCIES (1.0%) Lamar Advertising Co., Class A (a)14,100 $ 603 ---------------------------------------------------------------------------------------------- BIOTECHNOLOGY RESEARCH & PRODUCTION (1.8%) Genentech, Inc. (a)19,900 1,083 ---------------------------------------------------------------------------------------------- CASINOS & GAMBLING (5.6%) GTECH Holdings Corp. 25,200 654 International Game Technology 45,500 1,564 Las Vegas Sands Corp. (a)6,762 324 Station Casinos, Inc. 16,800 919 ---------------------------------------------------------------------------------------------- 3,461 ============================================================================================== COMMUNICATIONS & MEDIA (1.6%) News Corp., Class B 51,000 979 ---------------------------------------------------------------------------------------------- COMMUNICATIONS TECHNOLOGY (7.5%) America Movil S.A. de C.V., Class L ADR 20,000 1,047 Crown Castle International Corp. (a)88,737 1,476 QUALCOMM, Inc. 49,264 2,089 ---------------------------------------------------------------------------------------------- 4,612 ============================================================================================== COMPUTER SERVICES SOFTWARE & SYSTEMS (5.1%) Google, Inc., Class A (a)2,000 386 Microsoft Corp. 103,500 2,765 ---------------------------------------------------------------------------------------------- 3,151 ============================================================================================== COMPUTER TECHNOLOGY (3.5%) Dell, Inc. (a)50,925 2,146 ---------------------------------------------------------------------------------------------- CONSUMER ELECTRONICS (7.6%) Electronic Arts, Inc. (a)35,400 2,183 Yahoo!, Inc. (a)65,440 2,466 ---------------------------------------------------------------------------------------------- 4,649 ============================================================================================== DRUGS & PHARMACEUTICALS (1.5%) Gilead Sciences, Inc. (a)25,600 896 ---------------------------------------------------------------------------------------------- EDUCATION SERVICES (3.2%) Apollo Group, Inc., Class A (a)24,100 1,945 ---------------------------------------------------------------------------------------------- ELECTRONICS: INSTRUMENTS GAUGES & METERS (1.4%) Fisher Scientific International, Inc. (a)14,100 880 ---------------------------------------------------------------------------------------------- ELECTRONICS: SEMI-CONDUCTORS/COMPONENTS (1.5%) Marvell Technology Group Ltd. (a)26,800 951 ---------------------------------------------------------------------------------------------- ENERGY -- MISCELLANEOUS (5.5%) Suncor Energy, Inc. 41,800 1,480 Ultra Petroleum Corp. (a)39,570 1,905 ---------------------------------------------------------------------------------------------- 3,385 ============================================================================================== FINANCIAL DATA PROCESSING SERVICES & SYSTEMS (1.1%) Paychex, Inc. 20,230 689 ---------------------------------------------------------------------------------------------- FINANCIAL -- MISCELLANEOUS (6.1%) Berkshire Hathaway, Inc., Class B (a)553 1,624 Brascan Corp., Class A 37,200 1,340 Moody's Corp. 8,600 747 ---------------------------------------------------------------------------------------------- 3,711 ============================================================================================== FOODS (2.6%) Wrigley (W.M.) Jr. Co. 22,700 1,571 ---------------------------------------------------------------------------------------------- HEALTH CARE -- MISCELLANEOUS (3.8%) Alcon, Inc. 21,300 1,717 Caremark Rx, Inc. (a)16,300 642 ---------------------------------------------------------------------------------------------- 2,359 ============================================================================================== HEALTH CARE SERVICES (2.8%) UnitedHealth Group, Inc. 19,300 $ 1,699 ---------------------------------------------------------------------------------------------- INVESTMENT MANAGEMENT COMPANIES (2.2%) Franklin Resources, Inc. 19,600 1,365 ---------------------------------------------------------------------------------------------- LEISURE TIME (5.4%) Carnival Corp. 57,400 3,308 ---------------------------------------------------------------------------------------------- MATERIALS & PROCESSING -- MISCELLANEOUS (3.8%) Newmont Mining Corp. 51,800 2,300 ---------------------------------------------------------------------------------------------- MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (3.2%) Kinetic Concepts, Inc. (a)9,100 694 Zimmer Holdings, Inc. (a)15,900 1,274 ---------------------------------------------------------------------------------------------- 1,968 ============================================================================================== MISCELLANEOUS (1.0%) Monsanto Co. 11,100 617 ---------------------------------------------------------------------------------------------- RADIO & TV BROADCASTERS (2.0%) Univision Communications, Inc., Class A (a)41,320 1,209 ---------------------------------------------------------------------------------------------- RETAIL (8.1%) Chico's FAS, Inc. (a)16,200 738 Home Depot, Inc. 29,100 1,244 Petsmart, Inc. 26,970 958 Wal-Mart Stores, Inc. 38,100 2,012 ---------------------------------------------------------------------------------------------- 4,952 ============================================================================================== SERVICES: COMMERCIAL (6.6%) Corporate Executive Board Co. 14,000 937 eBay, Inc. (a)26,960 3,135 ---------------------------------------------------------------------------------------------- 4,072 ============================================================================================== UTILITIES: GAS PIPELINES (1.1%) Questar Corp. 13,500 688 ---------------------------------------------------------------------------------------------- UTILITIES: TELECOMMUNICATIONS (1.1%) Nextel Communications, Inc., Class A (a)21,900 657 ---------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $53,840) 59,906 ============================================================================================== FACE AMOUNT (000) ---------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (1.9%) REPURCHASE AGREEMENT (1.9%) J.P. Morgan Securities, Inc., 2.00%, dated 12/31/04, due 1/3/05, repurchase price $1,175 (COST $1,175) $ (f)1,175 1,175 ---------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (99.6%) (COST $55,015) 61,081 ============================================================================================== OTHER ASSETS IN EXCESS OF LIABILITIES (0.4%) 235 ============================================================================================== NET ASSETS (100%) $ 61,316 ==============================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 65 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) FOCUS EQUITY PORTFOLIO (a) Non-income producing security. (f) Represents the Portfolio's undivided interest in a joint repurchase agreement which has a total value of $1,018,656,000. The repurchase agreement was fully collateralized by U.S. government agency securities at the date of this portfolio of investments as follows: Federal Farm Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist Corp., 8.80%, due 6/10/05. The investment in the repurchase agreement is through participation in a joint account with affiliated parties pursuant to exemptive relief received by the Portfolio from the SEC. ADR American Depositary Receipts THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 66 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW SMALL COMPANY GROWTH PORTFOLIO [CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
SMALL LIPPER COMPANY SMALL-CAP FISCAL YEAR GROWTH RUSSELL GROWTH ENDED PORTFOLIO - 2000 GROWTH FUNDS DECEMBER 31 CLASS A INDEX INDEX 1994 500000 500000 500000 1995 666550 655200 682521 1996 691346 728976 798872 1997 769883 823378 888548 1998 981908 833505 897122 1999 1928959 1192663 1445873 2000 1800799 925149 1326555 2001 1581389 839757 1157480 2002 1229056 585647 835575 2003 1771438 869920 1209704 2004 2110950 994400 1340250
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
SMALL LIPPER COMPANY SMALL-CAP GROWTH RUSSELL GROWTH PORTFOLIO - 2000 GROWTH FUNDS CLASS B INDEX INDEX ** 100000 100000 100000 1996 103580 111000 117361 1997 115108 125375 130535 1998 146027 126917 131795 1999 286168 181605 212411 2000 266680 140871 194882 2001 233745 127869 170043 2002 181293 89176 122753 2003 260699 132461 177715 2004 309710 151600 196890
* Minimum Investment ** Commenced offering on January 2, 1996 In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. PERFORMANCE COMPARED TO THE RUSSELL 2000 GROWTH INDEX(1) AND THE LIPPER SMALL-CAP GROWTH FUNDS INDEX(2)
TOTAL RETURNS(3) ---------------------------------------------- AVERAGE ANNUAL ----------------------------------- ONE FIVE TEN SINCE YEAR YEARS YEARS INCEPTION(6) ----------------------------------------------------------------------------------------- Portfolio - Class A (4) 19.17% 1.82% 15.49% 13.54% Russell 2000 Growth Index 14.31 (3.57) 7.12 7.56 Lipper Small-Cap Growth Funds Index 10.79 (1.51) 10.36 10.78 Portfolio - Class B (5) 18.79 1.58 -- 13.39 Russell 2000 Growth Index 14.31 (3.57) -- 4.73 Lipper Small-Cap Growth Funds Index 10.79 (1.51) -- 7.82
(1) Russell 2000 Growth Index measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. (2) The Lipper Small-Cap Growth Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Small-Cap Growth Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. As of the date of this report, the Portfolio is in the Lipper Small-Cap Growth Funds classification. (3) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (4) Commenced operations on November 1, 1989 (5) Commenced offering on January 2, 1996 (6) For comparative purposes, average annual since inception returns listed for the indexes refer to the inception date or initial offering of the respective share class of the Portfolio, not the inception of the index. 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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO SHARES. The Small Company Growth Portfolio seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of small U.S. and, to a limited extent, foreign companies that are listed on U.S. exchanges or traded in U.S. markets. Investments in small sized corporations are more vulnerable to financial risks and other risks than larger corporations and may involve a higher degree of price volatility than investments in the general equity markets. PERFORMANCE For the year ended December 31, 2004, the Portfolio had a total return of 19.17% for the Class A shares, net of fees, and 18.79% for the Class B shares, net of fees, compared to 14.31% for the Russell 2000 Growth Index (the "Index"). 67 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) SMALL COMPANY GROWTH PORTFOLIO FACTORS AFFECTING PERFORMANCE - The Portfolio outperformed the Index primarily as a result of stock selection, although sector weights also had a favorable impact. - Stock selection within technology significantly exceeded the index sector return, and coupled with an underweight this was the strongest contributor to performance relative to the Index. Communications technology, software and electronics were particularly strong in the Portfolio. Technology was the only sector of the Index with a negative return, while stocks held in the Portfolio advanced sharply. - Energy was the top performing segment of the Index and the Portfolio. An overweight in this sector, combined with superior stock selection added favorably to results. Crude oil producers had a positive impact, benefiting from rising prices throughout the year. - Consumer discretionary was the largest sector in the Portfolio and the largest overweight relative to the Index. Stock selection exceeded the Index sector return, and combined with an overweight contributed to the Portfolio's performance. Casinos and gambling, hotel/motel and leisure names performed well. - Underperformance in small sectors such as materials and processing and utilities detracted modestly from results. MANAGEMENT STRATEGIES - On average, the three largest sectors in the Portfolio during 2004 were consumer discretionary, healthcare and technology. EXPENSE EXAMPLES As a shareholder of the Portfolio, you incur ongoing costs, including management fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the six-month period ended December 31, 2004 and held for the entire six-month period. ACTUAL EXPENSES The first line of the tables 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 tables below provides information about hypothetical account values and hypothetical expenses based on the rate Portfolio's actual expense ratio and an assumed of return of 5% per year before expenses, which is not the Portfolio'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 costs of investing in the Portfolio 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.
EXPENSES PAID ENDING ACCOUNT DURING PERIOD* BEGINNING VALUE JULY 1, 2004 -- ACCOUNT VALUE DECEMBER 31, DECEMBER 31, JULY 1, 2004 2004 2004 ------------------------------------------------------------------------------------------ CLASS A Actual $ 1,000.00 $ 1,100.10 $ 5.81 Hypothetical (5% average annual return before expenses) 1,000.00 1,019.61 5.58 CLASS B Actual 1,000.00 1,098.50 7.12 Hypothetical (5% average annual return before expenses) 1,000.00 1,018.35 6.85
* Expenses are equal to Class A and Class B annualized net expense ratios of 1.10% and 1.35%, respectively, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS The following graph depicts the Portfolio's holdings by industry, as a percentage of total investments. [CHART] Retail 9.4% Computer Services Software & Systems 8.0% Casinos & Gambling 6.3% Energy - Miscellaneous 6.2% Services: Commercial 5.0% Leisure Time 4.3% Health Care Services 4.2% Medical & Dental Instruments & Supplies 3.9% Hotel/Motel 3.5% Health Care - Miscellaneous 3.3% Other* 41.7% Short-Term Investments 4.2%
* Industries which do not appear in the top 10 industries and industries which represent less than 3% of total investments, if applicable, are included in the category labeled "Other". January 2005 68 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS SMALL COMPANY GROWTH PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- COMMON STOCKS (96.7%) BANKS: OUTSIDE NEW YORK CITY (1.1%) Texas Regional Bancshares, Inc. 147,371 $ 4,816 UCBH Holdings, Inc. 220,200 10,090 ---------------------------------------------------------------------------------------------- 14,906 ============================================================================================== BIOTECHNOLOGY RESEARCH & PRODUCTION (1.2%) Idexx Laboratories, Inc. (a)141,500 7,724 MGI Pharma, Inc. (a)111,800 3,132 Telik, Inc. (a)267,525 5,120 ---------------------------------------------------------------------------------------------- 15,976 ============================================================================================== BUILDING: CEMENT (1.7%) Eagle Materials, Inc. 85,600 7,216 Florida Rock Industries, Inc. 258,200 15,371 ---------------------------------------------------------------------------------------------- 22,587 ============================================================================================== CASINOS & GAMBLING (6.4%) Kerzner International Ltd. (a)468,700 28,146 Lakes Entertainment, Inc. (a)523,900 8,534 Penn National Gaming, Inc. (a)538,700 32,618 Shuffle Master, Inc. (a)382,750 18,028 ---------------------------------------------------------------------------------------------- 87,326 ============================================================================================== COMMUNICATIONS TECHNOLOGY (2.8%) Plantronics, Inc. 145,000 6,013 Spectrasite, Inc. (a)555,700 32,175 ---------------------------------------------------------------------------------------------- 38,188 ============================================================================================== COMPUTER SERVICES SOFTWARE & SYSTEMS (8.1%) Akamai Technologies, Inc. (a)867,700 11,306 Avocent Corp. (a)117,900 4,777 FileNET Corp. (a)203,000 5,229 Hyperion Solutions Corp. (a)146,300 6,820 Macromedia, Inc. (a)153,900 4,789 Micros Systems, Inc. (a)149,100 11,639 Neoforma, Inc. (a)592,029 4,553 Netease.com ADR (a)103,500 5,468 Salesforce.com, Inc. (a)555,000 9,402 Sina Corp. (a)180,900 5,800 SkillSoft plc ADR (a)1,002,300 5,663 SS&C Technologies, Inc. 233,300 4,818 Transact Technologies, Inc. (a)305,850 6,533 ValueClick, Inc. (a)368,150 4,907 Verint Systems, Inc. (a)172,300 6,260 Websense, Inc. (a)250,600 12,710 ---------------------------------------------------------------------------------------------- 110,674 ============================================================================================== COMPUTER TECHNOLOGY (2.1%) RSA Security, Inc. (a)715,900 14,361 Shanda Interactive Entertainment Ltd. ADR (a)334,100 14,199 ---------------------------------------------------------------------------------------------- 28,560 ============================================================================================== CONSTRUCTION (0.6%) Chicago Bridge & Iron Co. N.V. (NY Shares) 196,000 7,840 ---------------------------------------------------------------------------------------------- CONSUMER ELECTRONICS (1.1%) Activision, Inc. (a)274,700 5,543 CNET Networks, Inc. (a)894,000 10,040 ---------------------------------------------------------------------------------------------- 15,583 ============================================================================================== CONSUMER PRODUCTS (0.4%) PlanetOut, Inc. (a)363,800 $ 4,948 ---------------------------------------------------------------------------------------------- DIVERSIFIED (0.4%) Beacon Roofing Supply, Inc. (a)304,400 6,045 ---------------------------------------------------------------------------------------------- DIVERSIFIED FINANCIAL SERVICES (1.2%) Calamos Asset Management, Inc., Class A (a)602,000 16,254 ---------------------------------------------------------------------------------------------- DRUGS & PHARMACEUTICALS (1.7%) Flamel Technologies ADR (a)315,830 6,156 Gen-Probe, Inc. (a)224,400 10,145 Noven Pharmaceuticals, Inc. (a)413,500 7,054 ---------------------------------------------------------------------------------------------- 23,355 ============================================================================================== EDUCATION SERVICES (3.2%) Bright Horizons Family Solutions, Inc. (a)147,000 9,520 Laureate Education, Inc. (a)171,200 7,548 Strayer Education, Inc. 237,150 26,037 ---------------------------------------------------------------------------------------------- 43,105 ============================================================================================== ELECTRICAL & ELECTRONICS (0.9%) Flir Systems, Inc. (a)200,900 12,815 ---------------------------------------------------------------------------------------------- ELECTRONICS (1.1%) Avid Technology, Inc. (a)241,600 14,919 ---------------------------------------------------------------------------------------------- ELECTRONICS: SEMI-CONDUCTORS/COMPONENTS (1.4%) Microsemi Corp. (a)256,100 4,446 Tessera Technologies, Inc. (a)399,000 14,847 ---------------------------------------------------------------------------------------------- 19,293 ============================================================================================== ENERGY -- MISCELLANEOUS (6.2%) Bill Barrett Corp. (a)211,800 6,775 Denbury Resources, Inc. (a)572,300 15,710 Gasco Energy, Inc. (a)1,801,700 7,675 Quicksilver Resources, Inc. (a)761,400 28,004 Range Resources Corp. 242,900 4,970 Southwestern Energy Co. (a)334,100 16,936 Veritas DGC, Inc. (a)221,600 4,966 ---------------------------------------------------------------------------------------------- 85,036 ============================================================================================== ENGINEERING & CONTRACTING SERVICES (0.5%) Washington Group International, Inc. (a)167,100 6,893 ---------------------------------------------------------------------------------------------- ENTERTAINMENT (0.5%) Lions Gate Entertainment Corp. (a)653,700 6,942 ---------------------------------------------------------------------------------------------- FINANCIAL DATA PROCESSING SERVICES & SYSTEMS (0.4%) Advent Software, Inc. (a)298,900 6,122 ---------------------------------------------------------------------------------------------- FINANCIAL -- MISCELLANEOUS (0.7%) Interactive Data Corp. (a)463,175 10,069 ---------------------------------------------------------------------------------------------- HEALTH CARE MANAGEMENT SERVICES (0.7%) Eclipsys Corp. (a)467,300 9,547 ---------------------------------------------------------------------------------------------- HEALTH CARE -- MISCELLANEOUS (3.4%) Adeza Biomedical Corp. (a)268,391 4,710 Advanced Medical Optics, Inc. (a)248,500 10,223 VCA Antech, Inc. (a)1,585,700 31,080 ---------------------------------------------------------------------------------------------- 46,013 ============================================================================================== HEALTH CARE SERVICES (4.2%) Animas Corp. (a)285,250 4,459 Dade Behring Holdings, Inc. (a)654,400 36,646 Stericycle, Inc. (a)350,725 16,116 ---------------------------------------------------------------------------------------------- 57,221 ==============================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 69 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) SMALL COMPANY GROWTH PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- HOMEBUILDING (0.6%) Brookfield Homes Corp. 223,650 $ 7,582 ---------------------------------------------------------------------------------------------- HOTEL/MOTEL (3.5%) BJ's Restaurants, Inc. (a)464,950 6,509 Gaylord Entertainment Co. (a)515,000 21,388 Great Wolf Resorts, Inc. (a)659,862 14,741 Multimedia Games, Inc. (a)359,500 5,666 ---------------------------------------------------------------------------------------------- 48,304 ============================================================================================== IDENTIFICATION CONTROL & FILTER DEVICES (0.4%) CUNO, Inc. (a)92,500 5,495 ---------------------------------------------------------------------------------------------- INSURANCE: PROPERTY & CASUALTY (0.8%) Markel Corp. (a)29,850 10,865 ---------------------------------------------------------------------------------------------- INVESTMENT MANAGEMENT COMPANIES (1.7%) Affiliated Managers Group, Inc. (a)108,800 7,370 Greenhill & Co., Inc. 548,800 15,751 ---------------------------------------------------------------------------------------------- 23,121 ============================================================================================== LEISURE TIME (4.3%) SCP Pool Corp. 888,050 28,329 WMS Industries, Inc. (a)902,000 30,253 ---------------------------------------------------------------------------------------------- 58,582 ============================================================================================== MACHINERY: INDUSTRIAL/SPECIALTY (0.3%) Middleby Corp. 93,900 4,763 ---------------------------------------------------------------------------------------------- MACHINERY: OIL WELL EQUIPMENT & SERVICES (0.4%) CARBO Ceramics, Inc. 83,000 5,727 ---------------------------------------------------------------------------------------------- MANUFACTURED HOUSING (0.5%) Winnebago Industries, Inc. 176,700 6,902 ---------------------------------------------------------------------------------------------- MANUFACTURING (0.9%) Actuant Corp., Class A (a)229,200 11,953 ---------------------------------------------------------------------------------------------- MATERIALS & PROCESSING -- MISCELLANEOUS (1.3%) Agnico-Eagle Mines, Ltd. 521,600 7,172 Glamis Gold, Ltd. (a)633,200 10,866 ---------------------------------------------------------------------------------------------- 18,038 ============================================================================================== MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (3.9%) American Medical Systems Holdings, Inc. (a)242,300 10,131 Enzon Pharmaceuticals, Inc. (a)188,500 2,586 Inamed Corp. (a)417,000 26,375 Sybron Dental Specialties, Inc. (a)258,200 9,135 Techne Corp. (a)138,100 5,372 ---------------------------------------------------------------------------------------------- 53,599 ============================================================================================== METALS & MINERALS -- MISCELLANEOUS (0.7%) Coeur d'Alene Mines Corp. (a)2,498,200 9,818 ---------------------------------------------------------------------------------------------- OIL: INTEGRATED DOMESTIC (0.5%) Delta Petroleum Corp. (a)465,650 7,301 ---------------------------------------------------------------------------------------------- PAPER (0.5%) Neenah Paper, Inc. (a)205,900 6,712 ---------------------------------------------------------------------------------------------- PRODUCTION TECHNOLOGY EQUIPMENT (0.8%) Cymer, Inc. (a)139,400 4,118 Dionex Corp. (a)116,700 6,613 ---------------------------------------------------------------------------------------------- 10,731 ============================================================================================== PUBLISHING: MISCELLANEOUS (0.5%) ProQuest Co. (a)228,500 6,786 ---------------------------------------------------------------------------------------------- RADIO & TV BROADCASTERS (0.5%) Radio One, Inc., Class D (a)398,836 6,429 ---------------------------------------------------------------------------------------------- RESTAURANTS (2.8%) P.F. Chang's China Bistro, Inc. (a)249,695 $ 14,071 Sonic Corp. (a)545,907 16,650 Steak N Shake Co. (The) (a)359,325 7,215 ---------------------------------------------------------------------------------------------- 37,936 ============================================================================================== RETAIL (9.4%) AFC Enterprises, Inc. (a)706,620 16,754 Blue Nile, Inc. (a)172,950 4,777 Build-A-Bear Workshop, Inc. (a)336,920 11,843 CEC Entertainment, Inc. (a)220,900 8,829 Guitar Center, Inc. (a)411,400 21,677 Overstock.com, Inc. (a)158,800 10,957 Petco Animal Supplies, Inc. (a)337,600 13,328 Provide Commerce, Inc. (a)147,700 5,487 Tractor Supply Co. (a)405,900 15,104 Tuesday Morning Corp. (a)658,600 20,173 ---------------------------------------------------------------------------------------------- 128,929 ============================================================================================== SERVICES: COMMERCIAL (5.0%) 51job, Inc. ADR (a)96,700 5,026 Advisory Board Co. (The) (a)381,100 14,055 Arbitron, Inc. (a)159,775 6,260 Corporate Executive Board Co. 304,399 20,376 Macquarie Infrastructure Co. Trust (a)265,900 7,804 Universal Technical Institute, Inc. (a)387,300 14,764 ---------------------------------------------------------------------------------------------- 68,285 ============================================================================================== TELECOMMUNICATIONS EQUIPMENT (0.4) Andrew Corp. (a)451,000 6,147 ---------------------------------------------------------------------------------------------- TEXTILE APPAREL MANUFACTURERS (1.0%) Carter's, Inc. (a)382,075 12,987 ---------------------------------------------------------------------------------------------- TRANSPORTATION -- MISCELLANEOUS (0.4%) Arlington Tankers Ltd. (a)220,200 5,054 ---------------------------------------------------------------------------------------------- TRUCKERS (1.3%) Landstar System, Inc. (a)240,200 17,688 ---------------------------------------------------------------------------------------------- UTILITIES: MISCELLANEOUS (0.4%) Petroleum Development Corp. (a)128,400 4,952 ---------------------------------------------------------------------------------------------- UTILITIES: TELECOMMUNICATIONS (1.9%) Arbinet-thexchange, Inc. (a)188,040 4,673 IDT Corp., Class B (a)272,700 4,221 NII Holdings, Inc. (a)150,044 7,119 PTEK Holdings, Inc. (a)439,000 4,702 USA Mobility, Inc. (a)140,800 4,972 ---------------------------------------------------------------------------------------------- 25,687 ============================================================================================== TOTAL COMMON STOCKS (COST $1,098,639) 1,320,590 ============================================================================================== FACE AMOUNT (000) ---------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (4.2%) REPURCHASE AGREEMENT (4.2%) J.P. Morgan Securities, Inc., 2.00%, dated 12/31/04, due 1/3/05, repurchase price $57,249 (COST $57,239) $ (f)57,239 57,239 ==============================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 70 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) SMALL COMPANY GROWTH PORTFOLIO
VALUE (000) ---------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.9%) (COST $1,155,878) $ 1,377,829 ============================================================================================== LIABILITIES IN EXCESS OF OTHER ASSETS (-0.9%) (12,820) ============================================================================================== NET ASSETS (100%) $ 1,365,009 ==============================================================================================
(a) Non-income producing security. (f) Represents the Portfolio's undivided interest in a joint repurchase agreement which has a total value of $1,018,656,000. The repurchase agreement was fully collateralized by U.S. government agency securities at the date of this portfolio of investments as follows: Federal Farm Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist Corp., 8.80%, due 6/10/05. The investment in the repurchase agreement is through participation in a joint account with affiliated parties pursuant to exemptive relief received by the Portfolio from the SEC. ADR American Depositary Receipts THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 71 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW U.S. REAL ESTATE PORTFOLIO [CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT SINCE INCEPTION
U.S. REAL FISCAL YEAR ESTATE NAREIT LIPPER ENDED PORTFOLIO - EQUITY REAL ESTATE DECEMBER 31 CLASS A INDEX FUNDS INDEX ** 500000 500000 500000 1995 605450 575000 312264 1996 845087 777803 411648 1997 1078669 935385 496347 1998 948257 771693 411938 1999 934128 736040 396825 2000 1210910 930134 498248 2001 1322919 1059702 548679 2002 1325301 1100183 568570 2003 1823746 1508681 780160 2004 2503650 1985050 1030783
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
U.S. REAL FISCAL YEAR ESTATE NAREIT LIPPER ENDED PORTFOLIO - EQUITY REAL ESTATE DECEMBER 31 CLASS B INDEX FUNDS INDEX *** 100000 100000 100000 1996 138250 135270 131602 1997 175868 162676 158680 1998 153849 134207 131695 1999 151188 128007 126863 2000 195576 161762 159288 2001 212943 184296 175410 2002 212816 191336 181769 2003 292089 262379 249414 2004 400100 345260 329540
* Minimum Investment ** Commenced operations on February 24, 1995 *** Commenced offering on January 2, 1996 In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. PERFORMANCE COMPARED TO THE NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT TRUSTS (NAREIT) EQUITY INDEX(1) AND THE LIPPER REAL ESTATE FUNDS INDEX(2)
TOTAL RETURNS(3) ------------------------ AVERAGE ANNUAL --------------------- ONE FIVE SINCE YEAR YEARS INCEPTION(6) -------------------------------------------------------------------------------- Portfolio - Class A (4) 37.28% 21.86% 17.77% NAREIT Equity Index 31.58 21.95 15.03 Lipper Real Estate Funds Index 32.12 21.04 -- Portfolio - Class B (5) 36.95 21.49 16.66 NAREIT Equity Index 31.58 21.95 14.77 Lipper Real Estate Funds Index 32.12 21.04 14.18
(1) The NAREIT Equity Index is an unmanaged market weighted index of tax qualified REITs listed on the New York Stock Exchange, American Stock Exchange and the NASDAQ National Market System, including dividends. (2) The Lipper Real Estate Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Real Estate 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. As of the date of this report, the Portfolio is in the Lipper Real Estate Funds classification. (3) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (4) Commenced operations on February 24, 1995 (5) Commenced offering on January 2, 1996 (6) For comparative purposes, average annual since inception returns listed for the indexes refer to the inception date or initial offering of the respective share class of the Portfolio, not the inception of the index. 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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO SHARES. The U.S. Real Estate Portfolio seeks to provide above average current income and long-term capital appreciation by investing primarily in equity securities of companies in the U.S. real estate industry, including real estate investment trusts ("REITs"). The Portfolio's concentration in the real estate sector makes it subject to greater risk and volatility than other portfolios that are more diversified, and the value of its shares may be substantially affected by economic events in the real estate industry. 72 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) U.S. REAL ESTATE PORTFOLIO PERFORMANCE For the year ended December 31, 2004, the Portfolio had a total return of 37.28% for the Class A shares, net of fees, and 36.95% for the Class B shares, net of fees, compared to 31.58% for the National Association of Real Estate Investment Trusts (NAREIT) Equity Index (the "Index"). FACTORS AFFECTING PERFORMANCE - We believe there were two primary catalysts for the remarkable performance of real estate securities in 2004. - First, the sector continued to benefit from the strong favorable funds flows from both retail and institutional investors committed to increasing their allocations to real estate securities. In 2004, fund flows to dedicated REIT mutual funds totaled $6.9 billion, which represented the highest level of total annual net inflows and surpassed the $4.5 billion received in 2003. - Aside from the strong funds flows to the sector, the continued improvement in underlying real estate values contributed to and supported rising REIT share prices in 2004. Several large portfolio transactions and public company mergers in the latter half of the year provided evidence of a continuation of the improvement in property prices. - Other key factors that impacted stocks during the year were a slower than expected recovery in the job market for the year, no back-up in interest rates and continued strength in consumer spending. - For the full year, among the major sectors, the office stocks underperformed while the apartment and retail stocks outperformed. The office companies suffered as it became clear throughout the year that the office recovery will take significantly longer than investors had expected. Although the apartment recovery was also dampened by weaker job growth and the continued loss of tenants to for-sale housing, portfolio transactions and M&A activity continued to demonstrate the robust underlying property values, which supported valuations of apartment stocks. Retail stocks remained strong throughout the year as favorable earnings and transaction activities supported these stocks. This was particularly the case in the malls, which were the best performing stocks, as multiple portfolio transactions proved the high values of these assets. The hotel REITs provided strong operating results throughout the year and performed in-line due to a strong rally in December. Healthcare REITs were the weakest performers as the external growth prospects for these companies remained muted. - Stock selection was the largest contributor to the Portfolio's outperformance versus the Index this year and sector allocation was also favorable. From a bottom-up perspective, the most significant contributions were generated in the apartment, office and hotel sectors. In apartments, the Portfolio benefited from the strong relative performance from the owners of coastal assets. The outperformance in the office space was driven by the predominant exposure to owners in the stronger office markets of New York, Washington D.C. and Southern California. Favorable attribution in the hotel sector was due to the preference for owners of upscale urban hotel assets. From a top-down perspective, the most significant favorable contributors to outperformance were from the overweight to the mall sector and underweight to the mixed office/industrial, specialty and healthcare sectors. MANAGEMENT STRATEGIES - We have maintained the Portfolio's core investment philosophy as a real estate value investor. This results in the ownership of stocks that provide what we view as the best valuation relative to their underlying real estate values. - Current top-down preferences include an overweighting of companies that are focused in the ownership of upscale urban hotels, coastal apartments, higher-end malls and urban offices, and underweighting to owners of strip shopping centers and suburban offices. - The overweighting in the hotel sector continues to be accomplished through the ownership of companies that are owners of portfolios of major upscale urban hotel assets, which are recovering along with the return of corporate travel. The hotel REITs benefited from improving fundamentals, as gains in occupancy were complemented by improvements in average daily rate and new supply remains limited. Transaction activity during the year provided further evidence that the public hotel companies are trading below private market values. - We remain optimistic for the prospects of a recovery in fundamentals for the apartment sector due to evidence of job growth and the growing disparity between affordability for rental versus for-sale housing. Clearly, this remains tied to the continuation of an economic recovery and related job growth. Given the short lease term structure, this sector should be well-positioned for a recovery, beginning gradually in 2005. We believe 73 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) U.S. REAL ESTATE PORTFOLIO valuations remain most attractive in the owners of coastal assets, as the stocks are trading below private market values, which have continued to improve. - We remain cautious on the prospects of a recovery in fundamentals for the office sector. While the sector is similar to the apartments in that it requires a job recovery in order to generate better demand, there are several notable differences. Tenants are currently leasing excess office space, which will absorb part of the demand recovery. In addition, there are high costs required for attracting and retaining tenants. Finally, given the longer lease term, office owners will face a roll down in rents at lease expiration in most markets for the next several years. Thus, despite improvements in occupancy, a recovery in both net effective rents and NAV per share, REITs in the office sector are likely to lag that of other real estate sectors. Despite weak overall national trends, there are a number of markets with considerably better characteristics. - In retail, we continue to favor malls over the open-air shopping centers, which in our opinion, appear expensive versus underlying real estate values. Within both sub-sectors, we continue to favor owners of higher quality assets in major metropolitan areas. For the malls, this results in a preference for owners of large malls that dominate a trade area. Within open-air centers, we prefer the in-fill centers anchored by leading grocers and the dominant community centers with multiple key anchor tenants. EXPENSE EXAMPLES As a shareholder of the Portfolio, you incur ongoing costs, including management fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the six-month period ended December 31, 2004 and held for the entire six-month period. ACTUAL EXPENSES The first line of the tables 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 tables below provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio'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 costs of investing in the Portfolio 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.
EXPENSES PAID ENDING ACCOUNT DURING PERIOD* BEGINNING VALUE JULY 1, 2004 -- ACCOUNT VALUE DECEMBER 31, DECEMBER 31, JULY 1, 2004 2004 2004 ------------------------------------------------------------------------------------------ CLASS A Actual $ 1,000.00 $ 1,283.30 $ 5.45 Hypothetical (5% average annual return before expenses) 1,000.00 1,020.36 4.82 CLASS B Actual 1,000.00 1,281.70 6.83 Hypothetical (5% average annual return before expenses) 1,000.00 1,019.15 6.04
* Expenses are equal to Class A and Class B annualized net expense ratios of 0.95% and 1.19%, respectively, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS The following graph depicts the Portfolio's holdings by industry, as a percentage of total investments. [CHART] Office 22.3% Residential Apartments 18.2% Retail Regional Malls 15.4% Lodging/Resorts 13.2% Retail Strip Centers 8.1% Industrial 7.2% Self Storage 5.8% Diversified 5.4% Other* 3.0% Short-Term Investment 1.4%
* Industries which do not appear in the top 10 industries and industries which represent less than 3% of total investments, if applicable, are included in the category labeled "Other". January 2005 74 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS U.S. REAL ESTATE PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- COMMON STOCKS (97.6%) DIVERSIFIED (5.4%) Capital Automotive REIT 53,400 $ 1,897 Correctional Properties Trust REIT 148,630 4,293 Forest City Enterprises, Inc., Class A 210,170 12,095 Spirit Finance Corp. REIT (a)265,100 3,353 Vornado Realty Trust REIT 557,800 42,465 Wellsford Real Properties, Inc. (a)218,389 3,149 ---------------------------------------------------------------------------------------------- 67,252 ============================================================================================== HEALTH CARE (2.2%) Health Care Property Investors, Inc. REIT 124,100 3,436 Healthcare Realty Trust, Inc. REIT 56,100 2,283 Omega Healthcare Investors, Inc. REIT 754,300 8,901 Senior Housing Properties Trust REIT 485,900 9,203 Ventas, Inc. REIT 141,900 3,890 ---------------------------------------------------------------------------------------------- 27,713 ============================================================================================== INDUSTRIAL (7.1%) AMB Property Corp. REIT 963,220 38,904 BRCP Realty LP I (d)(i)2,117,638 2,118 Cabot Industrial Value Fund, Inc. (d)(i)1,904 952 Catellus Development Corp. REIT 292,500 8,950 ProLogis REIT 877,289 38,013 ---------------------------------------------------------------------------------------------- 88,937 ============================================================================================== LODGING/RESORTS (12.5%) Hilton Hotels Corp. 1,641,900 37,337 Host Marriot Corp. REIT 2,462,000 42,593 Innkeepers USA Trust REIT 43,100 612 Interstate Hotels & Resorts, Inc. (a)257,080 1,378 Lodgian, Inc. (a)176,900 2,176 Meristar Hospitality Corp. REIT (a)564,725 4,715 Starwood Hotels & Resorts Worldwide, Inc. 1,094,393 63,912 Sunstone Hotel Investors, Inc. REIT 109,750 2,281 Wyndham International, Inc., Class A (a)985,554 1,173 ---------------------------------------------------------------------------------------------- 156,177 ============================================================================================== OFFICE (22.3%) Arden Realty, Inc. REIT 1,175,400 44,336 Beacon Capital Partners, Inc. (a)(d)(i)335,100 1,420 Boston Properties, Inc. REIT 876,150 56,661 Brandywine Realty Trust REIT 131,000 3,850 Brookfield Properties Co. 2,029,601 75,907 Equity Office Properties Trust REIT 1,180,407 34,373 Mack-Cali Realty Corp. REIT 376,975 17,352 PS Business Parks, Inc. REIT 123,900 5,588 Reckson Associates Realty Corp. REIT 717,800 23,551 SL Green Realty Corp. REIT 172,550 10,448 Trizec Properties, Inc. REIT 223,500 4,229 ---------------------------------------------------------------------------------------------- 277,715 ============================================================================================== RESIDENTIAL APARTMENTS (18.2%) American Campus Communities, Inc. REIT 140,700 3,164 Amli Residential Properties Trust REIT 58,600 1,875 Apartment Investment & Management Co., Class A REIT 522,400 $ 20,133 Archstone-Smith Trust REIT 1,608,096 61,590 AvalonBay Communities, Inc. REIT 942,362 70,960 BRE Properties REIT 11,650 470 Brookfield Homes Corp. 4,300 146 Equity Residential REIT 714,850 25,863 Essex Property Trust, Inc. REIT 299,200 25,073 Gables Residential Trust REIT 36,900 1,321 Post Properties, Inc. REIT 456,950 15,948 ---------------------------------------------------------------------------------------------- 226,543 ============================================================================================== RESIDENTIAL MANUFACTURED HOMES (0.8%) Equity Lifestyle Properties, Inc. REIT 282,060 10,084 ---------------------------------------------------------------------------------------------- RETAIL REGIONAL MALLS (15.3%) General Growth Properties, Inc. REIT 749,590 27,105 Macerich Co. (The) REIT 321,100 20,165 Simon Property Group, Inc. REIT 1,762,252 113,965 Taubman Centers, Inc. REIT 970,478 29,066 ---------------------------------------------------------------------------------------------- 190,301 ============================================================================================== RETAIL STRIP CENTERS (8.1%) Acadia Realty Trust REIT 345,340 5,629 BPP Liquidating Trust REIT (d)113,290 36 Developers Diversified Realty Corp. REIT 129,500 5,746 Federal Realty Investment Trust REIT 891,900 46,066 Heritage Property Investment Trust REIT 169,425 5,437 Kimco Realty Corp. REIT 54,280 3,148 Pan Pacific Retail Properties, Inc. REIT 44,980 2,820 Regency Centers Corp. REIT 584,200 32,365 ---------------------------------------------------------------------------------------------- 101,247 ============================================================================================== SELF STORAGE (5.7%) Public Storage, Inc. REIT 742,690 41,405 Shurgard Storage Centers, Inc., Class A REIT 685,980 30,190 ---------------------------------------------------------------------------------------------- 71,595 ============================================================================================== TOTAL COMMON STOCKS (COST $746,258) 1,217,564 ============================================================================================== PREFERRED STOCKS (0.8%) LODGING/RESORTS (0.7%) Wyndham International, Inc., Series II (d)(i)53,537 2,963 Wyndham, Series B (d)(i)100,022 5,259 ---------------------------------------------------------------------------------------------- 8,222 ============================================================================================== RESIDENTIAL APARTMENTS (0.0%) Atlantic Gulf Communities Corp., Series B (a)(d)107,021 @-- Atlantic Gulf Communities Corp., Series B (a)(d)(i)140,284 @-- Atlantic Gulf Communities Corp., Series B (Convertible) (a)(d)75,765 @-- ---------------------------------------------------------------------------------------------- @-- ============================================================================================== RETAIL REGIONAL MALLS (0.1%) Simon Property Group, Inc. 18,855 1,117 ---------------------------------------------------------------------------------------------- TOTAL PREFERRED STOCKS (COST $8,354) 9,339 ==============================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 75 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) U.S. REAL ESTATE PORTFOLIO
FACE AMOUNT VALUE (000) (000) ---------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (1.4%) REPURCHASE AGREEMENT (1.4%) J.P. Morgan Securities, Inc., 2.00%, dated 12/31/04, due 1/3/05, repurchase price $17,346 (COST $17,343) $ (f)17,343 $ 17,343 ---------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (99.8%) (COST $771,955) 1,244,246 ============================================================================================== OTHER ASSETS IN EXCESS OF LIABILITIES (0.2%) 2,652 ============================================================================================== NET ASSETS (100%) $ 1,246,898 ==============================================================================================
(a) Non-income producing security. (d) Security was valued at fair value -- At December 31, 2004, the Portfolio held $12,748,000 of fair valued securities, representing 1.0% of net assets. (f) Represents the Portfolio's undivided interest in a joint repurchase agreement which has a total value of $1,018,656,000. The repurchase agreement was fully collateralized by U.S. government agency securities at the date of this portfolio of investments as follows: Federal Farm Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist Corp., 8.80%, due 6/10/05. The investment in the repurchase agreement is through participation in a joint account with affiliated parties pursuant to exemptive relief received by the Portfolio from the SEC. (i) Restricted security not registered under the Securities Act of 1933. Beacon Capital Partners, Inc. was acquired 3/98 and has a current cost basis of $1,420,000. Wyndham, Series B Preferred was acquired 6/99 - 12/04 and has a current cost basis of $3,037,000. Wyndham International, Inc., Series II Preferred was acquired 11/00 - 12/04 and has a current cost basis of $1,686,000. Atlantic Gulf Communities Corp., Series B Preferred was acquired 6/97 and has a current cost basis of $790,000. Cabot Industrial Value Fund, Inc. was acquired 12/03-11/04 and has a current cost basis of $952,000. BRCP REIT LLC I was acquired 03/03-12/04 and has a current cost basis of $2,118,000. At December 31, 2004, these securities had an aggregate market value of $10,003,000, representing 0.8% of net assets. @ Face Amount/Value is less than $500. REIT Real Estate Investment Trust THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 76 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW VALUE EQUITY PORTFOLIO [CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
FISCAL YEAR VALUE EQUITY LIPPER LARGE-CAP ENDED PORTFOLIO - RUSSELL 1000 S&P 500 VALUE FUNDS DECEMBER 31 CLASS A VALUE INDEX INDEX INDEX 1994 500000 500000 500000 500000 1995 668470 691800 687720 666214 1996 800386 841506 845648 806553 1997 1034111 1137547 1127790 1036211 1998 1125009 1315346 1450045 1225222 1999 1255847 1412024 1755192 1357292 2000 1482905 1511148 1595206 1383822 2001 1459920 1426613 1405776 1265153 2002 1106327 1205202 1095310 1016213 2003 1449842 1567125 1409445 1300726 2004 1661150 1825500 1562950 1456750
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
FISCAL YEAR VALUE EQUITY LIPPER LARGE-CAP ENDED PORTFOLIO - RUSSELL 1000 S&P 500 VALUE FUNDS DECEMBER 31 CLASS A VALUE INDEX INDEX INDEX ** 100000 100000 100000 100000 1996 122590 120850 122964 120291 1997 161819 163365 163990 154543 1998 182192 188899 210848 182733 1990 209921 202783 255219 202430 2000 258035 217018 231956 206387 2001 253933 204878 204411 188688 2002 202333 173081 159267 151561 2003 273069 225057 204945 193994 2004 311500 262190 225430 217260
* Minimum Investment ** Commenced offering on January 2, 1996 In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. PERFORMANCE COMPARED TO THE RUSSELL 1000 VALUE INDEX(1), THE S&P 500 INDEX(2) AND THE LIPPER LARGE-CAP VALUE FUNDS INDEX(3)
TOTAL RETURNS(4) ---------------------------------------- AVERAGE ANNUAL ------------------------------- ONE FIVE TEN SINCE YEAR YEARS YEARS INCEPTION(7) ----------------------------------------------------------------------------- Portfolio - Class A (5) 14.56% 5.75% 12.76% 11.13% Russell 1000 Value Index 16.49 5.27 13.83 12.59 S&P 500 Index 10.88 (2.30) 12.07 11.52 Lipper Large-Cap Value Funds Index 12.00 1.42 11.29 11.11 Portfolio - Class B (6) 14.07 6.71 -- 13.46 Russell 1000 Value Index 16.49 5.27 -- 11.31 S&P 500 Index 10.88 (2.30) -- 9.46 Lipper Large-Cap Value Funds Index 12.00 1.42 -- 9.01
(1) The Russell 1000 Value Index measures the performance of those companies in the Russell 1000 Index with lower price-to-book ratios and lower forecasted growth values. (2) The S&P 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. (3) The Lipper Large-Cap Value Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Large-Cap Value 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. As of the date of this report, the Portfolio is in the Lipper Large-Cap Value Funds classification. (4) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (5) Commenced operations on January 31, 1990 (6) Commenced offering on January 2, 1996 (7) For comparative purposes, average annual since inception returns listed for the indexes refer to the inception date or initial offering of the respective share class of the Portfolio, not the inception of the index. 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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO SHARES. The Value Equity Portfolio seeks high total return by investing primarily in equity securities that the Advisor believes to be undervalued relative to the stock market in general at the time of purchase. PERFORMANCE For the year ended December 31, 2004, the Portfolio had a total return of 14.56% for the Class A shares, net of fees, and 14.07% for the Class B shares, net of fees, compared to 77 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) VALUE EQUITY PORTFOLIO 16.49% for the Russell 1000 Value Index (the "Index") and 10.88% for the S&P 500 Index. FACTORS AFFECTING PERFORMANCE - For the second consecutive year, the markets finished in positive territory and stock prices continued to advance as the economy grew throughout the year. - Total returns in the market were strongest in sectors that were economically sensitive including industrials, materials and energy, which performed well as the price of oil steadily climbed throughout the year. - Stock selection was strong, but sector allocation more than negated this. Therefore, the Portfolio underperformed versus the Index for the year. All sectors had positive returns for the year. - Telecommunication services contributed the most to relative performance. The Portfolio maintained an underweight relative to the benchmark, however stock selection aided performance. - The Portfolio maintained an underweight in financials versus the benchmark and the allocation aided the relative performance for the year - Technology detracted the most as the Portfolio maintained an overweight versus the benchmark. Within technology, semiconductors proved to be the largest detriment to relative performance. - The overweight position in healthcare was also a detriment to performance. While stock selection was strong in the sector, the overweighting of pharmaceuticals hurt the Portfolio. MANAGEMENT STRATEGIES - Throughout 2004, the portfolio management team reduced the energy exposure in the Portfolio. The Portfolio continues to emphasize health care (mainly pharmaceuticals) and consumer discretionary. The Portfolio continues to maintain an underweight within financials. EXPENSE EXAMPLES As a shareholder of the Portfolio, you incur ongoing costs, including management fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the six-month period ended December 31, 2004 and held for the entire six-month period. ACTUAL EXPENSES The first line of the tables 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 tables below provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio'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 costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that Technology detracted most as the Portfolio appear in the shareholder reports of the other funds.
EXPENSES PAID ENDING ACCOUNT DURING PERIOD* BEGINNING VALUE JULY 1, 2004-- ACCOUNT VALUE DECEMBER 31, DECEMBER 31, JULY 1, 2004 2004 2004 -------------------------------------------------------------------------------- CLASS A Actual $ 1,000.00 $ 1,106.40 $ 3.71 Hypothetical (5% average annual return before expenses) 1,000.00 1,021.62 3.56 CLASS B Actual 1,000.00 1,104.50 5.03 Hypothetical (5% average annual return before expenses) 1,000.00 1,020.36 4.82
* Expenses are equal to Class A and Class B annualized net expense ratios of 0.70% and 0.95%, respectively, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). 78 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) VALUE EQUITY PORTFOLIO GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS The following graph depicts the Portfolio's holdings by industry, as a percentage of total investments. [CHART] Drugs & Pharmaceuticals 11.1% Investment Management Companies 9.8% Oil: Integrated Domestic 7.9% Utilities: Electrical 5.1% Communication & Media 4.3% Chemicals 4.2% Utilities: Telecommunications 3.2% Insurance Property & Casualty 3.0% Other* 47.3% Short-Term Investment 4.1%
* Industries which do not appear in the top 10 industries and industries which represent less than 3% of total investments, if applicable, are included in the category labeled "Other". January 2005 79 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS VALUE EQUITY PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- COMMON STOCKS (95.7%) AEROSPACE (2.0%) Northrop Grumman Corp. 32,430 $ 1,763 Raytheon Co. 40,350 1,567 ---------------------------------------------------------------------------------------------- 3,330 ============================================================================================== AUTO TRUCKS & PARTS (1.2%) Magna International, Inc., Class A 24,110 1,990 ---------------------------------------------------------------------------------------------- AUTOMOBILES (2.1%) Honda Motor Co., Ltd. ADR 135,060 3,520 ---------------------------------------------------------------------------------------------- BEVERAGES: SOFT DRINKS (1.4%) Coca Cola Co. (The) 55,010 2,290 ---------------------------------------------------------------------------------------------- BIOTECHNOLOGY RESEARCH & PRODUCTION (0.2%) Applera Corp. - Applied Biosystems Group 12,940 271 ---------------------------------------------------------------------------------------------- CHEMICALS (4.2%) Bayer AG ADR 139,920 4,754 Dow Chemical Co. (The) 44,490 2,203 ---------------------------------------------------------------------------------------------- 6,957 ============================================================================================== COMMUNICATIONS & MEDIA (4.2%) Time Warner, Inc. (a)221,340 4,303 Walt Disney Co. (The) 98,890 2,749 ---------------------------------------------------------------------------------------------- 7,052 ============================================================================================== COMMUNICATIONS TECHNOLOGY (0.5%) Motorola, Inc. 48,970 842 ---------------------------------------------------------------------------------------------- COMPUTER SERVICES SOFTWARE & SYSTEMS (1.7%) Computer Associates International, Inc. 43,430 1,349 Microsoft Corp. 58,030 1,550 ---------------------------------------------------------------------------------------------- 2,899 ============================================================================================== COMPUTER TECHNOLOGY (0.8%) International Business Machines Corp. 13,230 1,304 ---------------------------------------------------------------------------------------------- CONSUMER STAPLES -- MISCELLANEOUS (1.1%) Kimberly-Clark Corp. 28,840 1,898 ---------------------------------------------------------------------------------------------- DIVERSIFIED FINANCIAL SERVICES (2.2%) Bank of America Corp. 51,940 2,441 PNC Financial Services Group, Inc. 22,240 1,277 ---------------------------------------------------------------------------------------------- 3,718 ============================================================================================== DRUGS & PHARMACEUTICALS (11.1%) Bristol-Myers Squibb Co. 217,990 5,585 Eli Lilly & Co. 21,050 1,195 GlaxoSmithKline plc ADR 25,760 1,221 Roche Holding AG ADR 29,670 3,415 Sanofi-Aventis ADR 39,740 1,592 Schering-Plough Corp. 170,190 3,553 Wyeth 43,060 1,834 ---------------------------------------------------------------------------------------------- 18,395 ============================================================================================== ELECTRONICS: INSTRUMENTS GAUGES & METERS (1.2%) Parker Hannifin Corp. 26,320 1,993 ---------------------------------------------------------------------------------------------- ELECTRONICS: SEMI-CONDUCTORS/COMPONENTS (0.6%) Freescale Semiconductor, Inc., Class B (a)2,757 51 Intel Corp. 38,870 909 ---------------------------------------------------------------------------------------------- 960 ============================================================================================== ENERGY EQUIPMENT (2.2%) Schlumberger Ltd. 53,510 3,582 ---------------------------------------------------------------------------------------------- ENERGY -- MISCELLANEOUS (1.1%) Valero Energy Corp. 41,580 $ 1,888 ---------------------------------------------------------------------------------------------- ENTERTAINMENT (0.5%) Viacom, Inc., Class B 21,620 787 ---------------------------------------------------------------------------------------------- FINANCIAL DATA PROCESSING SERVICES & SYSTEMS (1.7%) Automatic Data Processing, Inc. 35,910 1,592 SunGard Data Systems, Inc. (a)44,790 1,269 ---------------------------------------------------------------------------------------------- 2,861 ============================================================================================== FINANCIAL -- MISCELLANEOUS (2.8%) Equifax, Inc. 57,540 1,617 Freddie Mac 40,850 3,010 ---------------------------------------------------------------------------------------------- 4,627 ============================================================================================== FOODS (2.2%) Cadbury Schweppes plc ADR 53,360 2,012 Kraft Foods, Inc., Class A 48,390 1,723 ---------------------------------------------------------------------------------------------- 3,735 ============================================================================================== HEALTH CARE -- MISCELLANEOUS (1.1%) Bausch & Lomb, Inc. 29,750 1,918 ---------------------------------------------------------------------------------------------- HOTEL/MOTEL (2.3%) Hilton Hotels Corp. 34,360 781 Marriot International, Inc., Class A 31,780 2,002 Starwood Hotels & Resorts Worldwide, Inc. 17,140 1,001 ---------------------------------------------------------------------------------------------- 3,784 ============================================================================================== INSURANCE: LIFE (1.4%) Cigna Corp. 27,870 2,273 ---------------------------------------------------------------------------------------------- INSURANCE: MULTI-LINE (2.8%) Aegon N.V. (NY Shares) 42,240 579 Hartford Financial Services Group, Inc. 32,240 2,235 Metlife, Inc. 5,730 232 Prudential Financial, Inc. 30,210 1,660 ---------------------------------------------------------------------------------------------- 4,706 ============================================================================================== INSURANCE: PROPERTY & CASUALTY (3.0%) Chubb Corp. 37,220 2,862 St. Paul Travelers Cos., Inc. (The) 56,551 2,097 ---------------------------------------------------------------------------------------------- 4,959 ============================================================================================== INVESTMENT MANAGEMENT COMPANIES (9.8%) Citigroup, Inc. 81,030 3,904 Goldman Sachs Group, Inc. 5,480 570 J.P. Morgan Chase & Co. 126,017 4,916 Lehman Brothers Holdings, Inc. 40,130 3,511 Merrill Lynch & Co., Inc. 56,760 3,392 ---------------------------------------------------------------------------------------------- 16,293 ============================================================================================== MANUFACTURING (0.8%) Ingersoll Rand Co., Class A 16,990 1,364 ---------------------------------------------------------------------------------------------- MATERIALS & PROCESSING -- MISCELLANEOUS (1.3%) Newmont Mining Corp. 48,560 2,157 ---------------------------------------------------------------------------------------------- MULTI-SECTOR COMPANIES (1.8%) General Electric Co. 80,900 2,953 ---------------------------------------------------------------------------------------------- OIL: INTEGRATED DOMESTIC (7.9%) BP plc ADR 69,220 4,042 ConocoPhillips 27,580 2,395 Exxon Mobil Corp. 58,010 2,974
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 80 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) VALUE EQUITY PORTFOLIO
VALUE SHARES (000) ---------------------------------------------------------------------------------------------- OIL: INTEGRATED DOMESTIC (CONT'D) Royal Dutch Petroleum Co. (NY Shares) 63,880 $ 3,665 ---------------------------------------------------------------------------------------------- 13,076 ============================================================================================== PAPER (0.6%) Temple-Inland, Inc. 15,380 1,052 ---------------------------------------------------------------------------------------------- PRODUCTION TECHNOLOGY EQUIPMENT (0.8%) Applied Materials, Inc. (a)73,260 1,253 ---------------------------------------------------------------------------------------------- RADIO & TV BROADCASTERS (1.5%) Clear Channel Communications, Inc. 74,540 2,496 ---------------------------------------------------------------------------------------------- RAILROADS (2.0%) Norfolk Southern Corp. 94,050 3,404 ---------------------------------------------------------------------------------------------- RETAIL (2.4%) Kohl's Corp. (a)40,600 1,996 McDonald's Corp. 20,030 642 Target Corp. 24,580 1,277 ---------------------------------------------------------------------------------------------- 3,915 ============================================================================================== SECURITIES BROKERAGE & SERVICES (0.5%) Charles Schwab Corp. (The) 66,070 790 ---------------------------------------------------------------------------------------------- SERVICES: COMMERCIAL (1.3%) Accenture Ltd., Class A (a)82,340 2,223 ---------------------------------------------------------------------------------------------- TOBACCO (1.1%) Altria Group, Inc. 28,900 1,766 ---------------------------------------------------------------------------------------------- UTILITIES: ELECTRICAL (5.1%) American Electric Power Co., Inc. 35,180 1,208 Consolidated Edison, Inc. 27,690 1,211 Edison International 21,830 699 Entergy Corp. 30,160 2,039 Exelon Corp. 37,100 1,635 FirstEnergy Corp. 41,730 1,649 ---------------------------------------------------------------------------------------------- 8,441 ============================================================================================== UTILITIES: TELECOMMUNICATIONS (3.2%) France Telecom S.A. ADR 42,400 1,403 Sprint Corp. 46,690 1,160 Verizon Communications, Inc. 67,020 2,715 ---------------------------------------------------------------------------------------------- 5,278 ============================================================================================== TOTAL COMMON STOCKS (COST $139,586) 159,000 ============================================================================================== FACE AMOUNT (000) ---------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (4.1%) REPURCHASE AGREEMENT (4.1%) J.P.Morgan Securities, Inc., 2.00%, dated 12/31/04, due 1/3/05, repurchase price $6,858 (COST $6,857) $ (f)6,857 6,857 ---------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (99.8%) (COST $146,443) 165,857 ============================================================================================== OTHER ASSETS IN EXCESS OF LIABILITIES (0.2%) 270 ============================================================================================== NET ASSETS (100%) $ 166,127 ==============================================================================================
(a) Non-income producing security. (f) Represents the Portfolio's undivided interest in a joint repurchase agreement which has a total value of $1,018,656,000. The repurchase agreement was fully collateralized by U.S. government agency securities at the date of this portfolio of investments as follows: Federal Farm Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist Corp., 8.80%, due 6/10/05. The investment in the repurchase agreement is through participation in a joint account with affiliated parties pursuant to exemptive relief received by the Portfolio from the SEC. ADR American Depositary Receipts THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 81 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW EMERGING MARKETS DEBT PORTFOLIO [CHART] COMPARISON OF THE CHANGE IN VALUE OF A $500,000* INVESTMENT OVER 10 YEARS
FISCAL YEAR EMERGING MARKETS J.P. MORGAN LIPPER EMERGING ENDED DEBT PORTFOLIO - EMERGING MARKETS MARKETS DEBT DECEMBER 31 CLASS A BOND GLOBAL INDEX FUNDS INDEX 1994 500000 500000 500000 1995 639000 631875 696255 1996 961823 854465 804285 1997 1137740 956574 598180 1998 728723 846147 764490 1999 941655 1050745 863610 2000 1062470 1202157 931040 2001 1174773 1218507 1035645 2002 1307405 1378253 1356450 2003 1679492 1731913 1542650 2004 1848600 1935050 2002800
[CHART] COMPARISON OF THE CHANGE IN VALUE OF A $100,000* INVESTMENT SINCE INCEPTION
FISCAL YEAR EMERGING MARKETS J.P. MORGAN LIPPER EMERGING ENDED DEBT PORTFOLIO - EMERGING MARKETS MARKETS DEBT DECEMBER 31 CLASS B BOND GLOBAL INDEX FUNDS INDEX ** 100000 100000 100000 1996 149000 133500 137450 1997 175895 149453 158777 1998 113681 132200 118089 1999 145523 164166 150921 2000 163713 187856 170489 2001 180903 190429 183800 2002 199608 215433 204451 2003 256177 270756 267782 2004 281560 302580 304541
* Minimum Investment ** Commenced offering on January 2, 1996 In accordance with SEC regulations, Portfolio performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. PERFORMANCE COMPARED TO THE J.P. MORGAN EMERGING MARKETS BOND GLOBAL INDEX(1) AND THE LIPPER EMERGING MARKETS DEBT FUNDS INDEX(2)
TOTAL RETURNS(3) ------------------------------ AVERAGE ANNUAL ------------------------------ ONE FIVE TEN SINCE YEAR YEARS YEARS INCEPTION(6) ---------------------------------------------------------------------------- Portfolio - Class A (4) 10.07% 14.44% 13.97% 11.24% J.P. Morgan Emerging Markets Bond Global Index 11.73 12.99 14.49 11.03 Lipper Emerging Markets Debt Funds Index 12.33 14.97 13.56 -- Portfolio - Class B (5) 9.90 14.19 -- 12.19 J.P. Morgan Emerging Markets Bond Global Index 11.73 12.99 -- 13.10 Lipper Emerging Markets Debt Funds Index 12.33 14.97 -- --
(1) The J.P. Morgan Emerging Markets Bond Global Index tracks total returns for U.S. dollar - denominated debt instruments issued by emerging market sovereign and quasi - sovereign entities, including Brady Bonds, loans, Eurobonds and local market instruments for over 30 emerging market countries. (2) The Lipper Emerging Markets Debt Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Emerging Markets Debt 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 10 funds represented in this Index. As of the date of this report, the Portfolio is in the Lipper Emerging Markets Debt Funds classification. (3) Total returns for the Portfolio reflect expenses waived and reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time. (4) Commenced operations on February 1, 1994 (5) Commenced offering on January 2, 1996 (6) For comparative purposes, average annual since inception returns listed for the indexes refer to the inception date or initial offering of the respective share class of the Portfolio, not the inception of the index. 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. PERFORMANCE ASSUMES THAT ALL DIVIDENDS AND DISTRIBUTIONS, IF ANY, WERE REINVESTED. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT morganstanley.com/im. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT PORTFOLIO SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. TOTAL RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON PORTFOLIO DISTRIBUTIONS OR THE REDEMPTION OF PORTFOLIO SHARES. The Emerging Markets Debt Portfolio seeks high total return by investing primarily in fixed income securities of government and government-related issuers and, to a lesser extent, of corporate issuers in emerging market countries. Foreign investing involves certain risks, including currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. 82 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) EMERGING MARKETS DEBT PORTFOLIO In addition, investing in emerging markets may involve a relatively higher degree of volatility. PERFORMANCE For the year ended December 31, 2004, the Portfolio had a total return of 10.07% for Class A, net of fees, shares and 9.90% for Class B, net of fees, shares compared to 11.73% for the J.P. Morgan Emerging Markets Bond Global Index (the "Index"). FACTORS AFFECTING PERFORMANCE - In sharp contrast to the relatively gloomy end-2003 market expectations, 2004 turned out to be a surprisingly good year for emerging markets debt (EMD). The largely anticipated impact of higher global interest rates on global liquidity and hence on credit product in general and EMD in particular did not materialize, as interest rates in the U.S. increased in line with market expectations. Interest rates rose across the shorter end of the yield curve as the U.S. economy grew at a healthy 4% pace without generating significant inflationary pressures. Longer-term interest rates remained stable. Furthermore, the surprisingly orderly depreciation of the U.S. dollar did not disrupt markets despite the magnitude of its decline. - EMD spreads compressed to new absolute lows in 2004 reflecting the asset class'higher average rating continued large inflows from strategic investors, a supportive environment for credit product and fundamental improvements in most of the countries that constitute the EMD investable universe. The abundance of financial market liquidity greatly benefited emerging economies, lifting EMD in spite of tight absolute valuations at the beginning of the year. High global growth, low global interest rates, high commodity prices, and a weak U.S. dollar together with a marked improvement in the quality of economic management proved to be a powerful mix. Despite the historically low spread level for the Index, EMD remains cheap relative to comparable corporate credits. In fact, BBB, BB, and B credits in EMD are about 60, 160, and 100 basis points wider, respectively, than comparable corporate credits in the U.S. - In addition, most emerging economies took advantage of the expansionary global cycle to strengthen their external and fiscal accounts and reduce (and/or improve the composition and duration) their net external liabilities, while benefiting from high growth and low unemployment at home. The export-led growth trickled down to the domestic economy helping to appease social and political pressures in most emerging countries. - The benign international environment benefited high beta credits that were in distress at the end of 2003, including Uruguay (up 34%), the Dominican Republic (up 27%), and Argentina (up 19.8%). High oil prices lifted Venezuela's bonds by 23% and Ecuador's debt by 21%. Among the largest countries, Brazil returned 14.33%, Russia 11.51%, and Mexico 8.56%. Turkey (up 10%), benefited from cautious policies and the EU invitation to start accession negotiation on October 3, 2005. Investment grade emerging markets credits lagged the market during 2004, returning 8.8%, while the overall Index returned 11.7%. - Performance for 2004 was negatively impacted by the Portfolio's more defensive positioning relative to its benchmark during the second and third quarters. The Portfolio's management team emphasized defensive credits and deemphasized bonds of countries dependant on ample global liquidity conditions. Unfortunately, weaker than expected U.S. economic data and the perception that the U.S. Federal Reserve would slow down the pace of interest rate hikes, had the effect of increasing investor risk appetite throughout the summer months. Lower-rated credits such as Brazil, Turkey and Venezuela led the advance during July and August and handily outperformed the market. An underweight in Brazil during the second quarter detracted from the portfolio's relative returns. Brazilian bonds rose more than 14% between the end of May and the end of August, as strong economic data in Brazil helped drive spreads back toward their low point for the year. The portfolio's underweight in Uruguayan and Venezuelan debt also adversely impacted relative performance. The portfolio's overweights in Turkish local currency debt aided relative performance during the fourth quarter, as did overweights in select distressed credits in Mexico and Indonesia. MANAGEMENT STRATEGIES - Next year is likely to benefit from the last leg of the current global expansionary cycle. We expect 2005 to deliver an above-trend global real gross domestic product (GDP) growth rate, albeit at a somewhat lower level than in 2004. Consequently, we expect a respectable growth rate in trade volumes (albeit lower than in 2004) and relatively stable commodity prices (from a high base in 2004). We also expect global real interest rates to remain below their historical average (albeit slightly positive in contrast with negative real rates in 2004), in spite of the expected hikes in policy 83 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) EMERGING MARKETS DEBT PORTFOLIO rates in the U.S. As such, global liquidity will most likely remain abundant in 2005. We are relatively agnostic vis-a-vis the U.S. dollar as there are powerful offsetting forces playing against each other. - In all, we expect benign external conditions to continue supporting emerging countries in 2005, which together with cautious financial policies should result in a further improvement in macroeconomic fundamentals and payment capacity. Nonetheless, there are several risks to our otherwise benign external 2005 outlook. First, inflationary pressures are building up in the U.S. and there is a risk that investors may adjust their expectations about the likely pace and magnitude of interest rate hikes--just as they did in April/May 2004--particularly if the Fed is perceived to be behind the curve. Second, the large fiscal and external imbalances in the U.S. economy pose a risk to what so far has been an orderly (and hence beneficial) depreciation of the U.S. dollar. Sharp movements in interest and exchange rates in the U.S. could adversely affect risk taking, global growth, capital flows trade flows, and commodity prices. - We believe that a cautious management of interest rate risk together with selective allocation of resources in countries that still offer fundamental value will be the best strategy to maximize returns in 2005. We also believe that certain local markets, which have yet to fully reflect the ongoing improvement in economic fundamentals, may provide good investment opportunities in 2005. EXPENSE EXAMPLES As a shareholder of the Portfolio, you incur ongoing costs, including management fees, distribution (12b-1) fees (in the case of Class B) and other Portfolio expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the six-month period ended December 31, 2004 and held for the entire six-month period. ACTUAL EXPENSES The first line of the tables 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 tables below provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio'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 costs of investing in the Portfolio 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.
EXPENSES PAID ENDING ACCOUNT DURING PERIOD* BEGINNING VALUE JULY 1, 2004-- ACCOUNT VALUE DECEMBER 31, DECEMBER 31, JULY 1, 2004 2004 2004 -------------------------------------------------------------------------------- CLASS A Actual $ 1,000.00 $ 1,136.10 $ 5.37 Hypothetical (5% average annual return before expenses) 1,000.00 1,020.11 5.08 CLASS B Actual 1,000.00 1,136.80 6.71 Hypothetical (5% average annual return before expenses) 1,000.00 1,018.85 6.34
* Expenses are equal to Class A and Class B annualized net expense ratios of 1.00% and 1.25%, respectively, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS The following graph depicts the Portfolio's holdings by industry, as a percentage of total investments. Short-Term Investment 0.3% Sovereign 86.8% Finance 3.6% Other* 9.3%
* Industries which do not appear in the top 10 industries and industries which represent less than 3% of total investments, if applicable, are included in the category labeled "Other". January 2005 84 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS EMERGING MARKETS DEBT PORTFOLIO
FACE AMOUNT VALUE (000) (000) ---------------------------------------------------------------------------------------------- DEBT INSTRUMENTS (95.8%) ARGENTINA (3.8%) SOVEREIGN (3.8%) Republic of Argentina 6.00%, 3/31/23 $ (b)472 $ 269 11.375%, 3/15/10-1/30/17 (b)1,100 380 11.75%, 4/7/09-6/15/15 (b)5,235 1,802 12.00%, 2/1/20 (b)45 15 12.125%, 5/21/05 (b)440 139 Republic of Argentina (Linked Variable Rate) 100.74%, 4/10/05 (b)(h)1,210 484 ---------------------------------------------------------------------------------------------- 3,089 ============================================================================================== BRAZIL (15.9%) SOVEREIGN (15.9%) Federative Republic of Brazil 3.062%, 4/15/24 (h)1,480 1,369 6.00%, 4/15/24 (h)400 372 8.875%, 4/15/24 1,275 1,326 10.50%, 7/14/14 1,230 1,460 11.00%, 8/17/40 1,330 1,580 14.50%, 10/15/09 2,810 3,761 Federative Republic of Brazil, PIK 8.00%, 4/15/14 3,003 3,076 ---------------------------------------------------------------------------------------------- 12,944 ============================================================================================== BULGARIA (1.4%) SOVEREIGN (1.4%) Republic of Bulgaria 8.25%, 1/15/15 (e)200 251 8.25%, 1/15/15 473 593 Republic of Bulgaria (Registered) 8.25%, 1/15/15 270 339 ---------------------------------------------------------------------------------------------- 1,183 ============================================================================================== CHILE (1.5%) CORPORATE (1.5%) Empresa Nacional de Petroleo 6.75%, 11/15/12 (e)1,100 1,226 ---------------------------------------------------------------------------------------------- COLOMBIA (3.7%) SOVEREIGN (3.7%) Republic of Colombia 9.75%, 4/9/11 849 981 10.375%, 1/28/33 510 592 11.75%, 2/25/20 1,095 1,412 ---------------------------------------------------------------------------------------------- 2,985 ============================================================================================== ECUADOR (1.4%) SOVEREIGN (1.4%) Government of Ecuador (Registered) 8.00%, 8/15/30 1,350 1,171 ---------------------------------------------------------------------------------------------- INDONESIA (2.3%) CORPORATE (2.3%) Pindo Deli Finance Mauritius 10.75%, 10/1/07 (b)(e)3,200 1,008 Tjiwi Kimia Finance Mauritius Ltd. 10.00%, (expired maturity) $ (b)670 $ 278 Tjiwi Kimia International BV 13.25%, (expired maturity) (b)1,450 587 ---------------------------------------------------------------------------------------------- 1,873 ============================================================================================== IVORY COAST (0.1%) SOVEREIGN (0.1%) Ivory Coast 22.66%, 3/29/18 (b)(h)580 103 ---------------------------------------------------------------------------------------------- MALAYSIA (1.8%) SOVEREIGN (1.8%) Government of Malaysia 8.75%, 6/1/09 1,240 1,473 ---------------------------------------------------------------------------------------------- MEXICO (20.0%) CORPORATE (6.4%) Pemex Project Funding Master Trust 3.79%, 6/15/10 (e)(h)1,080 1,111 9.125%, 10/13/10 1,260 1,514 Petroleos Mexicanos 9.50%, 9/15/27 1,190 1,500 Petroleos Mexicanos (Registered) 8.625%, 12/1/23 460 534 Satelites Mexicanos S.A. de C.V. 10.125%, 11/1/04 (b)977 542 ---------------------------------------------------------------------------------------------- 5,201 ============================================================================================== SOVEREIGN (13.6%) United Mexican States 8.00%, 9/24/22 370 428 8.125%, 12/30/19 1,210 1,423 8.30%, 8/15/31 1,490 1,750 8.375%, 1/14/11 2,890 3,401 10.375%, 2/17/09 1,190 1,458 11.50%, 5/15/26 1,749 2,680 ---------------------------------------------------------------------------------------------- 11,140 ============================================================================================== 16,341 ============================================================================================== NIGERIA (1.2%) SOVEREIGN (1.2%) Central Bank of Nigeria 6.25%, 11/15/20 (n)1,000 945 ---------------------------------------------------------------------------------------------- PANAMA (3.3%) SOVEREIGN (3.3%) Republic of Panama 8.875%, 9/30/27 750 829 9.375%, 4/1/29 590 696 9.625%, 2/8/11 725 859 10.75%, 5/15/20 220 287 ---------------------------------------------------------------------------------------------- 2,671 ==============================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 85 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) EMERGING MARKETS DEBT PORTFOLIO
FACE AMOUNT VALUE (000) (000) ---------------------------------------------------------------------------------------------- PERU (2.5%) SOVEREIGN (2.5%) Republic of Peru 4.50%, 3/7/17 $ (h)460 $ 430 8.375%, 5/3/16 860 967 9.875%, 2/6/15 520 640 ---------------------------------------------------------------------------------------------- 2,037 ============================================================================================== PHILIPPINES (3.4%) SOVEREIGN (3.4%) Republic of Philippines 8.875%, 3/17/15 2,770 2,777 ---------------------------------------------------------------------------------------------- QATAR (0.9%) SOVEREIGN (0.9%) State of Qatar (Registered) 9.75%, 6/15/30 500 728 ---------------------------------------------------------------------------------------------- RUSSIA (18.0%) SOVEREIGN (18.0%) Aries Vermoegensverwaltungs GmbH (Registered) 9.60%, 10/25/14 1,250 1,546 Russian Federation 5.00%, 3/31/30 (e)(n)65 68 Russian Federation (Registered) 5.00%, 3/31/30 (n)3,723 3,853 8.25%, 3/31/10 1,030 1,141 11.00%, 7/24/18 2,186 3,039 12.75%, 6/24/28 3,100 5,068 ---------------------------------------------------------------------------------------------- 14,715 ============================================================================================== TUNISIA (0.3%) SOVEREIGN (0.3%) Banque Centrale de Tunisie 7.375%, 4/25/12 210 241 ---------------------------------------------------------------------------------------------- TURKEY (8.3%) SOVEREIGN (8.3%) Citigroup Global Markets Holdings, Inc. (Turkish Lira Index Linked) Zero coupon, 2/23/06 1,250 1,556 Zero coupon, 2/23/06 710 864 Zero coupon, 2/23/06 560 721 Republic of Turkey 11.00%, 1/14/13 1,360 1,737 11.50%, 1/23/12 1,460 1,884 ---------------------------------------------------------------------------------------------- 6,762 ============================================================================================== UKRAINE (1.2%) SOVEREIGN (1.2%) Ukraine Government 5.33%, 8/5/09 (h)930 983 ---------------------------------------------------------------------------------------------- VENEZUELA (4.8%) SOVEREIGN (4.8%) Republic of Venezuela 8.50%, 10/8/14 $ 440 $ 467 9.25%, 9/15/27 520 550 9.375%, 1/13/34 790 838 10.75%, 9/19/13 1,690 2,028 ---------------------------------------------------------------------------------------------- 3,883 ============================================================================================== TOTAL DEBT INSTRUMENTS (COST $75,647) 78,130 ============================================================================================== NO. OF WARRANTS ---------------------------------------------------------------------------------------------- WARRANTS (0.0%) NIGERIA (0.0%) Central Bank of Nigeria, expiring 11/15/20 (a)(d)8,500 $ @-- ---------------------------------------------------------------------------------------------- VENEZUELA (0.0%) Republic of Venezuela Oil-Linked Payment Obligation, expiring 4/15/20 (a)2,700 @-- ---------------------------------------------------------------------------------------------- TOTAL WARRANTS (COST $ @--) @-- ============================================================================================== FACE AMOUNT (000) ---------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT (0.3%) REPURCHASE AGREEMENT (0.3%) J.P. Morgan Securities, Inc., 2.00%, dated 12/31/04, due 1/3/05, repurchase price $238 (COST $238) $ (f)238 238 ============================================================================================== TOTAL INVESTMENTS (96.1%) (COST $75,885) 78,368 ============================================================================================== OTHER ASSETS IN EXCESS OF LIABILITIES (3.9%) 3,178 ============================================================================================== NET ASSETS (100%) $ 81,546 ==============================================================================================
(a) Non-income producing security. (b) Issuer is in default. (d) Security was valued at fair value -- At December 31, 2004, the Portfolio held a fair valued security valued at less than $500, representing less than 0.05% of net assets. (e) 144A security -- certain conditions for public sale may exist. Unless otherwise noted, these securities are deemed to be liquid. (f) Represents the Portfolio's undivided interest in a joint repurchase agreement which has a total value of $1,018,656,000. The repurchase agreement was fully collateralized by U.S. government agency securities at the date of this portfolio of investments as follows: Federal Farm Credit Bank, 0.00% to 6.75%, due 2/28/05 to 8/15/13; Federal Home Loan Bank, 1.10% to 6.875%, due 4/15/05 to 10/28/24; Federal Home Loan Mortgage Corp., 2.00% to 6.51%, due 6/15/15 to 3/15/19; Federal National Mortgage Association, 1.75% to 8.20%, due 2/24/05 to 5/24/19; and Financial Assist Corp., 8.80%, due 6/10/05. The investment in the repurchase agreement is through participation in a joint account with affiliated parties pursuant to exemptive relief received by the Portfolio from the SEC. (h) Variable/Floating Rate Security -- interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on December 31, 2004. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 86 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) EMERGING MARKETS DEBT PORTFOLIO (n) Step Bond -- coupon rate increases in increments to maturity. Rate disclosed is as of December 31, 2004. Maturity date disclosed is the ultimate maturity date. @ Face Amount/Value is less than $500. PIK Payment-in-Kind. Income may be paid in additional securities or cash at the discretion of the issuer. FUTURES CONTRACTS: The Portfolio had the following futures contract(s) open at period end:
NET UNREALIZED NUMBER APPRECIATION OF VALUE EXPIRATION (DEPRECIATION) CONTRACTS (000) DATE (000) ------------------------------------------------------------ SHORT: U.S. 5 Year Treasury Note 136 14,896 Mar-05 $ 24 ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 87 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW MONEY MARKET PORTFOLIO The Money Market Portfolio seeks to maximize current income and preserve capital while maintaining high levels of liquidity. Investments in shares of the Portfolio are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Portfolio seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Portfolio. PERFORMANCE The seven day yield and seven day effective yield (which assumes an annualization of the current yield with all dividends reinvested) for the Portfolio as of December 31, 2004, were 1.96% and 1.98%, respectively. The yield quotation more closely reflects the current earnings of the Portfolio than the total return. As with all money market portfolios, the seven day yields are not necessarily indicative of future performance. FACTORS AFFECTING PERFORMANCE - During the year ended December 31, 2004, favorable economic trends began to appear. Revised gross domestic product (GDP) growth for the third quarter was 4.0%. Although this was below the fourth quarter of 2003 and the first quarter of 2004, it was stronger than the 3.3% rate posted in the second quarter of this year. Job growth (as measured by non-farm payrolls), which slowed in mid 2004, appeared to regain some momentum early in the third quarter. In addition, leading economic indicators turned positive in November, after posting five consecutive months of contraction. As a result, December consumer confidence rose to its highest level in five months, well above analysts' expectations. - The Federal Reserve Open Market Committee (the Fed) began its current tightening cycle at its June 30 meeting. The Fed has increased its target rate for federal funds a cumulative 125 basis points over five separate meetings to 2.25% as of the December meeting. The Fed's formal risk assessment was balanced, and it has stated that increases will continue at a "measured pace." Against this backdrop, money market fund yield levels have begun rising from record lows. MANAGEMENT STRATEGY - As of December 31, 2004, the Portfolio had net assets of $547 million. The average maturity of the Portfolio was 13 days. - In the face of steadily rising interest rates, we maintained a strategy of keeping the average maturity of the Portfolio short. This enabled us to better capitalize on interest rate increases. - The Portfolio seeks to maximize current income and preserve capital while maintaining liquidity by purchasing only high quality, very liquid money market securities. The Portfolio does not contain any derivative securities. EXPENSE EXAMPLES As a shareholder of the Portfolio, you incur ongoing costs, including management fees and other Portfolio expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the six-month period ended December 31, 2004 and held for the entire six-month period. ACTUAL EXPENSES The first line of the tables 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 tables below provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio'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 costs of investing in the Portfolio 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.
EXPENSES PAID ENDING ACCOUNT DURING PERIOD* BEGINNING VALUE JULY 1, 2004 -- ACCOUNT VALUE DECEMBER 31, DECEMBER 31, JULY 1, 2004 2004 2004 -------------------------------------------------------------------------------- CLASS A Actual $ 1,000.00 $ 1,006.56 $ 2.22 Hypothetical (5% average annual return before expenses) 1,000.00 1,022.92 2.24
* Expenses are equal to Class A annualized net expense ratios of 0.44%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). 88 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) MONEY MARKET PORTFOLIO GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS The following graph depicts the Portfolio's holdings by industry, as a percentage of total investments. Repurchase Agreements 38.6% International Banks 16.6% Asset Backed - Securities 7.7% Major Banks 4.6% Insurance 4.6% Asset Backed - Automotive 4.6% Financial Conglomerate 4.5% Asset Backed - Diversified 4.2% Asset Backed - Corporate 3.6% Asset Backed - Mortgage 3.6% Other* 7.4%
* Industries which do not appear in the top 10 industries and industries which represent less than 3% of total investments, if applicable, are included in the category labeled "Other". January 2005 89 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS MONEY MARKET PORTFOLIO
FACE AMOUNT VALUE (000) (000) ---------------------------------------------------------------------------------------------- CERTIFICATE OF DEPOSIT (4.6%) MAJOR BANKS (4.6%) Wells Fargo Bank NA, 2.32%, 1/14/05 (COST $25,000) $ 25,000 $ 25,000 ============================================================================================== COMMERCIAL PAPER (54.3%) ASSET BACKED -- AUTOMOTIVE (4.6%) New Center Asset Trust, 2.19%, 1/12/05 25,000 24,983 ---------------------------------------------------------------------------------------------- ASSET BACKED -- CORPORATE (3.7%) Variable Funding Capital, 2.08%, 1/10/05 (e)20,000 19,990 ---------------------------------------------------------------------------------------------- ASSET BACKED -- DIVERSIFIED (4.2%) CRC Funding LLC, 2.05%, 1/7/05 (e)23,000 22,992 ---------------------------------------------------------------------------------------------- ASSET BACKED -- MORTGAGE (3.7%) Sydney Capital Corp., 2.25%, 2/14/05 (e)20,000 19,945 ---------------------------------------------------------------------------------------------- ASSET BACKED -- SECURITIES (7.7%) Cancara Asset Securitization Ltd., 2.23%, 1/5/05 (e)22,000 21,994 Galaxy Funding, Inc., 2.07%, 1/28/05 (e)20,000 19,969 ---------------------------------------------------------------------------------------------- 41,963 ============================================================================================== COMPUTER HARDWARE (2.9%) International Business Machines Corp., 2.15%, 1/24/05 16,000 15,978 ---------------------------------------------------------------------------------------------- FINANCE -- CORPORATE (1.8%) CIT Group, Inc., 2.19%, 1/19/05 10,000 9,989 ---------------------------------------------------------------------------------------------- FINANCIAL CONGLOMERATE (4.6%) General Electric Capital Corp., 2.11%, 3/21/05 10,000 9,954 General Electric Capital Corp., 2.31%, 1/20/05 15,000 14,982 ---------------------------------------------------------------------------------------------- 24,936 ============================================================================================== INSURANCE (4.5%) USAA Capital Corp., 2.28%, 1/4/05 25,000 24,996 ---------------------------------------------------------------------------------------------- INTERNATIONAL BANKS (16.6%) Barclays U.S. Funding Corp., 2.26%, 2/22/05 25,000 24,919 Danske Corp., 2.35%, 1/4/05 16,000 15,997 Deutsche Bank Financial LLC, 2.32%, 1/11/05 25,000 24,984 UBS Finance (Delaware) LLC, 2.31%, 1/6/05 25,000 24,991 ---------------------------------------------------------------------------------------------- 90,891 ============================================================================================== TOTAL COMMERCIAL PAPER (COST $296,663) 296,663 ============================================================================================== DISCOUNT NOTE (2.7%) U.S. GOVERNMENT & AGENCY SECURITIES (2.7%) Federal Home Loan Bank, 2.06%, 1/14/05 (COST $14,989) 15,000 14,989 ============================================================================================== REPURCHASE AGREEMENTS (38.6%) Bear Stearns & Co., 2.29%, dated 12/31/04, due 1/3/05, repurchase price $107,220; fully collateralized by U.S. government and/or agency obligations with coupons of 2.97% - 4.84%, maturing from 9/1/19 - 1/1/42, valued at $109,346 107,200 107,200 UBS Finance Securities LLC 2.25%, dated 12/31/04, due 1/3/05, repurchase price $104,020; fully collateralized by U.S. government and/or agency obligations with coupons of 3.57% - 5.81%, maturing from 10/1/31 - 12/1/34, valued at $106,080 104,000 104,000 ---------------------------------------------------------------------------------------------- TOTAL REPURCHASE AGREEMENTS (COST $211,200) 211,200 ============================================================================================== TOTAL INVESTMENTS (100.2%) (COST $547,852) $ 547,852 ============================================================================================== LIABILITIES IN EXCESS OF OTHER ASSETS (-0.2%) (986) ============================================================================================== NET ASSETS (100%) $ 546,866 ==============================================================================================
(e) 144A security -- certain conditions for public sale may exist. Unless otherwise noted, these securities are deemed to be liquid. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 90 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW MUNICIPAL MONEY MARKET PORTFOLIO The Municipal Money Market Portfolio seeks to maximize current tax-exempt income and preserve capital. Investments in shares of the Portfolio are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Portfolio seeks to preserve its net asset value of $1.00 per share, it is possible to lose money by investing in the Portfolio. PERFORMANCE The seven-day yield and seven-day effective yield (assuming an annualized current yield with all dividends reinvested) for the Portfolio as of December 31, 2004, were 1.62% and 1.63%, respectively. The seven-day taxable-equivalent yield and the seven-day taxable-equivalent effective yield for the Portfolio as of December 31, 2004 (assuming the maximum Federal income tax rate of 35%) were 2.49 and 2.51%, respectively. The seven-day yields are not necessarily indicative of future performance. FACTORS AFFECTING PERFORMANCE - Tax-free money-market yields were dominated by typical seasonal events in the first half of 2004, as opposed to any shift in market expectations. Beginning in June, five consecutive increases to the Federal Funds target rate, and the anticipation of more to come, pushed short-term tax-exempt yields to their highest levels in two years. Subsequently, yields for both fixed-rate and variable-rate municipal money-market instruments registered further sharp increases. The Bond Buyer One Year Note Index, an indicator for the tax-free money market, increased from 1.60% to 2.08% between the end of June and the end of December. - At the same time, yields for daily and weekly variable-rate demand obligations (VRDOs) rose even more dramatically. Yields for weekly VRDOs increased from 1.05% in late June to 1.99% in late December. The year closed with daily and weekly VRDO yields at more attractive levels as the market faced its traditional seasonal cash outflows. MANAGEMENT STRATEGIES - Our asset allocation strategy heavily favored VRDOs and short-maturity commercial paper, and the Portfolio's weighted average maturity (WAM) moved lower. We were largely cautious in managing the Portfolio's fixed-rate investment during the period, tending to avoid the one-year segment of the money market in anticipation of further yield increases there. As a result, the Portfolio ended the period with a WAM somewhat lower than has historically been the case at this point in the year. The rising rate environment, coupled with existing municipal budgetary pressures, called for greater restraint in managing maturity. At the end of December, the Portfolio's average maturity was nine days. - We expect the pace of economic activity during 2005 to begin to reflect some improvement as the economy responds to stimulative monetary policy and fiscal conditions. Barring any significant geo-political activity in the world, we believe that consumer and business confidence should continue to improve, producing meaningful economic expansion. Such an economic environment, in our experience, normally leads to moderately higher levels of short-term interest rates, which could become more evident during the second half of 2005. EXPENSE EXAMPLES As a shareholder of the Portfolio, you incur ongoing costs, including management fees and other Portfolio expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the six-month period ended December 31, 2004 and held for the entire six-month period. ACTUAL EXPENSES The first line of the tables 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. 91 2004 ANNUAL REPORT December 31, 2004 INVESTMENT OVERVIEW (CONT'D) MUNICIPAL MONEY MARKET PORTFOLIO HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the tables below provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio'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 costs of investing in the Portfolio 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.
EXPENSES PAID ENDING ACCOUNT DURING PERIOD* BEGINNING VALUE JULY 1, 2004 -- ACCOUNT VALUE DECEMBER 31, DECEMBER 31, JULY 1, 2004 2004 2004 -------------------------------------------------------------------------------- CLASS A Actual $ 1,000.00 $ 1,005.05 $ 2.22 Hypothetical (5% average annual return before expenses) 1,000.00 1,022.92 2.24
* Expenses are equal to Class A annualized net expense ratios of 0.44%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). GRAPHIC PRESENTATION OF PORTFOLIO HOLDINGS The following graph depicts the Portfolio's holdings by industry, as a percentage of total investments. Commercial Paper 16.6% Daily Variable Rate Bonds 10.5% Weekly Variable Rate Bonds 72.9%
January 2005 92 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS MUNICIPAL MONEY MARKET PORTFOLIO
AMORTIZED COST VALUE (000) (000) ---------------------------------------------------------------------------------------------- TAX-EXEMPT INSTRUMENTS (104.4%) FIXED RATE INSTRUMENTS (17.4%) COMMERCIAL PAPER (17.4%) Burke County Development Authority, Georgia, Oglethorpe Power Corp., Ser. 1998 B (Ambac), 1.83%, 1/26/05 $ 7,000 $ 7,000 Burke County Development Authority, Georgia, Oglethorpe Power Corp., Ser. 1998 B (Ambac), 1.85%, 1/18/05 7,000 7,000 Jacksonville, Florida, Ser. A, 1.80%, 1/20/05 9,500 9,500 Jacksonville, Florida, Ser. A, 1.83%, 2/23/05 7,000 7,000 King County, Washington, Sewer, Ser. A, 1.83%, 1/24/05 5,000 5,000 Las Vegas Valley Water District, Nevada, Water, Ser. 2004 A, 1.82%, 1/25/05 6,000 6,000 Montgomery County Industrial Development Authority, Pennsylvania, PECO Energy Co., Ser. 1994 A, 1.84%, 1/19/05 8,400 8,400 Rochester, Minnesota, Mayo Foundation/Mayo Medical Center, Ser. 2001B, 1.88%, 1/13/05 5,000 5,000 San Antonio, Texas, Electric & Gas, Ser. 1995 A, 1.82%, 1/11/05 5,000 5,000 San Antonio, Texas, Electric & Gas, Ser. 1995 A, 1.82%, 1/21/05 5,000 5,000 San Antonio, Texas, Water System, Ser. 2001 A, 1.85%, 1/21/05 5,000 5,000 Texas Public Finance Authority, Unemployment Compensation, Ser. 2003 C-1, 1.80%, 1/19/05 5,000 5,000 Texas Tech University System, Ser. A, 1.85%, 1/18/05 3,256 3,256 ---------------------------------------------------------------------------------------------- 78,156 ============================================================================================== VARIABLE/FLOATING RATE INSTRUMENTS (87.0%) DAILY VARIABLE RATE BONDS (10.9%) Breckinridge County, Kentucky, Kentucky Association of Counties Leasing Trust, 2002 Ser. A, 2.20%, 2/1/32 2,395 2,395 California Health Facilities Financing Authority, Adventist Health System/West, Ser. 2002 B, 2.20%, 9/1/25 2,100 2,100 Collier County Health Facilities Authority, Florida, Cleveland Clinic Health System, Ser. 2003 C-1, 2.19%, 1/1/35 200 200 Cuyahoga County, Ohio, Cleveland Clinic Health System, Ser. 2004 B, 2.27%, 1/1/39 3,000 3,000 Harris County Health Facilities Development Corp., Texas, Methodist Hospital, Ser. 2002, 2.20%, 12/1/32 13,200 13,200 Illinois Health Facilities Authority, Northwestern Memorial Hospital, Subser. 2004 B-1, 2.19%, 8/15/38 3,600 3,600 Illinois Finance Authority, Northwestern Memorial Hospital, Ser. B-2, 2.15%, 8/15/38 1,100 1,100 Jackson County, Mississippi; Pollution Control Revenue Bonds, Chevron USA, Inc. Project, Ser. 1993, 2.15%, 6/1/23 100 100 Los Angeles Department of Water & Power, California, Water System, 2001 Subser. B-2, 2.15%, 7/1/35 800 800 Metropolitan Government of Nashville & Davidson County Health & Educational Facilities Board, Tennessee, Vanderbilt University, Ser. 2002 B, 2.15%, 10/1/32 $ 5,675 $ 5,675 Mount Vernon, Indiana, Pollution Control & Solid Waste Disposal General Electric Co., Ser. 2004, 2.10%, 12/1/14 5,000 5,000 New York City Municipal Water Finance Authority, Ser. F-1, 2.20%, 6/15/33 250 250 New York City Transitional Finance Authority, NY, Recovery, Fiscal 2003 Ser. 1, 2.20%, 11/1/22 500 500 Salt Lake County, Utah, Service Station Holdings, British Petroleum, Ser. 1994 B, 2.19%, 8/1/07 3,000 3,000 Uinta County, Wyoming, Chevron USA, Inc., Ser. 1993, 2.15%, 8/15/20 1,100 1,100 University of Missouri, Ser. 2000 B, 2.19%, 11/1/30 400 400 University of Missouri, Systems Facilities, Ser. A, 2.19%, 11/1/31 2,055 2,055 Ward County, North Dakota, Trinity Obligated Group, Ser. 2002 A, 2.27%, 7/1/29 4,155 4,155 Weber County, Utah, IHC Health Services, Inc., Ser 2000 B, 2.20%, 2/15/32 600 600 ---------------------------------------------------------------------------------------------- 49,230 ============================================================================================== WEEKLY VARIABLE RATE BONDS (76.1%) American Public Energy Agency, Nebraska, National Public Gas Agency, 2003 Ser. A, 2.015%, 2/1/14 16,100 16,100 Arizona Health Facilities Authority, Northern Arizona Healthcare, Ser. 1996 B (MBIA), 2.00%, 10/1/26 6,850 6,850 Bexar County Housing Finance Corp., Texas, Multi-Family PT-2082, 2.03%, 1/20/10 1,000 1,000 Broward County Health Facilities Authority, Florida, Henderson Mental Health Center, Ser. 2004, 2.05%, 7/1/29 5,100 5,100 California, Ser. A-9, 1.97%, 5/1/34 3,400 3,400 Centerra Metropolitan District No. 1, Colorado, Ser. 2004, 2.02%, 12/1/29 7,100 7,100 Central Washington University Housing System, Washington, Ser. 2002 ROCs R-2121 (FGIC), 2.04%, 5/1/21 4,195 4,195 Charlotte, North Carolina, Convention Facility, Ser. 2003 B COPs, 2.05%, 12/1/21 9,950 9,950 Chicago Board of Education, Illinois, Ser. 2000 B (FSA), 2.00%, 3/1/32 3,110 3,110 Chicago Board of Education, Illinois, Ser. 2004 D (FSA), 2.01%, 3/1/23 7,030 7,030 Chicago, Illinois, Ser. 1997, 1.95%, 1/1/12 990 990 Clarksville Public Building Authority, Tennessee, Pooled Financing, Ser. 1994, 2.00%, 6/1/24 4,310 4,310 Cobb County Housing Authority, Georgia, Tamarron Apartments Project, Ser. 2003, 2.00%, 3/1/24 4,820 4,820 Colorado Health Facilities Authority, Catholic Health Initiatives, Ser. 2004 B-4, 1.95%, 3/1/23 15,100 15,100 Dayton City School District, Ohio, Ser. 2003-A P- FLOATs SG-173 (FGIC), 2.02%, 12/1/31 7,530 7,530 DeKalb County Housing Authority, Georgia, Multifamily Housing Post Brook, Ser. 1995, 2.00%, 6/1/25 4,000 4,000
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 93 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) MUNICIPAL MONEY MARKET PORTFOLIO
AMORTIZED COST VALUE (000) (000) ---------------------------------------------------------------------------------------------- VARIABLE/FLOATING RATE INSTRUMENTS (CONT'D) WEEKLY VARIABLE RATE BONDS (CONT'D) Denver Urban Renewal Authority, Colorado, Stapleton Senior Tax Increment, Ser. PT-999, 2.08%, 10/07/06 $ 3,000 $ 3,000 Dyer, Indiana, Regency Place of Dyer, Ser. 1992 A TOBs (FHA), 2.17%, 8/1/12 2,655 2,655 Fulton County Development Authority, Georgia, Morehouse College, Ser. 1997, 1.99%, 8/1/17 3,010 3,010 Georgia, PUTTERs, Ser. 440, 2.01%, 5/1/10 2,995 2,995 Hamilton County, Ohio, Twin Towers and Twin Lakes, Ser. 2003 A, 2.02%, 7/1/23 3,500 3,500 Houston, Texas, Combined Utility System, MERLOTS Ser. C-13 (MBIA), 2.06%, 5/15/25 2,995 2,995 Houston, Texas, Combined Utility System, MERLOTS Ser. C-17 (MBIA), 2.06%, 5/15/26 3,000 3,000 Illinois Finance Authority, Northwestern University, Ser. 2004 B, 1.97%, 12/1/34 8,500 8,500 Illinois Housing Development Authority, Village Center Development, Ser. 2004, 1.99%, 3/1/20 7,000 7,000 Illinois, PUTTERs, Ser. 409, 2.03%, 3/1/12 1,990 1,990 Indiana Transportation Finance Authority, Highway, Ser. CDC 2004-5 (FGIC), 2.03%, 12/1/18 2,770 2,770 Indiana Transportation Finance Authority, MERLOTs Ser. B-21 (FGIC), 2.06%, 12/1/22 2,100 2,100 Jackson Energy Authority, Tennessee, Water System, Ser. 2002 (FSA), 2.00%, 12/1/23 5,210 5,210 JEA, Florida, Water & Sewer System, PUTTERS, Ser. 408 (FGIC), 2.03%, 10/1/11 2,715 2,715 Kansas Department of Transportation, Highway, Ser. 2004 C-4, 1.95%, 9/1/24 18,600 18,600 Louisiana Public Facilities Authority, College & University Equipment, Ser. A (FGIC), 2.00%, 9/1/10 4,400 4,400 Massachusetts Bay Transportation Authority, Ser. 2000, 1.95%, 3/1/30 4,750 4,750 Massachusetts Development Finance Agency, The Institute of Contemporary Art, Ser. 2004 A, 1.99%, 7/1/34 7,000 7,000 Miami-Dade County School Board, Florida, COPs Floater- TRs, Ser. 2004 L29 (MBIA), 2.05%, 8/1/27 6,285 6,285 Minneapolis, Minnesota, Guthrie Theater on the River, Ser. 2003 A, 2.00%, 10/1/23 7,000 7,000 Mississippi Hospital Equipment & Facilities Authority, Baptist Memorial Health Care, Ser. PA- 1276, 2.04%, 9/1/24 13,125 13,125 Missouri State Health & Educational Facilities Authority, Stowers Institute, Ser. 2002 (MBIA), 2.00%, 7/1/36 6,700 6,700 Mobile Industrial Development Board, Alabama, Holnam Inc., Ser. 1999 B, 1.98%, 6/1/32 1,700 1,700 Municipal Securities Pooled Trust Receipts, Various States, Ser. 2004 SG P-18, 2.14%, 1/1/35 5,545 5,545 Nebraska Public Power District, Ser. 2003 A Eagle #20041016 Class A (Ambac), 2.04%, 1/1/35 5,335 5,335 New York City Industrial Development Agency, Bryant Park LLC, Ser. A, 2.03%, 11/1/39 5,000 5,000 North Carolina Capital Facilities Finance Agency, Barton College, Ser. 2004, 2.02%, 7/1/19 2,000 2,000 North Carolina Medical Care Commission, Firsthealth of the Carolinas, Ser. 2002, 1.97%, 10/1/32 $ 9,500 $ 9,500 North Carolina Medical Care Commission, Mission- St. Joseph's Health System, Ser. 2003, 2.05%, 10/1/18 6,135 6,135 North East Independent School District, Texas, PUTTERs, Ser. 393 (PSFG), 2.03%, 2/1/12 5,790 5,790 Orange County Industrial Development Authority, Florida, Independent Blood & Tissue Services of Florida, Ser. 2002, 2.00%, 10/1/27 3,290 3,290 Palm Beach County, Florida, Hospice of Palm Beach County, Inc., Ser. 2001, 2.00%, 10/1/31 4,600 4,600 Pennsylvania Turnpike Commission, 2002 Ser. A-2, 2.00%, 12/1/30 13,000 13,000 Private Colleges & Universities Authority, Georgia, Emory University, Ser. 2001 B, 1.95%, 9/1/33 4,610 4,610 Rhode Island Convention Center Authority, Refunding, Ser. 2001 A (MBIA), 1.95%, 5/15/27 10,300 10,300 Sayre Health Care Facilities Authority, Pennsylvania, VHA of Pennsylvania, Inc., Capital Asset Financing, Ser 1985 B (AMBAC), 2.02%, 12/1/20 1,400 1,400 South Carolina Jobs Economic Development Authority, Burroughs & Chapin Business Park, Ser. 2002, 2.05%, 5/1/32 700 700 University of Texas, Permanent University Fund, PUTTERs, Ser. 411, 2.03%, 1/1/12 2,845 2,845 Utah County, Utah, IHC Health Services, Inc., Ser. 2002 B, 2.00%, 5/15/35 1,500 1,500 Virginia Public Building Authority, ROCs R-6027, 2.04%, 8/1/14 2,000 2,000 Washington County Authority, Pennsylvania, The Trustees of the University of Pennsylvania, Ser. 2004, 1.96%, 7/1/34 13,300 13,300 Williamsburg, Kentucky, Cumberland College, Ser. 2002, 1.99%, 9/1/32 9,345 9,345 Wilmot Union High School District, Wisconsin, Ser. PT- 2275 (FSA), 2.03%, 3/1/23 5,205 5,205 York County School District No 4, South Carolina, Fort Mill, Ser. 2004 F TOCs, 2.03%, 4/16/12 5,870 5,870 Yorkville United City Special Service Area 2004-106, Illinois, Ser. 2004, 2.01%, 3/1/34 3,000 3,000 ---------------------------------------------------------------------------------------------- 341,855 ============================================================================================== 391,085 ============================================================================================== TOTAL TAX-EXEMPT INSTRUMENTS (COST $469,241) 469,241 ============================================================================================== TOTAL INVESTMENTS (104.4%) (COST $469,241) 469,241 ============================================================================================== LIABILITIES IN EXCESS OF OTHER ASSETS (-4.4%) (19,923) ============================================================================================== NET ASSETS (100%) $ 449,318 ==============================================================================================
AMBAC Ambac Assurance Corp. FGIC Financial Guaranty Insurance Co. FHA Federal Housing Administration FSA Financial Security Assurance Inc. MBIA MBIA Insurance Corp. PSFG Permanent School Fund Guaranteed THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 94 2004 ANNUAL REPORT December 31, 2004 PORTFOLIO OF INVESTMENTS (CONT'D) MUNICIPAL MONEY MARKET PORTFOLIO SUMMARY OF TAX-EXEMPT INSTRUMENTS BY STATE (UNAUDITED)
AMORTIZED PERCENT COST OF NET STATE (000) ASSETS ------------------------------------------------------------------------------- Texas $ 52,086 11.6% Florida 38,690 8.6 Illinois 36,320 8.1 Pennsylvania 36,100 8.0 Georgia 33,435 7.4 North Carolina 27,585 6.1 Colorado 25,200 5.6 Nebraska 21,435 4.8 Kansas 18,600 4.1 Tennessee 15,195 3.4 Ohio 14,030 3.1 Mississippi 13,225 2.9 Indiana 12,525 2.8 Minnesota 12,000 2.7 Massachusetts 11,750 2.6 Kentucky 11,740 2.6 Rhode Island 10,300 2.3 Washington 9,195 2.1 Missouri 9,155 2.0 Arizona 6,850 1.5 South Carolina 6,570 1.5 California 6,300 1.4 Nevada 6,000 1.3 New York 5,750 1.3 Delaware 5,545 1.2 Wisconsin 5,205 1.2 Utah 5,100 1.1 Louisiana 4,400 1.0 North Dakota 4,155 0.9 Virginia 2,000 0.5 Alabama 1,700 0.4 Wyoming 1,100 0.3 ------------------------------------------------------------------------------- $ 469,241 104.4% ===============================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 95 2004 ANNUAL REPORT December 31, 2004 STATEMENTS OF ASSETS AND LIABILITIES
ACTIVE INTERNATIONAL EMERGING EUROPEAN GLOBAL ALLOCATION MARKETS REAL ESTATE FRANCHISE PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO (000) (000) (000) (000) -------------------------------------------------------------------------------------------------------------------------- ASSETS: Investments in Securities of Unaffiliated Issuers, at Cost: $ 561,068 $ 1,090,651 $ 35,616 $ 45,141 Investment in Security of Affiliated Issuer, at Cost: -- 3,415 -- -- Foreign Currency, at Cost: 6,765 2,093 7 33 ========================================================================================================================== Investments in Securities of Unaffiliated Issuers, at Value:(1) 636,355 1,389,075 51,380 62,938 Investment in Security of Affiliated Issuer, at Value: -- 7,712 -- -- Foreign Currency, at Value: 6,877 2,098 7 33 Cash 1 -- 1 @-- Due from Broker 8,192 -- -- -- Receivable for Portfolio Shares Sold 442 4,405 85 -- Receivable for Investments Sold -- 2,027 -- -- Unrealized Appreciation on Foreign Currency Exchange Contracts 2,757 -- -- -- Foreign Withholding Tax Reclaim Receivable 45 411 44 119 Dividends Receivable 546 2,636 51 129 Interest Receivable 4 112 @-- @-- Other Assets 16 33 1 2 -------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS 655,235 1,408,509 51,569 63,221 -------------------------------------------------------------------------------------------------------------------------- LIABILITIES: Collateral on Securities Loaned, at Value (66,163) (69,758) -- -- Unrealized Depreciation on Foreign Currency Exchange Contracts (1,606) (4,664) -- (869) Payable for Investments Purchased (2,908) (1,555) -- (55) Payable for Portfolio Shares Redeemed (149) (7,138) (22) -- Investment Advisory Fees Payable (808) (3,607) (73) (105) Bank Overdraft Payable -- (124) -- -- Payable for Administration Fees (40) (89) (4) (5) Payable for Custodian Fees (36) (172) (11) (6) Directors' Fees and Expenses Payable (17) (69) (1) (1) Distribution Fees, Class B (2) (39) (1) (2) Deferred Country Taxes -- (666) -- -- Other Liabilities (32) (75) (10) (14) -------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES (71,761) (87,956) (122) (1,057) -------------------------------------------------------------------------------------------------------------------------- NET ASSETS $ 583,474 $ 1,320,553 $ 51,447 $ 62,164 ========================================================================================================================== NET ASSETS CONSIST OF: Paid-in Capital $ 603,631 $ 1,238,996 $ 36,278 $ 44,060 Undistributed (Distributions in Excess of) Net Investment Income 2,454 (3,455) (293) 287 Accumulated Net Realized Gain (Loss) (100,301) (212,177) (308) 863 Unrealized Appreciation (Depreciation) on: Investments 75,287 301,780* 15,763 17,797 oreign Currency Exchange Contracts and Translations 1,292 (4,591) 7 (843) Futures Contracts 1,111 -- -- -- ========================================================================================================================== NET ASSETS $ 583,474 $ 1,320,553 $ 51,447 $ 62,164 ========================================================================================================================== CLASS A: NET ASSETS $ 580,851 $ 1,249,299 $ 50,620 $ 58,223 SHARES OUTSTANDING $0.01 par value shares of beneficial interest (500,000,000 shares authorized) (not in 000's) 53,017,626 65,394,891 2,306,303 3,849,941 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 10.96 $ 19.10 $ 21.95 $ 15.12 ========================================================================================================================== CLASS B: NET ASSETS $ 2,623 $ 71,254 $ 827 $ 3,941 SHARES OUTSTANDING $0.01 par value shares of beneficial interest (500,000,000 shares authorized) (not in 000's) 235,700 3,769,982 37,525 262,568 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 11.13 $ 18.90 $ 22.04 $ 15.01 ========================================================================================================================== (1) INCLUDING: Repurchase Agreements, at Value: $ 78,384 $ 51,370 $ 2,048 $ 2,248 Securities on Loan, at Value: 62,888 67,299 -- -- ========================================================================================================================== Net of $941 Deferred Country Tax.
@ Amount is less than $500. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 96 2004 ANNUAL REPORT December 31, 2004 STATEMENTS OF ASSETS AND LIABILITIES
GLOBAL VALUE INTERNATIONAL INTERNATIONAL INTERNATIONAL EQUITY EQUITY MAGNUM SMALL CAP PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO (000) (000) (000) (000) ----------------------------------------------------------------------------------------------------------------- ASSETS: Investments in Securities of Unaffiliated Issuers, at Cost: $ 82,572 $ 7,417,903 $ 88,177 $ 916,740 Foreign Currency, at Cost: -- 190,589 55 5 ================================================================================================================= Investments in Securities of Unaffiliated Issuers, at Value:(1) 99,258 9,139,947 105,371 1,277,037 Foreign Currency, at Value: -- 192,695 56 5 Cash 7 1 @-- @-- Due from Broker -- -- 1,953 -- Receivable for Portfolio Shares Sold 63 25,994 42 1,207 Receivable for Investments Sold -- 634 5 352 Unrealized Appreciation on Foreign Currency Exchange Contracts -- 2,523 540 @-- Foreign Withholding Tax Reclaim Receivable 61 1,163 55 910 Dividends Receivable 133 7,722 86 1,238 Interest Receivable @-- 3 @-- @-- Other Assets 3 234 3 39 ----------------------------------------------------------------------------------------------------------------- TOTAL ASSETS 99,525 9,370,916 108,111 1,280,788 ----------------------------------------------------------------------------------------------------------------- LIABILITIES: Collateral on Securities Loaned, at Value -- (1,058,940) (10,703) -- Unrealized Depreciation on Foreign Currency Exchange Contracts -- (3,375) (407) (4) Payable for Investments Purchased -- (1,228) -- (1,019) Payable for Portfolio Shares Redeemed (189) (16,086) (17) (449) Investment Advisory Fees Payable (175) (15,531) (153) (2,984) Payable for Administration Fees (8) (567) (8) (89) Payable for Custodian Fees (8) (315) (17) (77) Directors' Fees and Expenses Payable (8) (199) (10) (18) Distribution Fees, Class B (18) (593) (1) -- Other Liabilities (16) (198) (28) (65) ----------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES (422) (1,097,032) (11,344) (4,705) ----------------------------------------------------------------------------------------------------------------- NET ASSETS $ 99,103 $ 8,273,884 $ 96,767 $ 1,276,083 ================================================================================================================= NET ASSETS CONSIST OF: Paid-in Capital $ 84,515 $ 6,532,781 $ 93,268 $ 896,082 Undistributed (Distributions in Excess of) Net Investment Income (8) (6,123) 257 (2,567) Accumulated Net Realized Gain (Loss) (2,103) 23,504 (14,228) 22,099 Unrealized Appreciation (Depreciation) on: Investments 16,686 1,722,044 17,194 360,297 Foreign Currency Exchange Contracts and Translations 13 1,678 146 172 Futures Contracts -- -- 130 -- ================================================================================================================= NET ASSETS $ 99,103 $ 8,273,884 $ 96,767 $ 1,276,083 ================================================================================================================= CLASS A: NET ASSETS $ 68,505 $ 7,200,606 $ 94,162 $ 1,276,083 SHARES OUTSTANDING $0.01 par value shares of beneficial interest (500,000,000 shares authorized) (not in 000's) 3,846,584 343,072,956 7,956,605 50,818,493 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 17.81 $ 20.99 $ 11.83 $ 25.11 ================================================================================================================= CLASS B: NET ASSETS $ 30,598 $ 1,073,278 $ 2,605 $ -- SHARES OUTSTANDING $0.01 par value shares of beneficial interest (500,000,000 shares authorized) (not in 000's) 1,734,260 51,470,006 220,665 -- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 17.64 $ 20.85 $ 11.80 $ -- ================================================================================================================= (1) INCLUDING: Repurchase Agreements, at Value: $ 3,766 $ 55,914 $ 5,973 $ 3,389 Securities on Loan, at Value: -- 1,006,675 10,169 -- =================================================================================================================
@ Amount is less than $500. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 97 2004 ANNUAL REPORT December 31, 2004 STATEMENTS OF ASSETS AND LIABILITIES
EQUITY FOCUS SMALL COMPANY U.S. REAL GROWTH EQUITY GROWTH ESTATE PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO (000) (000) (000) (000) ----------------------------------------------------------------------------------------------------------------------------------- ASSETS: Investments in Securities of Unaffiliated Issuers, at Cost: $ 683,355 $ 55,015 $ 1,155,878 $ 771,955 =================================================================================================================================== Investments in Securities of Unaffiliated Issuers, at Value:(1) 760,462 61,081 1,377,829 1,244,246 Cash 1 1 1,943 233 Receivable for Portfolio Shares Sold 667 51 2,440 2,201 Receivable for Investments Sold 37,801 322 1,473 4,200 Dividends Receivable 322 19 111 6,706 Interest Receivable 1 @-- 3 1 Other Assets 26 2 35 36 ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS 799,280 61,476 1,383,834 1,257,623 ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES: Payable for Investments Purchased (8,118) -- (5,026) (1,880) Payable for Portfolio Shares Redeemed (32,765) -- (10,209) (6,317) Investment Advisory Fees Payable (1,126) (110) (3,033) (2,292) Payable for Administration Fees (58) (5) (93) (87) Payable for Custodian Fees (11) (3) (13) (10) Directors' Fees and Expenses Payable (46) (8) (12) (21) Distribution Fees, Class B (133) (5) (405) (80) Other Liabilities (33) (29) (34) (38) ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES (42,290) (160) (18,825) (10,725) ----------------------------------------------------------------------------------------------------------------------------------- NET ASSETS $ 756,990 $ 61,316 $ 1,365,009 $ 1,246,898 =================================================================================================================================== NET ASSETS CONSIST OF: Paid-in Capital $ 797,087 $ 87,821 $ 1,171,895 $ 739,534 Undistributed (Distributions in Excess of) Net Investment Income 894 90 -- (21) Accumulated Net Investment Loss -- -- (134) -- Accumulated Net Realized Gain (Loss) (118,098) (32,661) (28,703) 35,094 Unrealized Appreciation (Depreciation) on: Investments 77,107 6,066 221,951 472,291 =================================================================================================================================== NET ASSETS $ 756,990 $ 61,316 $ 1,365,009 $ 1,246,898 =================================================================================================================================== CLASS A: NET ASSETS $ 554,097 $ 52,757 $ 651,276 $ 1,097,718 SHARES OUTSTANDING $0.01 par value shares of beneficial interest (500,000,000 shares authorized) (not in 000's) 32,817,608 4,191,468 52,101,905 47,300,320 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 16.88 $ 12.59 $ 12.50 $ 23.21 =================================================================================================================================== CLASS B: NET ASSETS $ 202,893 $ 8,559 $ 713,733 $ 149,180 SHARES OUTSTANDING $0.01 par value shares of beneficial interest (500,000,000 shares authorized) (not in 000's) 12,168,487 693,675 59,374,837 6,474,615 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 16.67 $ 12.34 $ 12.02 $ 23.04 =================================================================================================================================== (1) INCLUDING: Repurchase Agreements, at Value: $ 10,639 $ 1,175 $ 57,239 $ 17,343 ===================================================================================================================================
@ Amount is less than $500. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 98 2004 ANNUAL REPORT December 31, 2004 STATEMENTS OF ASSETS AND LIABILITIES
EMERGING MUNICIPAL MARKETS MONEY MONEY VALUE EQUITY DEBT MARKET MARKET PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO (000) (000) (000) (000) ----------------------------------------------------------------------------------------------------------------------------------- ASSETS: Investments in Securities of Unaffiliated Issuers, at Cost: $ 146,443 $ 75,885 $ 547,852 $ 469,241 Foreign Currency, at Cost: -- 13 -- -- =================================================================================================================================== Investments in Securities of Unaffiliated Issuers, at Value:(1) 165,857 78,368 547,852 469,241 Foreign Currency, at Value: -- 15 -- -- Cash 1 1 31 11 Due from Broker -- 466 -- -- Receivable for Portfolio Shares Sold 36 74 -- -- Receivable for Investments Sold 357 1,613 -- 120 Dividends Receivable 191 -- -- -- Interest Receivable @-- 1,433 21 972 Other Assets 6 2 19 16 ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS 166,448 81,972 547,923 470,360 ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES: Payable for Investments Purchased -- (259) -- (20,263) Payable for Portfolio Shares Redeemed (29) -- -- -- Dividends Declared -- -- (465) (308) Investment Advisory Fees Payable (203) (134) (430) (344) Payable for Administration Fees (12) (7) (26) (22) Payable for Custodian Fees (5) (5) (4) @-- Directors' Fees and Expenses Payable (10) (7) (103) (57) Distribution Fees, Class B (44) @-- -- -- Other Liabilities (18) (14) (29) (48) ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES (321) (426) (1,057) (21,042) ----------------------------------------------------------------------------------------------------------------------------------- NET ASSETS $ 166,127 $ 81,546 $ 546,866 $ 449,318 =================================================================================================================================== NET ASSETS CONSIST OF: Paid-in Capital $ 153,104 $ 165,480 $ 546,836 $ 449,299 Undistributed (Distributions in Excess of) Net Investment Income (10) (503) 30 19 Accumulated Net Realized Gain (Loss) (6,381) (85,940) @-- @-- Unrealized Appreciation (Depreciation) on: Investments 19,414 2,483 -- -- Foreign Currency Translations -- 2 -- -- Futures Contracts -- 24 -- -- =================================================================================================================================== NET ASSETS $ 166,127 $ 81,546 $ 546,866 $ 449,318 =================================================================================================================================== CLASS A: NET ASSETS $ 90,938 $ 81,109 $ 546,866 $ 449,318 SHARES OUTSTANDING $0.01 par value shares of beneficial interest (500,000,000 shares authorized for Value Equity Portfolio and Emerging Market Debt Portfolio) (4,000,000,000 shares authorized for Money Market Portfolio and Municipal Money Market Portfolio) (not in 000's) 8,645,567 22,275,638 547,012,269 449,299,194 NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 10.52 $ 3.64 $ 1.00 $ 1.00 =================================================================================================================================== CLASS B: NET ASSETS $ 75,189 $ 437 $ -- $ -- SHARES OUTSTANDING $0.01 par value shares of beneficial interest (unlimited number of shares authorized) (not in 000's) 7,151,159 117,351 -- -- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 10.51 $ 3.72 $ -- $ -- =================================================================================================================================== (1) INCLUDING: Repurchase Agreements, at Value: $ 6,857 $ 238 $ 211,200 $ -- ===================================================================================================================================
@ Amount is less than $500. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 99 2004 ANNUAL REPORT December 31, 2004 STATEMENTS OF OPERATIONS For the Year Ended December 31, 2004
ACTIVE EUROPEAN GLOBAL INTERNATIONAL EMERGING REAL GLOBAL VALUE ALLOCATION MARKETS ESTATE FRANCHISE EQUITY PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO (000) (000) (000) (000) (000) ------------------------------------------------------------------------------------------------------------------------------ INVESTMENT INCOME: Dividends from Securities of Unaffiliated Issuers $ 9,176 $ 26,691 $ 1,153 $ 2,083 $ 2,131 Dividends from Affiliated Issuer -- 572 -- -- -- Interest 1,081 2,619 23 28 58 Less: Foreign Taxes Withheld (990) (1,732) (147) (179) (129) ------------------------------------------------------------------------------------------------------------------------------ Total Investment Income 9,267 28,150 1,029 1,932 2,060 ------------------------------------------------------------------------------------------------------------------------------ EXPENSES: Investment Advisory Fees (Note B) 2,901 13,384 269 548 692 Administration Fees (Note C) 622 1,509 51 103 130 Custodian Fees (Note E) 239 1,085 74 43 46 Directors' Fees and Expenses 8 24 1 1 2 Bank Overdraft Expense @-- 21 @-- 4 @-- Professional Fees 48 138 25 25 34 Shareholder Reporting Fees 93 122 5 31 9 Distribution Fees on Class B Shares (Note D) 9 142 3 9 75 Other Expenses 86 85 39 42 46 ------------------------------------------------------------------------------------------------------------------------------ Total Expenses 4,006 16,510 467 806 1,034 ------------------------------------------------------------------------------------------------------------------------------ Waiver of Investment Advisory Fees (Note B) (424) -- (127) (109) (68) ------------------------------------------------------------------------------------------------------------------------------ Net Expenses 3,582 16,510 340 697 966 ------------------------------------------------------------------------------------------------------------------------------ NET INVESTMENT INCOME (LOSS) 5,685 11,640 689 1,235 1,094 ------------------------------------------------------------------------------------------------------------------------------ REALIZED GAIN (LOSS): Investments Sold 10,584 123,143* 3,825 7,856 5,902 Foreign Currency Transactions 5,695 (610) 2 (811) 36 Futures Contracts 4,921 -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------ Net Realized Gain (Loss) 21,200 122,533 3,827 7,045 5,938 ------------------------------------------------------------------------------------------------------------------------------ CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION): Investments 51,179 112,023** 10,115 725 4,960 Foreign Currency Exchange Contracts and Translations 165 (4,597) (24) (409) (29) Futures Contracts (259) -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------ Net Change in Unrealized Appreciation (Depreciation) 51,085 107,426 10,091 316 4,931 ------------------------------------------------------------------------------------------------------------------------------ TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 72,285 229,959 13,918 7,361 10,869 ------------------------------------------------------------------------------------------------------------------------------ Net Increase (Decrease) in Net Assets Resulting from Operations $ 77,970 $ 241,599 $ 14,607 $ 8,596 $ 11,963 ==============================================================================================================================
@ Amount is less than $500. * Net of Country Taxes of $(252). ** Net of Decrease in Deferred Country Tax Accrual of $988. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 100 2004 ANNUAL REPORT December 31, 2004 STATEMENTS OF OPERATIONS For the Year Ended December 31, 2004
INTERNATIONAL INTERNATIONAL INTERNATIONAL EQUITY FOCUS EQUITY MAGNUM SMALL CAP GROWTH EQUITY PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO (000) (000) (000) (000) (000) ------------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from Securities of Unaffiliated Issuers $ 189,180 $ 2,002 $ 26,347 $ 10,944 $ 857 Interest 6,268 131 559 155 20 Less: Foreign Taxes Withheld (20,916) (217) (2,969) (11) (1) ------------------------------------------------------------------------------------------------------------------------------- Total Investment Income 174,532 1,916 23,937 11,088 876 ------------------------------------------------------------------------------------------------------------------------------- EXPENSES: Investment Advisory Fees (Note B) 56,800 694 10,377 4,807 514 Administration Fees (Note C) 9,921 127 1,529 1,167 96 Custodian Fees (Note E) 1,890 135 491 69 20 Directors' Fees and Expenses 120 3 16 18 2 Bank Overdraft Expense 2 1 1 2 1 Professional Fees 211 27 90 48 29 Shareholder Reporting Fees 665 34 118 144 11 Distribution Fees on Class B Shares (Note D) 2,110 5 -- 523 21 Other Expenses 293 48 77 85 39 ------------------------------------------------------------------------------------------------------------------------------- Total Expenses 72,012 1,074 12,699 6,863 733 ------------------------------------------------------------------------------------------------------------------------------- Waiver of Investment Advisory Fees (Note B) -- (199) (138) -- (69) ------------------------------------------------------------------------------------------------------------------------------- Net Expenses 72,012 875 12,561 6,863 664 ------------------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 102,520 1,041 11,376 4,225 212 ------------------------------------------------------------------------------------------------------------------------------- REALIZED GAIN (LOSS): Investments Sold 626,725 7,089 110,193 77,504 2,863 Foreign Currency Transactions 42,185 976 42 -- -- Futures Contracts -- 456 -- -- -- ------------------------------------------------------------------------------------------------------------------------------- Net Realized Gain (Loss) 668,910 8,521 110,235 77,504 2,863 ------------------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION): Investments 608,282 5,830 198,546 (18,972) 884 Foreign Currency Exchange Contracts and Translations (29,655) (243) (126) -- -- Futures Contracts -- (132) -- -- -- ------------------------------------------------------------------------------------------------------------------------------- Net Change in Unrealized Appreciation (Depreciation) 578,627 5,455 198,420 (18,972) 884 ------------------------------------------------------------------------------------------------------------------------------- TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 1,247,537 13,976 308,655 58,532 3,747 ------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations $ 1,350,057 $ 15,017 $ 320,031 $ 62,757 $ 3,959 ===============================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 101 2004 ANNUAL REPORT December 31, 2004 STATEMENTS OF OPERATIONS For the Year Ended December 31, 2004
SMALL EMERGING COMPANY U.S. REAL VALUE MARKETS GROWTH ESTATE EQUITY DEBT PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO (000) (000) (000) (000) ---------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from Securities of Unaffiliated Issuers $ 2,731 $ 31,000 $ 3,456 $ -- Interest 457 320 101 5,560 Less: Foreign Taxes Withheld -- (193) (13) -- ---------------------------------------------------------------------------------------------------------------------- Total Investment Income 3,188 31,127 3,544 5,560 ---------------------------------------------------------------------------------------------------------------------- EXPENSES: Investment Advisory Fees (Note B) 9,794 8,269 890 499 Administration Fees (Note C) 1,381 1,456 259 98 Custodian Fees (Note E) 81 57 29 26 Directors' Fees and Expenses 14 17 4 2 Bank Overdraft Expense 3 4 1 2 Professional Fees 92 48 34 38 Shareholder Reporting Fees 168 153 49 7 Distribution Fees on Class B Shares (Note D) 1,434 239 176 1 Other Expenses 100 105 55 38 ---------------------------------------------------------------------------------------------------------------------- Total Expenses 13,067 10,348 1,497 711 ---------------------------------------------------------------------------------------------------------------------- Waiver of Investment Advisory Fees (Note B) (628) -- (72) (22) ---------------------------------------------------------------------------------------------------------------------- Net Expenses 12,439 10,348 1,425 689 ---------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) (9,251) 20,779 2,119 4,871 ---------------------------------------------------------------------------------------------------------------------- REALIZED GAIN (LOSS): Investments Sold 94,642 78,698 17,231 782 Future Contracts -- -- -- (107) ---------------------------------------------------------------------------------------------------------------------- Net Realized Gain (Loss) 94,642 78,698 17,231 675 ---------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION): Investments 111,273 245,206 1,949 (280) Foreign Currency Exchange Contracts and Translations -- -- -- 2 Futures Contracts -- -- -- 202 ---------------------------------------------------------------------------------------------------------------------- Net Change in Unrealized Appreciation (Depreciation) 111,273 245,206 1,949 (76) ---------------------------------------------------------------------------------------------------------------------- TOTAL NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 205,915 323,904 19,180 599 ---------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations $ 196,664 $ 344,683 $ 21,299 $ 5,470 ======================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 102 2004 ANNUAL REPORT December 31, 2004 STATEMENTS OF OPERATIONS For the Year Ended December 31, 2004
MUNICIPAL MONEY MONEY MARKET MARKET PORTFOLIO PORTFOLIO (000) (000) ------------------------------------------------------------------------------------------- INVESTMENT INCOME: Interest $ 8,871 $ 5,744 ------------------------------------------------------------------------------------------- EXPENSES: Investment Advisory Fees (Note B) 1,986 1,421 Administration Fees (Note C) 922 649 Custodian Fees (Note E) 28 14 Directors' Fees and Expenses 24 15 Bank Overdraft Expense 1 2 Professional Fees 44 43 Shareholder Reporting Fees 3 21 Other Expenses 93 76 ------------------------------------------------------------------------------------------- Total Expenses 3,101 2,241 ------------------------------------------------------------------------------------------- NET INVESTMENT INCOME (LOSS) 5,770 3,503 ------------------------------------------------------------------------------------------- REALIZED GAIN (LOSS): Investments Sold @-- @-- ------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations $ 5,770 $ 3,503 ===========================================================================================
@ Amount is less than $500. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 103 2004 ANNUAL REPORT December 31, 2004 STATEMENTS OF CHANGES IN NET ASSETS
ACTIVE INTERNATIONAL ALLOCATION EMERGING MARKETS PORTFOLIO PORTFOLIO ----------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2004 2003 2004 2003 (000) (000) (000) (000) ----------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ 5,685 $ 4,731 $ 11,640 $ 9,042 Net Realized Gain (Loss) 21,200 (17,331) 122,533 60,144 Net Change in Unrealized Appreciation (Depreciation) 51,085 102,137 107,426 310,184 ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 77,970 89,537 241,599 379,370 ----------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Investment Income (10,301) (6,132) (9,513) (11,316) Net Realized Gain -- -- -- (653) CLASS B: Net Investment Income (42) (86) (416) (408) Net Realized Gain -- -- -- (24) ----------------------------------------------------------------------------------------------------------------------------- Total Distributions (10,343) (6,218) (9,929) (12,401) ----------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 219,838 150,855 563,202 861,356 Distributions Reinvested 9,070 5,120 8,957 11,229 Redeemed (68,754) (133,423) (564,272) (860,424) Redemption Fees -- -- 104 13 CLASS B: Subscribed 2,286 40,954 38,135 554,055 Distributions Reinvested 42 86 413 421 Redeemed (5,807) (45,948) (20,076) (541,631) Redemption Fees 49 -- 21 -- ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions 156,724 17,644 26,484 25,019 ----------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets 224,351 100,963 258,154 391,988 NET ASSETS: Beginning of Period 359,123 258,160 1,062,399 670,411 ----------------------------------------------------------------------------------------------------------------------------- End of Period $ 583,474 $ 359,123 $ 1,320,553 $ 1,062,399 ============================================================================================================================= Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Assets $ 2,454 $ 1,349 $ (3,455) $ (4,916) ============================================================================================================================= (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 22,277 19,765 34,353 72,921 Shares Issued on Distributions Reinvested 840 555 481 742 Shares Redeemed (7,005) (17,615) (35,194) (72,761) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class A Shares Outstanding 16,112 2,705 (360) 902 ============================================================================================================================= CLASS B: Shares Subscribed 226 5,167 2,292 49,916 Shares Issued on Distributions Reinvested 4 9 22 28 Shares Redeemed (574) (5,732) (1,282) (48,519) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class B Shares Outstanding (344) (556) 1,032 1,425 =============================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 104 2004 ANNUAL REPORT December 31, 2004 STATEMENTS OF CHANGES IN NET ASSETS
EUROPEAN REAL ESTATE GLOBAL FRANCHISE PORTFOLIO PORTFOLIO ----------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2004 2003 2004 2003 (000) (000) (000) (000) ----------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ 689 $ 457 $ 1,235 $ 1,064 Net Realized Gain (Loss) 3,827 2,509 7,045 311 Net Change in Unrealized Appreciation (Depreciation) 10,091 4,781 316 14,286 ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 14,607 7,747 8,596 15,661 ----------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Investment Income (821) (609) -- (197) Net Realized Gain -- -- (3,955) (581) CLASS B: Net Investment Income (11) (23) -- (2) Net Realized Gain -- -- (277) (19) ----------------------------------------------------------------------------------------------------------------------------- Total Distributions (832) (632) (4,232) (799) ----------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 15,851 6,645 7,145 29,757 Distributions Reinvested 821 607 3,953 771 Redeemed (1,596) (11,123) (36,966) (13,713) Redemption Fees 1 -- 149 10 CLASS B: Subscribed 100 50 1,671 1,050 Distributions Reinvested @-- 12 277 21 Redeemed (604) (375) (871) (391) Redemption Fees -- -- 4 -- ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions 14,573 (4,184) (24,638) 17,505 ----------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets 28,348 2,931 (20,274) 32,367 NET ASSETS: Beginning of Period 23,099 20,168 82,438 50,071 ----------------------------------------------------------------------------------------------------------------------------- End of Period $ 51,447 $ 23,099 $ 62,164 $ 82,438 ============================================================================================================================= Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Assets $ (293) $ (274) $ 287 $ (212) ============================================================================================================================= (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 888 551 479 2,451 Shares Issued on Distributions Reinvested 37 41 260 56 Shares Redeemed (86) (884) (2,472) (1,234) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class A Shares Outstanding 839 (292) (1,733) 1,273 ============================================================================================================================= CLASS B: Shares Subscribed 6 3 115 92 Shares Issued on Distributions Reinvested @-- 1 18 2 Shares Redeemed (29) (30) (59) (32) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class B Shares Outstanding (23) (26) 74 62 =============================================================================================================================
@ Amount is less than $500. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 105 2004 ANNUAL REPORT December 31, 2004 STATEMENTS OF CHANGES IN NET ASSETS
GLOBAL VALUE EQUITY INTERNATIONAL EQUITY PORTFOLIO PORTFOLIO ----------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2004 2003 2004 2003 (000) (000) (000) (000) ----------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ 1,094 $ 966 $ 102,520 $ 73,302 Net Realized Gain (Loss) 5,938 (3,228) 668,910 66,729 Net Change in Unrealized Appreciation (Depreciation) 4,931 22,557 578,627 1,420,439 ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 11,963 20,295 1,350,057 1,560,470 ----------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Investment Income (832) (552) (116,252) (93,410) Net Realized Gain (184) (296) (474,947) -- CLASS B: Net Investment Income (299) (260) (15,360) (11,014) Net Realized Gain (83) (176) (71,363) -- ----------------------------------------------------------------------------------------------------------------------------- Total Distributions (1,398) (1,284) (677,922) (104,424) ----------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 11,471 50,855 1,643,058 2,674,838 Distributions Reinvested 1,000 837 549,353 76,093 Redeemed (6,705) (42,321) (1,245,518) (2,347,380) Redemption Fees 9 28 91 7 CLASS B: Subscribed 5,089 12,816 414,909 493,867 Distributions Reinvested 382 436 86,576 10,897 Redeemed (11,020) (14,519) (237,977) (366,212) Redemption Fees 6 -- 18 6 ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions 232 8,132 1,210,510 542,116 ----------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets 10,797 27,143 1,882,645 1,998,162 NET ASSETS: Beginning of Period 88,306 61,163 6,391,239 4,393,077 ----------------------------------------------------------------------------------------------------------------------------- End of Period $ 99,103 $ 88,306 $ 8,273,884 $ 6,391,239 ============================================================================================================================= Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Assets $ (8) $ (12) $ (6,123) $ 13,763 ============================================================================================================================= (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 693 4,031 82,082 172,150 Shares Issued on Distributions Reinvested 56 57 26,129 4,076 Shares Redeemed (409) (3,335) (61,971) (150,128) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class A Shares Outstanding 340 753 46,240 26,098 ============================================================================================================================= CLASS B: Shares Subscribed 313 1,014 20,517 31,747 Shares Issued on Distributions Reinvested 22 30 4,164 587 Shares Redeemed (688) (1,133) (11,898) (23,883) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class B Shares Outstanding (353) (89) 12,783 8,451 =============================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 106 2004 ANNUAL REPORT December 31, 2004 STATEMENTS OF CHANGES IN NET ASSETS
INTERNATIONAL MAGNUM INTERNATIONAL SMALL CAP PORTFOLIO PORTFOLIO ----------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2004 2003 2004 2003 (000) (000) (000) (000) ----------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ 1,041 $ 1,024 $ 11,376 $ 8,911 Net Realized Gain (Loss) 8,521 (877) 110,235 35,111 Net Change in Unrealized Appreciation (Depreciation) 5,455 24,407 198,420 219,303 ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 15,017 24,554 320,031 263,325 ----------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Investment Income (1,884) (1,476) (16,593) (9,894) Net Realized Gain -- -- (89,822) (13,236) CLASS B: Net Investment Income (44) (164) -- -- ----------------------------------------------------------------------------------------------------------------------------- Total Distributions (1,928) (1,640) (106,415) (23,130) ----------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 14,773 26,857 290,544 322,236 Distributions Reinvested 1,707 1,369 97,500 21,202 Redeemed (26,151) (23,785) (225,580) (123,761) Redemption Fees -- -- 7 @-- CLASS B: Subscribed 1,464 312,397 -- -- Distributions Reinvested 44 164 -- -- Redeemed (1,484) (321,519) -- -- Redemption Fees 6 3 -- -- ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions (9,641) (4,514) 162,471 219,677 ----------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets 3,448 18,400 376,087 459,872 NET ASSETS: Beginning of Period 93,319 74,919 899,996 440,124 ----------------------------------------------------------------------------------------------------------------------------- End of Period $ 96,767 $ 93,319 $ 1,276,083 $ 899,996 ============================================================================================================================= Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Assets $ 257 $ 168 $ (2,567) $ (660) ============================================================================================================================= (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 1,391 3,223 12,655 19,043 Shares Issued on Distributions Reinvested 149 141 3,943 1,059 Shares Redeemed (2,512) (2,922) (9,636) (7,215) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class A Shares Outstanding (972) 442 6,962 12,887 ============================================================================================================================= CLASS B: Shares Subscribed 140 37,663 -- -- Shares Issued on Distributions Reinvested 4 17 -- -- Shares Redeemed (142) (38,288) -- -- ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class B Shares Outstanding 2 (608) -- -- =============================================================================================================================
@ Amount is less than $500. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 107 2004 ANNUAL REPORT December 31, 2004 STATEMENTS OF CHANGES IN NET ASSETS EQUITY GROWTH FOCUS EQUITY PORTFOLIO PORTFOLIO ----------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2004 2003 2004 2003 (000) (000) (000) (000) ----------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ 4,225 $ 1,854 $ 212 $ 130 Net Realized Gain (Loss) 77,504 30,184 2,863 8,486 Net Change in Unrealized Appreciation (Depreciation) (18,972) 128,831 884 9,403 ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 62,757 160,869 3,959 18,019 ----------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Investment Income (2,734) (1,800) (103) (137) CLASS B: Net Investment Income (480) (170) -- -- ----------------------------------------------------------------------------------------------------------------------------- Total Distributions (3,214) (1,970) (103) (137) ----------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 206,548 215,085 5,830 39,096 Distributions Reinvested 2,720 1,755 102 132 Redeemed (289,148) (179,059) (17,889) (45,080) CLASS B: Subscribed 45,500 46,547 2,104 2,464 Distributions Reinvested 477 168 -- -- Redeemed (57,939) (42,814) (2,263) (2,679) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions (91,842) 41,682 (12,116) (6,067) ----------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets (32,299) 200,581 (8,260) 11,815 NET ASSETS: Beginning of Period 789,289 588,708 69,576 57,761 ----------------------------------------------------------------------------------------------------------------------------- End of Period $ 756,990 $ 789,289 $ 61,316 $ 69,576 ============================================================================================================================= Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Assets $ 894 $ (117) $ 90 $ (19) ============================================================================================================================= (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 13,069 20,284 492 3,847 Shares Issued on Distributions Reinvested 162 113 8 11 Shares Redeemed (17,875) (17,540) (1,516) (4,344) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class A Shares Outstanding (4,644) 2,857 (1,016) (486) ============================================================================================================================= CLASS B: Shares Subscribed 2,947 3,359 183 275 Shares Issued on Distributions Reinvested 29 11 -- -- Shares Redeemed (3,644) (3,217) (195) (295) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class B Shares Outstanding (668) 153 (12) (20) =============================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 108 2004 ANNUAL REPORT December 31, 2004 STATEMENTS OF CHANGES IN NET ASSETS
SMALL COMPANY GROWTH U.S. REAL ESTATE PORTFOLIO PORTFOLIO ----------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2004 2003 2004 2003 (000) (000) (000) (000) ----------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ (9,251) $ (5,016) $ 20,779 $ 24,853 Net Realized Gain (Loss) 94,642 69,288 78,698 23,763 Net Change in Unrealized Appreciation (Depreciation) 111,273 104,359 245,206 215,670 ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 196,664 168,631 344,683 264,286 ----------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Investment Income -- -- (20,112) (23,648) Net Realized Gain (19,248) -- (39,780) (8,798) CLASS B: Net Investment Income -- -- (1,863) (1,359) Net Realized Gain (21,671) -- (5,186) (689) ----------------------------------------------------------------------------------------------------------------------------- Total Distributions (40,919) -- (66,941) (34,494) ----------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 383,757 137,063 272,597 236,560 Issued on Portfolio Merger -- 98,228 -- -- Distributions Reinvested 18,037 -- 56,387 29,125 Redeemed (121,266) (58,979) (380,361) (240,705) CLASS B: Subscribed 291,972 247,321 80,932 40,038 Issued on Portfolio Merger -- 1,975 -- -- Distributions Reinvested 21,670 -- 7,046 1,994 Redeemed (168,240) (101,358) (35,142) (15,965) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions 425,930 324,250 1,459 51,047 ----------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets 581,675 492,881 279,201 280,839 NET ASSETS: Beginning of Period 783,334 290,453 967,697 686,858 ----------------------------------------------------------------------------------------------------------------------------- End of Period $ 1,365,009 $ 783,334 $ 1,246,898 $ 967,697 ============================================================================================================================= Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Assets $ -- $ -- $ (21) $ (52) Accumulated Net Investment Loss Included in End of Period Net Assets (134) (30) -- -- ============================================================================================================================= (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 33,511 13,630 13,971 16,166 Shares Issued on Portfolio Merger -- 10,221 -- -- Shares Issued on Distributions Reinvested 1,462 -- 2,587 1,764 Shares Redeemed (10,553) (6,106) (19,349) (16,197) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class A Shares Outstanding 24,420 17,745 (2,791) 1,733 ============================================================================================================================= CLASS B: Shares Subscribed 26,411 27,650 4,029 2,488 Shares Issued on Portfolio Merger -- 213 -- -- Shares Issued on Distributions Reinvested 1,826 -- 322 120 Shares Redeemed (15,258) (11,195) (1,817) (1,013) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class B Shares Outstanding 12,979 16,668 2,534 1,595 =============================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 109 2004 ANNUAL REPORT December 31, 2004 STATEMENTS OF CHANGES IN NET ASSETS
VALUE EQUITY EMERGING MARKETS DEBT PORTFOLIO PORTFOLIO ----------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2004 2003 2004 2003 (000) (000) (000) (000) ----------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income (Loss) $ 2,119 $ 2,009 $ 4,871 $ 4,161 Net Realized Gain (Loss) 17,231 2,159 675 7,192 Net Change in Unrealized Appreciation (Depreciation) 1,949 32,309 (76) 2,777 ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 21,299 36,477 5,470 14,130 ----------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Investment Income (1,367) (1,250) (5,246) (3,737) CLASS B: Net Investment Income (745) (778) (26) (28) ----------------------------------------------------------------------------------------------------------------------------- Total Distributions (2,112) (2,028) (5,272) (3,765) ----------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 19,852 66,165 47,055 20,057 Distributions Reinvested 1,350 1,164 3,506 3,619 Redeemed (50,149) (53,059) (24,285) (28,095) Redemption Fees -- -- 2 -- CLASS B: Subscribed 25,523 45,709 -- -- Distributions Reinvested 739 752 26 28 Redeemed (31,552) (37,212) (32) (10) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions (34,237) 23,519 26,272 (4,401) ----------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets (15,050) 57,968 26,470 5,964 NET ASSETS: Beginning of Period 181,177 123,209 55,076 49,112 ----------------------------------------------------------------------------------------------------------------------------- End of Period $ 166,127 $ 181,177 $ 81,546 $ 55,076 ============================================================================================================================= Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Asset $ (10) $ (20) $ (503) $ (174) ============================================================================================================================= (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 2,070 7,984 12,890 6,560 Shares Issued on Distributions Reinvested 138 142 964 1,028 Shares Redeemed (5,277) (7,020) (7,065) (8,658) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class A Shares Outstanding (3,069) 1,106 6,789 (1,070) ============================================================================================================================= CLASS B: Shares Subscribed 2,668 5,461 -- -- Shares Issued on Distributions Reinvested 75 93 7 8 Shares Redeemed (3,349) (4,284) (9) (3) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class B Shares Outstanding (606) 1,270 (2) 5 =============================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 110 2004 ANNUAL REPORT December 31, 2004 STATEMENTS OF CHANGES IN NET ASSETS
MONEY MARKET MUNICIPAL MONEY MARKET PORTFOLIO PORTFOLIO ----------------------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2004 2003 2004 2003 (000) (000) (000) (000) ----------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net Investment Income $ 5,770 $ 7,531 $ 3,503 $ 4,229 Net Realized Gain (Loss) @-- -- @-- 10 ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 5,770 7,531 3,503 4,239 ----------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: CLASS A: Net Investment Income (5,834) (7,531) (3,503) (4,229) ----------------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS:(1) CLASS A: Subscribed 2,279,953 3,249,589 2,140,786 3,422,911 Distributions Reinvested 5,179 7,829 3,086 4,390 Redeemed (2,533,601) (3,831,954) (2,206,105) (3,826,186) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions (248,469) (574,536) (62,233) (398,885) ----------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) in Net Assets (248,533) (574,536) (62,233) (398,875) NET ASSETS: Beginning of Period 795,399 1,369,935 511,551 910,426 ----------------------------------------------------------------------------------------------------------------------------- End of Period $ 546,866 $ 795,399 $ 449,318 $ 511,551 ============================================================================================================================= Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Asset $ 30 $ 88 $ 19 $ 19 ============================================================================================================================= (1) CAPITAL SHARE TRANSACTIONS: CLASS A: Shares Subscribed 2,279,952 3,249,588 2,140,786 3,422,906 Shares Issued on Distributions Reinvested 5,179 7,829 3,086 4,390 Shares Redeemed (2,533,600) (3,831,950) (2,206,105) (3,826,184) ----------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Class A Shares Outstanding (248,469) (574,533) (62,233) (398,888) =============================================================================================================================
@ Amount is less than $500. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 111 2004 ANNUAL REPORT December 31, 2004 FINANCIAL HIGHLIGHTS ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
CLASS A ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.58 $ 7.30 $ 8.65 $ 10.68 $ 14.26 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.13+ 0.13+ 0.13+ 0.12 0.19 Net Realized and Unrealized Gain (Loss) on Investments 1.46 2.32 (1.26) (2.01) (2.32) --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.59 2.45 (1.13) (1.89) (2.13) --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.21) (0.17) (0.22) (0.14) (0.01) Net Realized Gain -- -- -- (0.00)++ (1.44) --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.21) (0.17) (0.22) (0.14) (1.45) --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 10.96 $ 9.58 $ 7.30 $ 8.65 $ 10.68 ================================================================================================================================= TOTAL RETURN 16.64% 33.65% (13.11)% (17.63)% (14.97)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 580,851 $ 353,488 $ 249,742 $ 388,225 $ 509,309 Ratio of Expenses to Average Net Assets(1) 0.80% 0.80% 0.80% 0.81% 0.82% Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense 0.80% 0.80% N/A 0.80% 0.80% Ratio of Net Investment Income (Loss) to Average Net Assets(1) 1.28% 1.66% 1.57% 1.25% 1.55% Portfolio Turnover Rate 24% 55% 42% 36% 80% --------------------------------------------------------------------------------------------------------------------------------- (1) Ratios before expense limitation: Expenses to Average Net Assets 0.91% 0.96% 0.93% 0.89% 0.93% Net Investment Income (Loss) to Average Net Assets 1.18% 1.50% 1.44% 1.17% 1.45% --------------------------------------------------------------------------------------------------------------------------------- CLASS B ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.72 $ 7.41 $ 8.77 $ 10.80 $ 14.41 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.10+ 0.12+ 0.11+ 0.13 0.27 Net Realized and Unrealized Gain (Loss) on Investments 1.35 2.33 (1.27) (2.06) (2.43) --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.45 2.45 (1.16) (1.93) (2.16) --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.17) (0.14) (0.20) (0.10) (0.01) Net Realized Gain -- -- -- (0.00)++ (1.44) --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.17) (0.14) (0.20) (0.10) (1.45) --------------------------------------------------------------------------------------------------------------------------------- REDEMPTION FEES 0.13 -- -- -- -- --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 11.13 $ 9.72 $ 7.41 $ 8.77 $ 10.80 ================================================================================================================================= TOTAL RETURN 16.29% 33.13% (13.29)% (17.81)% (15.02)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 2,623 $ 5,635 $ 8,418 $ 10,362 $ 19,814 Ratio of Expenses to Average Net Assets(2) 1.05% 1.05% 1.05% 1.06% 1.07% Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense 1.05% 1.05% N/A 1.05% 1.05% Ratio of Net Investment Income (Loss) to Average Net Assets(2) 1.03% 1.41% 1.32% 1.05% 1.42% Portfolio Turnover Rate 24% 55% 42% 36% 80% --------------------------------------------------------------------------------------------------------------------------------- (2) Ratios before expense limitation: Expenses to Average Net Assets 1.16% 1.21% 1.18% 1.14% 1.18% Net Investment Income (Loss) to Average Net Assets 0.92% 1.25% 1.19% 0.97% 1.31% ---------------------------------------------------------------------------------------------------------------------------------
+ Per share amount is based on average shares outstanding. ++ Amount is less than $0.005 per share. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 112 2004 ANNUAL REPORT December 31, 2004 FINANCIAL HIGHLIGHTS EMERGING MARKETS PORTFOLIO
CLASS A ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 15.52 $ 10.13 $ 10.81 $ 11.31 $ 19.27 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.19+ 0.14+ 0.04+ 0.05 (0.10) Net Realized and Unrealized Gain (Loss) on Investments 3.54 5.44 (0.71) (0.55) (7.28) --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 3.73 5.58 (0.67) (0.50) (7.38) --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.15) (0.18) (0.01) -- -- Net Realized Gain -- -- -- -- (0.58) Return of Capital -- (0.01) -- -- -- --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.15) (0.19) (0.01) -- (0.58) --------------------------------------------------------------------------------------------------------------------------------- REDEMPTION FEES 0.00++ 0.00++ -- -- -- --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 19.10 $ 15.52 $ 10.13 $ 10.81 $ 11.31 ================================================================================================================================= TOTAL RETURN 24.09% 55.08% (6.24)% (4.42)% (38.43)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 1,249,299 $ 1,020,353 $ 657,203 $ 748,058 $ 917,091 Ratio of Expenses to Average Net Assets 1.52%# 1.64% 1.65% 1.65% 1.63% Ratio of Expenses to Average Net Assets Excluding Country Tax Expense and Bank Overdraft Expense 1.52% 1.61% 1.58% N/A N/A Ratio of Net Investment Income (Loss) to Average Net Assets 1.09% 1.15% 0.35% 0.47% (0.63)% Portfolio Turnover Rate 73% 92% 91% 93% 92% --------------------------------------------------------------------------------------------------------------------------------- CLASS B ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 15.36 $ 10.06 $ 10.73 $ 11.26 $ 19.24 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.15+ 0.11+ 0.01+ 0.03 (0.11) Net Realized and Unrealized Gain (Loss) on Investments 3.49 5.35 (0.68) (0.56) (7.29) --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 3.64 5.46 (0.67) (0.53) (7.40) --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.11) (0.15) -- -- -- Net Realized Gain -- -- -- -- (0.58) Return of Capital -- (0.01) -- -- -- --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.11) (0.16) -- -- (0.58) --------------------------------------------------------------------------------------------------------------------------------- REDEMPTION FEES 0.01 -- -- -- -- --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 18.90 $ 15.36 $ 10.06 $ 10.73 $ 11.26 ================================================================================================================================= TOTAL RETURN 23.84% 54.31% (6.24)% (4.71)% (38.60)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 71,254 $ 42,046 $ 13,208 $ 14,456 $ 13,949 Ratio of Expenses to Average Net Assets 1.77%# 1.89% 1.90% 1.90% 1.88% Ratio of Expenses to Average Net Assets Excluding Country Tax Expense and Bank Overdraft Expense 1.77% 1.86% 1.83% N/A N/A Ratio of Net Investment Income (Loss) to Average Net Assets 0.89% 0.90% 0.10% 0.22% (0.82)% Portfolio Turnover Rate 73% 92% 91% 93% 92% ---------------------------------------------------------------------------------------------------------------------------------
+ Per share amount is based on average shares outstanding. ++ Amount is less than $0.005 per share. # Effective November 1, 2004, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 1.65% for Class A shares and 1.90% for Class B shares. Prior to November 1, 2004, these maximum ratios were 1.75% for Class A shares and 2.00% for Class B shares. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 113 2004 ANNUAL REPORT December 31, 2004 FINANCIAL HIGHLIGHTS EUROPEAN REAL ESTATE PORTFOLIO
CLASS A ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 15.13 $ 10.93 $ 9.30 $ 10.38 $ 9.16 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.36+ 0.27+ 0.37+ 0.27 0.07 Net Realized and Unrealized Gain (Loss) on Investments 6.82 4.35 1.90 (1.09) 1.30 --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 7.18 4.62 2.27 (0.82) 1.37 --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.36) (0.42) (0.64) (0.26) (0.15) --------------------------------------------------------------------------------------------------------------------------------- REDEMPTION FEES 0.00++ -- -- -- -- --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 21.95 $ 15.13 $ 10.93 $ 9.30 $ 10.38 ================================================================================================================================= TOTAL RETURN 47.49% 42.41% 24.52% (7.85)% 14.91% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 50,620 $ 22,184 $ 19,215 $ 13,826 $ 7,766 Ratio of Expenses to Average Net Assets (1) 1.00% 1.00% 1.00% 1.01% 1.03% Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense 1.00% 1.00% N/A 1.00% 1.00% Ratio of Net Investment Income (Loss) to Average Net Assets (1) 2.05% 2.23% 3.37% 2.30% 1.55% Portfolio Turnover Rate 42% 47% 79% 46% 74% --------------------------------------------------------------------------------------------------------------------------------- (1) Ratios before expense limitation: Expenses to Average Net Assets 1.38% 1.49% 1.56% 1.53% 1.90% Net Investment Income (Loss) to Average Net Assets 1.67% 1.74% 2.81% 1.74% 0.69% --------------------------------------------------------------------------------------------------------------------------------- CLASS B ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 15.17 $ 10.96 $ 9.33 $ 10.41 $ 9.19 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.35+ 0.28+ 0.27+ 0.08 0.18 Net Realized and Unrealized Gain (Loss) on Investments 6.81 4.32 1.97 (0.93) 1.16 --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 7.16 4.60 2.24 (0.85) 1.34 --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.29) (0.39) (0.61) (0.23) (0.12) --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 22.04 $ 15.17 $ 10.96 $ 9.33 $ 10.41 ================================================================================================================================= TOTAL RETURN 47.15% 42.06% 24.11% (8.08)% 14.55% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 827 $ 915 $ 953 $ 1,687 $ 1,449 Ratio of Expenses to Average Net Assets (2) 1.25% 1.25% 1.25% 1.26% 1.28% Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense 1.25% 1.25% N/A 1.25% 1.25% Ratio of Net Investment Income (Loss) to Average Net Assets (2) 2.03% 1.98% 3.12% 1.53% 1.50% Portfolio Turnover Rate 42% 47% 79% 46% 74% --------------------------------------------------------------------------------------------------------------------------------- (2) Ratios before expense limitation: Expenses to Average Net Assets 1.66% 1.74% 1.81% 1.78% 2.15% Net Investment Income (Loss) to Average Net Assets 1.62% 1.49% 2.56% 0.96% 0.61% ---------------------------------------------------------------------------------------------------------------------------------
+ Per share amount is based on average shares outstanding. ++ Amount is less than $0.005 per share. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 114 2004 ANNUAL REPORT December 31, 2004 FINANCIAL HIGHLIGHTS GLOBAL FRANCHISE PORTFOLIO
CLASS A ------------------------------------------------------------------ YEAR ENDED DECEMBER 31, PERIOD FROM ---------------------------------------------- NOVEMBER 28, 2001^ SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 TO DECEMBER 31, 2001 ---------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 14.29 $ 11.29 $ 10.48 $ 10.00 ============================================================================================================================ INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.27+ 0.23+ 0.17+ 0.01 Net Realized and Unrealized Gain (Loss) on Investments 1.66 2.91 0.68 0.47 ---------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.93 3.14 0.85 0.48 ---------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income -- (0.03) -- -- Net Realized Gain (1.13) (0.11) (0.04) -- ---------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.13) (0.14) (0.04) -- ---------------------------------------------------------------------------------------------------------------------------- REDEMPTION FEES 0.03 0.00++ -- -- ---------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 15.12 $ 14.29 $ 11.29 $ 10.48 ============================================================================================================================ TOTAL RETURN 13.77% 27.92% 8.10% 4.80%# ============================================================================================================================ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 58,223 $ 79,756 $ 48,644 $ 10,595 Ratio of Expenses to Average Net Assets (1) 1.00% 1.00% 1.00% 1.00%* Ratio of Net Investment Income (Loss) to Average Net Assets (1) 1.82% 1.91% 1.41% 1.30%* Portfolio Turnover Rate 21% 32% 62% N/A ---------------------------------------------------------------------------------------------------------------------------- (1) Ratios before expense limitation: Expenses to Average Net Assets 1.16% 1.23% 1.28% 16.47%* Net Investment Income (Loss) to Average Net Assets 1.66% 1.68% 1.13% (14.17)%* ---------------------------------------------------------------------------------------------------------------------------- CLASS B ------------------------------------------------------------------ YEAR ENDED DECEMBER 31, PERIOD FROM ---------------------------------------------- NOVEMBER 28, 2001^ SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 TO DECEMBER 31, 2001 ---------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 14.22 $ 11.24 $ 10.46 $ 10.00 ============================================================================================================================ INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.22+ 0.22+ 0.11+ (0.09) Net Realized and Unrealized Gain (Loss) on Investments 1.69 2.88 0.71 0.55 ---------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.91 3.10 0.82 0.46 ---------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income -- (0.01) -- -- Net Realized Gain (1.13) (0.11) (0.04) -- ---------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.13) (0.12) (0.04) -- ---------------------------------------------------------------------------------------------------------------------------- REDEMPTION FEES 0.01 -- -- -- ---------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 15.01 $ 14.22 $ 11.24 $ 10.46 ============================================================================================================================ TOTAL RETURN 13.56% 27.62% 7.82% 4.60%# ============================================================================================================================ RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 3,941 $ 2,682 $ 1,427 $ 415 Ratio of Expenses to Average Net Assets (2) 1.25% 1.25% 1.25% 1.25%* Ratio of Net Investment Income (Loss) to Average Net Assets (2) 1.47% 1.66% 1.16% (13.29)%* Portfolio Turnover Rate 21% 32% 62% N/A ---------------------------------------------------------------------------------------------------------------------------- (2) Ratios before expense limitation: Expenses to Average Net Assets 1.41% 1.48% 1.53% 16.72%* Net Investment Income (Loss) to Average Net Assets 1.31% 1.43% 0.88% (21.62)%* ----------------------------------------------------------------------------------------------------------------------------
+ Per share amount is based on average shares outstanding. ++ Amount is less than $0.005 per share. ^ Commencement of Operations # Not annualized * Annualized THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 115 2004 ANNUAL REPORT December 31, 2004 FINANCIAL HIGHLIGHTS GLOBAL VALUE EQUITY PORTFOLIO
CLASS A ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 15.84 $ 12.46 $ 15.45 $ 17.05 $ 18.32 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.22+ 0.19+ 0.15+ 0.13 0.26 Net Realized and Unrealized Gain (Loss) on Investments 2.02 3.42 (2.82) (1.56) 1.75 --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 2.24 3.61 (2.67) (1.43) 2.01 --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.22) (0.16) (0.20) (0.17) (0.62) Net Realized Gain (0.05) (0.08) (0.12) -- (2.66) --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.27) (0.24) (0.32) (0.17) (3.28) --------------------------------------------------------------------------------------------------------------------------------- REDEMPTION FEES 0.00++ 0.01 -- -- -- --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 17.81 $ 15.84 $ 12.46 $ 15.45 $ 17.05 ================================================================================================================================= TOTAL RETURN 14.13% 29.21% (17.34)% (8.36)% 11.75% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 68,505 $ 55,545 $ 34,297 $ 34,079 $ 40,418 Ratio of Expenses to Average Net Assets (1) 1.00% 1.00% 1.00% 1.01% 1.01% Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense 1.00% 1.00% N/A 1.00% 1.00% Ratio of Net Investment Income (Loss) to Average Net Assets (1) 1.31% 1.44% 1.08% 0.79% 1.16% Portfolio Turnover Rate 30% 53% 42% 51% 48% --------------------------------------------------------------------------------------------------------------------------------- (1) Ratios before expense limitation: Expenses to Average Net Assets 1.07% 1.20% 1.12% 1.16% 1.17% Net Investment Income (Loss) to Average Net Assets 1.24% 1.24% 0.96% 0.64% 1.00% --------------------------------------------------------------------------------------------------------------------------------- CLASS B ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 15.70 $ 12.35 $ 15.33 $ 16.92 $ 18.20 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.17+ 0.16+ 0.12+ 0.13 0.27 Net Realized and Unrealized Gain (Loss) on Investments 2.00 3.40 (2.82) (1.58) 1.68 --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 2.17 3.56 (2.70) (1.45) 1.95 --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.18) (0.13) (0.16) (0.14) (0.57) Net Realized Gain (0.05) (0.08) (0.12) -- (2.66) --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.23) (0.21) (0.28) (0.14) (3.23) --------------------------------------------------------------------------------------------------------------------------------- REDEMPTION FEES 0.00++ -- -- -- -- --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 17.64 $ 15.70 $ 12.35 $ 15.33 $ 16.92 ================================================================================================================================= TOTAL RETURN 13.78% 28.95% (17.63)% (8.58)% 11.52% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 30,598 $ 32,761 $ 26,866 $ 30,089 $ 30,196 Ratio of Expenses to Average Net Assets (2) 1.25% 1.25% 1.25% 1.26% 1.26% Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense 1.25% 1.25% N/A 1.25% 1.25% Ratio of Net Investment Income (Loss) to Average Net Assets (2) 1.07% 1.19% 0.83% 0.78% 1.14% Portfolio Turnover Rate 30% 53% 42% 51% 48% --------------------------------------------------------------------------------------------------------------------------------- (2) Ratios before expense limitation: Expenses to Average Net Assets 1.32% 1.45% 1.37% 1.41% 1.42% Net Investment Income (Loss) to Average Net Assets 0.99% 0.99% 0.71% 0.64% 0.97% ---------------------------------------------------------------------------------------------------------------------------------
+ Per share amount is based on average shares outstanding. ++ Amount is less than $0.005 per share. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 116 2004 ANNUAL REPORT December 31, 2004 FINANCIAL HIGHLIGHTS INTERNATIONAL EQUITY PORTFOLIO
CLASS A ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 19.06 $ 14.60 $ 15.59 $ 17.88 $ 19.62 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.30+ 0.24+ 0.19+ 0.25 0.25 Net Realized and Unrealized Gain (Loss) on Investments 3.50 4.54 (0.82) (2.00) 1.44 --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 3.80 4.78 (0.63) (1.75) 1.69 --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.37) (0.32) (0.33) (0.34) (0.04) Net Realized Gain (1.50) -- (0.03) (0.20) (3.39) --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.87) (0.32) (0.36) (0.54) (3.43) --------------------------------------------------------------------------------------------------------------------------------- REDEMPTION FEES 0.00++ 0.00++ -- -- -- --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 20.99 $ 19.06 $ 14.60 $ 15.59 $ 17.88 ================================================================================================================================= TOTAL RETURN 19.96% 32.82% (4.02)% (9.74)% 9.29% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 7,200,606 $ 5,657,941 $ 3,953,655 $ 4,004,817 $ 4,810,852 Ratio of Expenses to Average Net Assets (1) 0.98% 1.00% 1.00% 1.00% 1.00% Ratio of Net Investment Income (Loss) to Average Net Assets (1) 1.48% 1.48% 1.24% 1.35% 1.45% Portfolio Turnover Rate 41% 45% 51% 63% 53% --------------------------------------------------------------------------------------------------------------------------------- (1) Ratios before expense limitation: Expenses to Average Net Assets N/A 1.02% 1.00% 1.01% 1.00% Net Investment Income (Loss) to Average Net Assets N/A 1.46% 1.24% 1.34% 1.45% --------------------------------------------------------------------------------------------------------------------------------- CLASS B ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 18.96 $ 14.53 $ 15.53 $ 17.81 $ 19.58 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.24+ 0.18+ 0.12+ 0.07 0.23 Net Realized and Unrealized Gain (Loss) on Investments 3.47 4.54 (0.78) (1.83) 1.39 --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 3.71 4.72 (0.66) (1.76) 1.62 --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.32) (0.29) (0.31) (0.32) -- Net Realized Gain (1.50) -- (0.03) (0.20) (3.39) --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.82) (0.29) (0.34) (0.52) (3.39) --------------------------------------------------------------------------------------------------------------------------------- REDEMPTION FEES 0.00++ 0.00++ -- -- -- --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 20.85 $ 18.96 $ 14.53 $ 15.53 $ 17.81 ================================================================================================================================= TOTAL RETURN 19.67% 32.46% (4.25)% (9.83)% 8.94% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 1,073,278 $ 733,298 $ 439,422 $ 165,439 $ 59,945 Ratio of Expenses to Average Net Assets (2) 1.23% 1.25% 1.25% 1.25% 1.25% Ratio of Net Investment Income (Loss) to Average Net Assets (2) 1.21% 1.23% 0.99% 0.73% 1.44% Portfolio Turnover Rate 41% 45% 51% 63% 53% --------------------------------------------------------------------------------------------------------------------------------- (2) Ratios before expense limitation: Expenses to Average Net Assets N/A 1.27% 1.25% 1.26% 1.25% Net Investment Income (Loss) to Average Net Assets N/A 1.21% 0.99% 0.72% 1.44% ---------------------------------------------------------------------------------------------------------------------------------
+ Per share amount is based on average shares outstanding. ++ Amount is less than $0.005 per share. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 117 2004 ANNUAL REPORT December 31, 2004 FINANCIAL HIGHLIGHTS INTERNATIONAL MAGNUM PORTFOLIO
CLASS A ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.20 $ 8.04 $ 9.34 $ 11.56 $ 13.62 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.13+ 0.11+ 0.07+ 0.11 0.11 Net Realized and Unrealized Gain (Loss) on Investments 1.74 2.22 (1.31) (2.27) (1.52) --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.87 2.33 (1.24) (2.16) (1.41) --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.24) (0.17) (0.06) (0.06) (0.16) Net Realized Gain -- -- -- -- (0.49) --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.24) (0.17) (0.06) (0.06) (0.65) --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 11.83 $ 10.20 $ 8.04 $ 9.34 $ 11.56 ================================================================================================================================= TOTAL RETURN 18.45% 29.07% (13.36)% (18.71)% (10.50)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 94,162 $ 91,087 $ 68,275 $ 120,753 $ 183,566 Ratio of Expenses to Average Net Assets (1) 1.00% 1.00% 1.01% 1.01% 1.01% Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense 1.00% 1.00% 1.00% 1.00% 1.00% Ratio of Net Investment Income (Loss) to Average Net Assets (1) 1.20% 1.25% 0.81% 1.00% 0.84% Portfolio Turnover Rate 49% 53% 59% 44% 56% --------------------------------------------------------------------------------------------------------------------------------- (1) Ratios before expense limitation: Expenses to Average Net Assets 1.23% 1.29% 1.30% 1.14% 1.10% Net Investment Income (Loss) to Average Net Assets 0.96% 0.96% 0.52% 0.87% 0.75% --------------------------------------------------------------------------------------------------------------------------------- CLASS B ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.18 $ 8.04 $ 9.32 $ 11.52 $ 13.58 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.11+ 0.10+ 0.06+ 0.01 0.08 Net Realized and Unrealized Gain (Loss) on Investments 1.70 2.18 (1.31) (2.18) (1.54) --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.81 2.28 (1.25) (2.17) (1.46) --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.22) (0.14) (0.03) (0.03) (0.12) Net Realized Gain -- -- -- -- (0.48) --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.22) (0.14) (0.03) (0.03) (0.60) --------------------------------------------------------------------------------------------------------------------------------- REDEMPTION FEES 0.03 0.00++ -- -- -- --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 11.80 $ 10.18 $ 8.04 $ 9.32 $ 11.52 ================================================================================================================================= TOTAL RETURN 18.15% 28.49% (13.49)% (18.87)% (10.81)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 2,605 $ 2,232 $ 6,644 $ 10,542 $ 23,474 Ratio of Expenses to Average Net Assets (2) 1.25% 1.25% 1.26% 1.26% 1.26% Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense 1.25% 1.25% 1.25% 1.25% 1.25% Ratio of Net Investment Income (Loss) to Average Net Assets (2) 1.00% 1.00% 0.56% 0.75% 0.58% Portfolio Turnover Rate 49% 53% 59% 44% 56% --------------------------------------------------------------------------------------------------------------------------------- (2) Ratios before expense limitation: Expenses to Average Net Assets 1.48% 1.54% 1.55% 1.39% 1.35% Net Investment Income (Loss) to Average Net Assets 0.77% 0.71% 0.27% 0.62% 0.49% ---------------------------------------------------------------------------------------------------------------------------------
+ Per share amount is based on average shares outstanding. ++ Amount is less than $0.005 per share. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 118 2004 ANNUAL REPORT December 31, 2004 FINANCIAL HIGHLIGHTS INTERNATIONAL SMALL CAP PORTFOLIO
CLASS A ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 20.52 $ 14.21 $ 14.82 $ 16.30 $ 19.67 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.24+ 0.24+ 0.15+ 0.21 0.24 Net Realized and Unrealized Gain (Loss) on Investments ^^ 6.59 6.61 (0.59) (1.18) (0.86) --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 6.83 6.85 (0.44) (0.97) (0.62) --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.35) (0.23) (0.13) (0.27) (0.17) Net Realized Gain (1.89) (0.31) (0.04) (0.24) (2.61) --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (2.24) (0.54) (0.17) (0.51) (2.78) --------------------------------------------------------------------------------------------------------------------------------- REDEMPTION FEES 0.00++ 0.00++ -- -- -- --------------------------------------------------------------------------------------------------------------------------------- TRANSACTION FEES -- -- -- 0.00++ 0.03 ================================================================================================================================= NET ASSET VALUE, END OF PERIOD $ 25.11 $ 20.52 $ 14.21 $ 14.82 $ 16.30 ================================================================================================================================= TOTAL RETURN 33.53% 48.32% (2.99)% (5.88)% (2.92)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 1,276,083 $ 899,996 $ 440,124 $ 376,981 $ 374,924 Ratio of Expenses to Average Net Assets (1) 1.15% 1.15% 1.15% 1.15% 1.16% Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense 1.15% 1.15% N/A N/A 1.15% Ratio of Net Investment Income (Loss) to Average Net Assets (1) 1.04% 1.40% 1.00% 1.38% 1.32% Portfolio Turnover Rate 38% 38% 34% 39% 54% --------------------------------------------------------------------------------------------------------------------------------- (1) Ratios before expense limitation: Expenses to Average Net Assets 1.16% 1.20% 1.19% 1.19% 1.22% Net Investment Income (Loss) to Average Net Assets 1.03% 1.35% 0.96% 1.34% 1.38% ---------------------------------------------------------------------------------------------------------------------------------
+ Per share amount is based on average shares outstanding. ++ Amount is less than $0.005 per share. ^^ Includes a 0.50% transaction fee on subscriptions and redemptions of capital shares for the years ended 2000 and 2001. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 119 2004 ANNUAL REPORT December 31, 2004 FINANCIAL HIGHLIGHTS EQUITY GROWTH PORTFOLIO
CLASS A ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 15.74 $ 12.49 $ 17.29 $ 20.51 $ 25.04 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.09+ 0.05+ 0.03+ 0.01 (0.01) Net Realized and Unrealized Gain (Loss) on Investments 1.13 3.25 (4.80) (3.08) (2.76) --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.22 3.30 (4.77) (3.07) (2.77) --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.08) (0.05) (0.03) -- -- Net Realized Gain -- -- -- (0.15) (1.76) --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.08) (0.05) (0.03) (0.15) (1.76) --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 16.88 $ 15.74 $ 12.49 $ 17.29 $ 20.51 ================================================================================================================================= TOTAL RETURN 7.75% 26.41%^ (27.64)% (14.97)% (11.78)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 554,097 $ 589,698 $ 432,207 $ 603,652 $ 886,824 Ratio of Expenses to Average Net Assets (1) 0.77% 0.80% 0.80% 0.80% 0.80% Ratio of Net Investment Income (Loss) to Average Net Assets (1) 0.58% 0.34% 0.21% 0.05% 0.79% Portfolio Turnover Rate 179% 131% 143% 94% 71% --------------------------------------------------------------------------------------------------------------------------------- (1) Ratios before expense limitation: Expenses to Average Net Assets N/A 0.82% 0.81% 0.81% 0.80% Net Investment Income (Loss) to Average Net Assets N/A 0.32% 0.21% 0.06% (0.06)% --------------------------------------------------------------------------------------------------------------------------------- CLASS B ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 15.55 $ 12.34 $ 17.08 $ 20.32 $ 24.90 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.05+ 0.01+ (0.00)+** (0.04) (0.04) Net Realized and Unrealized Gain (Loss) on Investments 1.11 3.21 (4.74) (3.05) (2.78) --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.16 3.22 (4.74) (3.09) (2.82) --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.04) (0.01) -- -- -- Net Realized Gain -- -- -- (0.15) (1.76) --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.04) (0.01) -- (0.15) (1.76) --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 16.67 $ 15.55 $ 12.34 $ 17.08 $ 20.32 ================================================================================================================================= TOTAL RETURN 7.45% 26.13%^ (27.75)% (15.26)% (12.01)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 202,893 $ 199,591 $ 156,501 $ 223,646 $ 350,556 Ratio of Expenses to Average Net Assets(2) 1.02% 1.05% 1.05% 1.05% 1.05% Ratio of Net Investment Income (Loss) to Average Net Assets(2) 0.33% 0.09% (0.04)% (0.22)% (1.04)% Portfolio Turnover Rate 179% 131% 143% 94% 71% --------------------------------------------------------------------------------------------------------------------------------- (2) Ratios before expense limitation: Expenses to Average Net Assets N/A 1.07% 1.06% 1.06% 1.05% Net Investment Income (Loss) to Average Net Assets N/A 0.07% (0.04)% (0.22)% (0.30)% ---------------------------------------------------------------------------------------------------------------------------------
+ Per share amount is based on average shares outstanding. ** Amount is less than $0.005 per share. ^ In 2003, performance was positively impacted by approximately 1.34%, due to the receipt of proceeds from the settlement of class action suits involving, primarily, one of the Portfolio's holdings. This was a one-time settlement, and as a result, the impact on the NAV and consequently the performance will not likely be repeated in the future. Had these settlements not occurred, the total return for Class A shares and Class B shares would have been approximately 25.07% and 24.79%, respectively. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 120 2004 ANNUAL REPORT December 31, 2004 FINANCIAL HIGHLIGHTS FOCUS EQUITY PORTFOLIO
CLASS A ------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------ SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.79 $ 9.02 $ 12.67 $ 15.31 $ 19.70 ================================================================================================================================== INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.04+ 0.02+ 0.00+++ (0.03) (0.05) Net Realized and Unrealized Gain (Loss) on Investments 0.78 2.77 (3.65) (2.28) (2.05) ---------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 0.82 2.79 (3.65) (2.31) (2.10) ---------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.02) (0.02) -- -- -- Net Realized Gain -- -- -- (0.33) (2.29) ---------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.02) (0.02) -- (0.33) (2.29) ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 12.59 $ 11.79 $ 9.02 $ 12.67 $ 15.31 ================================================================================================================================== TOTAL RETURN 7.00% 30.99%^ (28.81)% (15.22)% (11.66)% ================================================================================================================================== RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 52,757 $ 61,420 $ 51,347 $ 85,204 $ 126,531 Ratio of Expenses to Average Net Assets (1) 1.00% 1.00% 1.00% 1.01% 1.00% Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense 1.00% 1.00% N/A 1.00% 1.00% Ratio of Net Investment Income (Loss) to Average Net Assets (1) 0.35% 0.22% 0.02% (0.21)% (0.27)% Portfolio Turnover Rate 163% 160% 173% 95% 93% ---------------------------------------------------------------------------------------------------------------------------------- (1) Ratios before expense limitation: Expenses to Average Net Assets 1.11% 1.14% 1.09% 1.08% 1.04% Net Investment Income (Loss) to Average Net Assets 0.24% 0.08% (0.07)% (0.28)% (0.29)% ---------------------------------------------------------------------------------------------------------------------------------- CLASS B ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.57 $ 8.85 $ 12.45 $ 15.09 $ 19.50 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.02+ (0.00)+++ (0.03)+ (0.07) (0.08) Net Realized and Unrealized Gain (Loss) on Investments 0.75 2.72 (3.57) (2.24) (2.04) --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 0.77 2.72 (3.60) (2.31) (2.12) --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Realized Gain -- -- -- (0.33) (2.29) --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 12.34 $ 11.57 $ 8.85 $ 12.45 $ 15.09 ================================================================================================================================= TOTAL RETURN 6.75% 30.62%^ (28.92)% (15.45)% (11.89)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 8,559 $ 8,156 $ 6,414 $ 13,143 $ 18,876 Ratio of Expenses to Average Net Assets (2) 1.25% 1.25% 1.25% 1.26% 1.25% Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense 1.25% 1.25% N/A 1.25% 1.25% Ratio of Net Investment Income (Loss) to Average Net Assets (2) 0.18% (0.03)% (0.23)% (0.45)% (0.52)% Portfolio Turnover Rate 163% 160% 173% 95% 93% --------------------------------------------------------------------------------------------------------------------------------- (2) Ratios before expense limitation: Expenses to Average Net Assets 1.36% 1.39% 1.34% 1.33% 1.29% Net Investment Income (Loss) to Average Net Assets 0.07% (0.17)% (0.32)% (0.53)% (0.54)% ---------------------------------------------------------------------------------------------------------------------------------
+ Per share amount is based on average shares outstanding. ++ Amount is less than $0.005 per share. ^ In 2003, performance was positively impacted by approximately 5.64%, due to the receipt of proceeds from the settlement of class action suits involving, primarily, one of the Portfolio's holdings. This was a one-time settlement, and as a result, the impact on the NAV and consequently the performance will not likely be repeated in the future. Had these settlements not occurred, the 2003 total return for Class A shares and Class B shares would have been approximately 25.35% and 24.98%, respectively. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 121 2004 ANNUAL REPORT December 31, 2004 FINANCIAL HIGHLIGHTS SMALL COMPANY GROWTH PORTFOLIO
CLASS A ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.81 $ 7.50 $ 9.65 $ 10.99 $ 13.32 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (0.09)+ (0.09)+ (0.07)+ (0.06) (0.08) Net Realized and Unrealized Gain (Loss) on Investments 2.16 3.40 (2.08) (1.28) (0.69) --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 2.07 3.31 (2.15) (1.34) (0.77) --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Realized Gain (0.38) -- -- (0.00)++ (1.56) --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 12.50 $ 10.81 $ 7.50 $ 9.65 $ 10.99 ================================================================================================================================= TOTAL RETURN 19.17% 44.13% (22.28)% (12.18)% (6.64)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 651,276 $ 299,198 $ 74,554 $ 82,300 $ 89,367 Ratio of Expenses to Average Net Assets (1) 1.10% 1.10% 1.10% 1.10% 1.25% Ratio of Net Investment Income (Loss) to Average Net Assets (1) (0.79)% (0.93)% (0.82)% (0.69)% (0.68)% Portfolio Turnover Rate 111% 160% 133% 144% 129% --------------------------------------------------------------------------------------------------------------------------------- (1) Ratios before expense limitation: Expenses to Average Net Assets 1.16% 1.26% 1.22% 1.25% 1.30% Net Investment Income (Loss) to Average Net Assets (0.85)% (1.09)% (0.94)% (0.83)% (0.73)% --------------------------------------------------------------------------------------------------------------------------------- CLASS B ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.43 $ 7.26 $ 9.36 $ 10.68 $ 13.01 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) (0.11)+ (0.10)+ (0.09)+ (0.06) (0.10) Net Realized and Unrealized Gain (Loss) on Investments 2.08 3.27 (2.01) (1.26) (0.67) --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.97 3.17 (2.10) (1.32) (0.77) --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Realized Gain (0.38) -- -- (0.00)++ (1.56) --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 12.02 $ 10.43 $ 7.26 $ 9.36 $ 10.68 ================================================================================================================================= TOTAL RETURN 18.79% 43.80% (22.44)% (12.35)% (6.81)% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 713,733 $ 484,136 $ 215,899 $ 184,099 $ 91,069 Ratio of Expenses to Average Net Assets (2) 1.35% 1.35% 1.35% 1.35% 1.50% Ratio of Net Investment Income (Loss) to Average Net Assets (2) (1.02)% (1.18)% (1.07)% (0.97)% (0.97)% Portfolio Turnover Rate 111% 160% 133% 144% 129% --------------------------------------------------------------------------------------------------------------------------------- (2) Ratios before expense limitation: Expenses to Average Net Assets 1.41% 1.51% 1.47% 1.50% 1.55% Net Investment Income (Loss) to Average Net Assets (1.09)% (1.34)% (1.19)% (1.12)% (1.02)% ---------------------------------------------------------------------------------------------------------------------------------
+ Per share amount is based on average shares outstanding. ++ Amount is less than $0.005 per share. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 122 2004 ANNUAL REPORT December 31, 2004 FINANCIAL HIGHLIGHTS U.S. REAL ESTATE PORTFOLIO
CLASS A ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 17.92 $ 13.55 $ 14.63 $ 14.50 $ 11.84 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.40+ 0.48+ 0.52+ 0.60 0.51 Net Realized and Unrealized Gain (Loss) on Investments 6.17 4.55 (0.48) 0.71 2.94 --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 6.57 5.03 0.04 1.31 3.45 --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.42) (0.48) (0.52) (0.57) (0.56) Net Realized Gain (0.86) (0.18) (0.60) (0.61) (0.23) --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.28) (0.66) (1.12) (1.18) (0.79) --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 23.21 $ 17.92 $ 13.55 $ 14.63 $ 14.50 ================================================================================================================================= TOTAL RETURN 37.28% 37.61% 0.18% 9.27% 29.65% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 1,097,718 $ 897,551 $ 655,274 $ 696,871 $ 584,263 Ratio of Expenses to Average Net Assets (1) 0.97% 1.00% 0.99% 1.00% 1.00% Ratio of Net Investment Income (Loss) to Average Net Assets (1) 2.02% 3.08% 3.49% 4.19% 4.13% Portfolio Turnover Rate 21% 17% 47% 33% 31% --------------------------------------------------------------------------------------------------------------------------------- (1) Ratios before expense limitation: Expenses to Average Net Assets N/A 1.01% 0.99% 1.01% 1.01% Net Investment Income (Loss) to Average Net Assets N/A 3.07% 3.49% 4.18% 4.11% --------------------------------------------------------------------------------------------------------------------------------- CLASS B ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 17.80 $ 13.47 $ 14.55 $ 14.45 $ 11.80 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.35+ 0.45+ 0.45+ 0.56 0.49 Net Realized and Unrealized Gain (Loss) on Investments 6.13 4.50 (0.45) 0.68 2.92 --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 6.48 4.95 -- 1.24 3.41 --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.38) (0.44) (0.48) (0.53) (0.53) Net Realized Gain (0.86) (0.18) (0.60) (0.61) (0.23) --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.24) (0.62) (1.08) (1.14) (0.76) --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 23.04 $ 17.80 $ 13.47 $ 14.55 $ 14.45 ================================================================================================================================= TOTAL RETURN 36.95% 37.23% (0.07)% 8.78% 29.36% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 149,180 $ 70,146 $ 31,584 $ 23,198 $ 20,235 Ratio of Expenses to Average Net Assets (2) 1.22% 1.25% 1.24% 1.25% 1.25% Ratio of Net Investment Income (Loss) to Average Net Assets (2) 1.76% 2.83% 3.24% 3.96% 3.83% Portfolio Turnover Rate 21% 17% 47% 33% 31% --------------------------------------------------------------------------------------------------------------------------------- (2) Ratios before expense limitation: Expenses to Average Net Assets N/A 1.26% 1.24% 1.26% 1.26% Net Investment Income (Loss) to Average Net Assets N/A 2.82% 3.24% 3.95% 3.81% ---------------------------------------------------------------------------------------------------------------------------------
+ Per share amount is based on average shares outstanding. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 123 2004 ANNUAL REPORT December 31, 2004 FINANCIAL HIGHLIGHTS VALUE EQUITY PORTFOLIO
CLASS A ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.30 $ 7.21 $ 9.68 $ 10.32 $ 9.63 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.12+ 0.13+ 0.14+ 0.15+ 0.16 Net Realized and Unrealized Gain (Loss) on Investments 1.23 2.09 (2.47) (0.31) 1.54 --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.35 2.22 (2.33) (0.16) 1.70 --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.13) (0.13) (0.14) (0.15) (0.16) Net Realized Gain -- -- -- (0.33) (0.85) --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.13) (0.13) (0.14) (0.48) (1.01) --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 10.52 $ 9.30 $ 7.21 $ 9.68 $ 10.32 ================================================================================================================================= TOTAL RETURN 14.56% 31.05% (24.22)% (1.55)% 18.08% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 90,938 $ 108,997 $ 76,452 $ 101,691 $ 70,454 Ratio of Expenses to Average Net Assets (1) 0.70% 0.70% 0.70% 0.70% 0.70% Ratio of Net Investment Income (Loss) to Average Net Assets (1) 1.28% 1.62% 1.69% 1.56% 1.64% Portfolio Turnover Rate 84% 130% 45% 50% 62% --------------------------------------------------------------------------------------------------------------------------------- (1) Ratios before expense limitation: Expenses to Average Net Assets 0.74% 0.77% 0.76% 0.79% 0.81% Net Investment Income (Loss) to Average Net Assets 1.24% 1.55% 1.63% 1.47% 1.54% --------------------------------------------------------------------------------------------------------------------------------- CLASS B ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.31 $ 7.21 $ 9.67 $ 10.32 $ 9.60 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income (Loss) 0.10+ 0.11++ 0.12+ 0.13+ 0.1 Net Realized and Unrealized Gain (Loss) on Investments 1.20 2.10 (2.46) (0.32) 1.56 --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.30 2.21 (2.34) (0.19) 1.68 --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.10) (0.11) (0.12) (0.13) (0.11) Net Realized Gain -- -- -- (0.33) (0.85) --------------------------------------------------------------------------------------------------------------------------------- Total Distributions (0.10) (0.11) (0.12) (0.46) (0.96) --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 10.51 $ 9.31 $ 7.21 $ 9.67 $ 10.32 ================================================================================================================================= TOTAL RETURN 14.07% 30.86% (24.32)% (1.89)% 17.92% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 75,189 $ 72,180 $ 46,757 $ 24,597 $ 891 Ratio of Expenses to Average Net Assets (2) 0.95% 0.95% 0.95% 0.95% 0.95% Ratio of Net Investment Income (Loss) to Average Net Assets (2) 1.05% 1.37% 1.44% 1.25% 1.35% Portfolio Turnover Rate 84% 130% 45% 50% 62% --------------------------------------------------------------------------------------------------------------------------------- (2) Ratios before expense limitation: Expenses to Average Net Assets 0.99% 1.02% 1.01% 1.04% 1.11% Net Investment Income (Loss) to Average Net Assets 1.01% 1.30% 1.38% 1.17% 1.24% ---------------------------------------------------------------------------------------------------------------------------------
+ Per share amount is based on average shares outstanding. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 124 2004 ANNUAL REPORT December 31, 2004 FINANCIAL HIGHLIGHTS EMERGING MARKETS DEBT PORTFOLIO
CLASS A ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 3.53 $ 2.95 $ 2.95 $ 2.88 $ 3.00 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income 0.26+ 0.25+ 0.27+ 0.21 0.55 Net Realized and Unrealized Gain (Loss) on Investments 0.10 0.59 0.06 0.09 (0.17) --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 0.36 0.84 0.33 0.30 0.38 --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.25) (0.26) (0.33) (0.23) (0.50) --------------------------------------------------------------------------------------------------------------------------------- REDEMPTION FEES 0.00++ -- -- -- -- --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 3.64 $ 3.53 $ 2.95 $ 2.95 $ 2.88 ================================================================================================================================= TOTAL RETURN 10.07% 28.46% 11.29% 10.57% 12.81% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 81,109 $ 54,647 $ 48,769 $ 52,561 $ 47,080 Ratio of Expenses to Average Net Assets(1) 1.04%# 1.16% 1.06% 1.13% 1.15% Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense 1.04% 1.13% N/A N/A 1.10% Ratio of Net Investment Income to Average Net Assets(1) 7.33% 7.48% 8.79% 8.22% 13.33% Portfolio Turnover Rate 151% 216% 157% 316% 375% --------------------------------------------------------------------------------------------------------------------------------- (1) Ratios before expense limitation: Expenses to Average Net Assets 1.07% N/A N/A N/A N/A Net Investment Income (Loss) to Average Net Assets 7.30% N/A N/A N/A N/A --------------------------------------------------------------------------------------------------------------------------------- CLASS B ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 3.60 $ 3.00 $ 3.01 $ 2.92 $ 3.03 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income 0.26+ 0.25+ 0.26+ 0.30 0.20 Net Realized and Unrealized Gain (Loss) on Investments 0.10 0.60 0.05 0.02 0.17 --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 0.36 0.85 0.31 0.32 0.37 --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.24) (0.25) (0.32) (0.23) (0.48) --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 3.72 $ 3.60 $ 3.00 $ 3.01 $ 2.92 ================================================================================================================================= TOTAL RETURN 9.90% 28.34% 10.34% 10.50% 12.50% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 437 $ 429 $ 343 $ 429 $ 387 Ratio of Expenses to Average Net Assets(2) 1.29%# 1.41% 1.31% 1.38% 1.40% Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense 1.29% 1.38% N/A N/A 1.35% Ratio of Net Investment Income to Average Net Assets(2) 7.07% 7.23% 8.54% 7.97% 13.28% Portfolio Turnover Rate 151% 216% 157% 316% 375% --------------------------------------------------------------------------------------------------------------------------------- (2) Ratios before expense limitation: Expenses to Average Net Assets 1.32% N/A N/A N/A N/A Net Investment Income (Loss) to Average Net Assets 7.04% N/A N/A N/A N/A ---------------------------------------------------------------------------------------------------------------------------------
+ Per share amount is based on average shares outstanding. ++ Amount is less than $0.005 per share. # Effective May 1, 2004, the Adviser has agreed to limit the ratio of expenses to average net assets to the maximum ratio of 1.00% for Class A shares and 1.25% for Class B shares. Prior to May 1, 2004, these maximum ratios were 1.75% for Class A shares and 2.00% for Class B shares. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 125 2004 ANNUAL REPORT December 31, 2004 FINANCIAL HIGHLIGHTS MONEY MARKET PORTFOLIO
CLASS A ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income 0.009 0.007+ 0.013 0.038 0.060 --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.009) (0.007) (0.013) (0.038) (0.060) --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 ================================================================================================================================= TOTAL RETURN 0.93% 0.64% 1.30% 3.82% 6.06% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 546,866 $ 795,399 $ 1,369,935 $ 2,706,283 $ 3,026,412 Ratio of Expenses to Average Net Assets 0.47% 0.51% 0.48% 0.48% 0.48% Ratio of Net Investment Income to Average Net Assets 0.87% 0.69% 1.32% 3.90% 6.07% ---------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL MONEY MARKET PORTFOLIO
CLASS A ----------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- SELECTED PER SHARE DATA AND RATIOS 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 ================================================================================================================================= INCOME (LOSS) FROM INVESTMENT OPERATIONS Net Investment Income 0.008 0.005+ 0.009 0.022 0.035 --------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS FROM AND/OR IN EXCESS OF: Net Investment Income (0.008) (0.005) (0.009) (0.022) (0.035) --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 ================================================================================================================================= TOTAL RETURN 0.75% 0.50% 0.90% 2.23% 3.57% ================================================================================================================================= RATIOS AND SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $ 449,318 $ 511,551 $ 910,426 $ 1,346,818 $ 1,476,436 Ratio of Expenses to Average Net Assets 0.48% 0.50% 0.48% 0.49% 0.48% Ratio of Net Investment Income to Average Net Assets 0.74% 0.54% 0.90% 2.25% 3.50% ---------------------------------------------------------------------------------------------------------------------------------
+ Per share amount is based on average shares outstanding. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 126 2004 ANNUAL REPORT December 31, 2004 NOTES TO FINANCIAL STATEMENTS Morgan Stanley Institutional Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940 (the "1940 Act"), as amended, as an open-end management investment company. The Fund is comprised of sixteen separate, active, diversified and non-diversified portfolios (individually referred to as a "Portfolio", collectively as the "Portfolios"). Each Portfolio (with the exception of the International Small Cap, Money Market and Municipal Money Market Portfolios) offers two classes of shares - Class A and Class B. Both classes of shares have identical voting rights (except that shareholders of a Class have exclusive voting rights regarding any matter relating solely to that Class of shares), dividend, liquidation and other rights. For detailed descriptions of the investment objectives of each of the Portfolios and other related information, please refer to the Prospectuses of the Fund. Generally, the investment objective of the domestic and international equity portfolios is to seek capital appreciation by investing in equity and equity-related securities. The investment objective of the international fixed income portfolio is primarily to seek a high total return consistent with preservation of capital. The investment objective of the money market portfolios is to seek current income and preserve capital. The International Equity Portfolio is authorized to issue 500 million shares per class but is currently closed to new accounts. On September 26, 2003, the net assets of the Small Cap Growth Portfolio's (formerly a Portfolio of Morgan Stanley Institutional Fund Trust) Institutional and Adviser Class shares were merged into the Small Company Growth Portfolio's Class A and B shares, respectively, through a tax-free exchange. In exchange for the $100,203,000 in net assets received, including $13,556,000 in unrealized appreciation, 10,221,445 Class A and 212,563 Class B shares of the Small Company Growth Portfolio were issued. Prior to the combination, the net assets of the Small Company Growth Portfolio totaled $497,416,000. Immediately after the combination, the net assets of the Small Company Growth Portfolio totaled $597,618,000. On May 27, 2004, the Asian Real Estate, European Value Equity, Japanese Value Equity and Latin American Portfolios were liquidated. On August 20, 2004, the Technology Portfolio was liquidated. A. ACCOUNTING POLICIES: The following significant accounting policies are in conformity with U.S. generally accepted accounting principles for investment companies. Such policies are consistently followed by the Fund in the preparation of the financial statements. U.S. generally accepted accounting principles may require management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results may differ from those estimates. 1. SECURITY VALUATION: Equity securities listed on a U.S. exchange are valued at the latest quoted sales price on the valuation date. Equity securities listed or traded on NASDAQ, for which market quotations are available, are valued at the NASDAQ Official Closing Price. Securities listed on a foreign exchange are valued at their closing price. Unlisted securities and listed securities not traded on the valuation date for which market quotations are readily available are valued at the mean between the current bid and asked prices obtained from reputable brokers. Bonds and other fixed income securities may be valued according to the broadest and most representative market. In addition, bonds and other fixed income securities may be valued on the basis of prices provided by a pricing service. The prices provided by a pricing service take into account broker dealer market price quotations for institutional size trading in similar groups of securities, security quality, maturity, coupon and other security characteristics as well as any developments related to the specific securities. Debt securities purchased with remaining maturities of 60 days or less are valued at amortized cost, if it approximates value. Securities owned by the Money Market and Municipal Money Market Portfolios are stated at amortized cost, which approximates market value. All other securities and investments for which market values are not readily available, including restricted securities, and those securities for which it is inappropriate to determine prices in accordance with the aforementioned procedures, are valued at fair value as determined in good faith under procedures adopted by the Board of Directors, although the actual calculations may be done by others. Factors considered in making this determination may include, but are not limited to, information obtained by contacting the issuer, analysts, or the appropriate stock exchange (for exchange-traded securities), analysis of the issuer's financial statements or other available documents and, if necessary, available information concerning other securities in similar circumstances. Most foreign markets close before the New York Stock Exchange (NYSE). Occasionally, developments that could affect the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities trade) and the close of business on the NYSE. If these developments are expected to materially affect the value of the securities, the valuations may be adjusted to reflect the estimated fair value as of the close of the NYSE, as determined in 127 2004 ANNUAL REPORT December 31, 2004 NOTES TO FINANCIAL STATEMENTS (CONT'D) good faith under procedures established by the Board of Directors. 2. REPURCHASE AGREEMENTS: The Portfolios may enter into repurchase agreements under which a Portfolio lends excess cash and takes possession of securities with an agreement that the counterparty will repurchase such securities. In connection with transactions in repurchase agreements, a bank as custodian for the Fund takes possession of the underlying securities which are held as collateral, with a market value at least equal to the amount of the repurchase transaction, including principal and accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market on a daily basis to determine the adequacy of the collateral. In the event of default on the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. In the event of default or bankruptcy by the counterparty to the agreement, realization and/or retention of the collateral or proceeds may be subject to legal proceedings. The Portfolios, along with other affiliated investment companies, may utilize a joint trading account for the purpose of entering into repurchase agreements. 3. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the mean of the bid and asked prices of such currencies against U.S. dollars last quoted by a major bank as follows: - investments, other assets and liabilities-at the prevailing rates of exchange on the valuation date; - investment transactions, investment income and expenses-at the prevailing rates of exchange on the dates of such transactions. Although the net assets of the Fund are presented at the foreign exchange rates and market values at the close of the period, 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 fluctuations arising from changes in the market prices of the securities held at period end. Similarly, the Fund does not isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of securities sold during the period. Accordingly, realized and unrealized foreign currency gains (losses) on investments in securities are included in the reported net realized and unrealized gains (losses) on investment transactions and balances. However, pursuant to U.S. Federal income tax regulations, gains and losses from certain foreign currency transactions and the foreign currency portion of gains and losses realized on sales and maturities of foreign denominated debt securities are treated as ordinary income for U.S. Federal income tax purposes. Net realized gains (losses) on foreign currency transactions represent net foreign exchange gains (losses) from foreign currency exchange contracts, disposition of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains (losses) from valuing foreign currency denominated assets and liabilities at period end exchange rates are reflected as a component of unrealized appreciation (depreciation) on the Statements of Assets and Liabilities. The change in net unrealized currency gains (losses) for the period is reflected on the Statements of Operations. Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, fluctuations of exchange rates in relation to the U.S. dollar, the possibility of lower levels of government supervision and regulation of foreign securities markets and the possibility of political or economic instability. Prior governmental approval for foreign investments may be required under certain circumstances in some countries, and the extent of foreign investments in domestic companies may be subject to limitation in other countries. Foreign ownership limitations also may be imposed by the charters of individual companies to prevent, among other concerns, violations of foreign investment limitations. As a result, an additional class of shares (identified as "Foreign" in the Portfolio of Investments) may be created and offered for investment. The "local" and "foreign shares" market values may differ. In the absence of trading of the foreign shares in such markets, the Fund values the foreign shares at the closing exchange price of the local shares. Such securities, if any, are identified as fair valued on the Portfolio of Investments. 4. FOREIGN CURRENCY EXCHANGE CONTRACTS: Certain Portfolios may enter into foreign currency exchange contracts generally to attempt to protect securities and related receivables and payables against changes in future foreign currency exchange rates and, in certain situations, to gain exposure to foreign currencies. A foreign currency exchange contract is an agreement between two parties to buy or sell currency at a set price on a future date. The 128 2004 ANNUAL REPORT December 31, 2004 NOTES TO FINANCIAL STATEMENTS (CONT'D) market value of the contract will fluctuate with changes in currency exchange rates. The contract is marked-to-market daily and the change in market value is recorded by the Portfolios as unrealized gain or loss. The Portfolios record realized gains or losses when the contract is closed 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. Credit risk may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and is generally limited to the amount of the unrealized gains on the contracts, if any, at the date of default. Risks may also arise from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. 5. LOAN AGREEMENTS: Certain Portfolios may invest in fixed and floating rate loans ("Loans") arranged through private negotiations between an issuer of sovereign debt obligations and one or more financial institutions ("Lenders") deemed to be creditworthy by the investment adviser. A Portfolio's investments in Loans may be in the form of participations in Loans ("Participations") or assignments of all or a portion of Loans ("Assignments") from third parties. A Portfolio's investment in Participations typically results in the Portfolio having a contractual relationship with only the Lender and not with the borrower. The Portfolios have the right to receive payments of principal, interest and any fees to which it is entitled only upon receipt by the Lender of the payments from the borrower. The Portfolios generally have no right to enforce compliance by the borrower under the terms of the loan agreement. As a result, the Portfolio may be subject to the credit risk of both the borrower and the Lender that is selling the Participation and any intermediaries between the Lender and the Portfolio. When a Portfolio purchases Assignments from Lenders, it typically acquires direct rights against the borrower on the Loan. Because Assignments are arranged through private negotiations between potential assignees and potential assignors, the rights and obligations acquired by the Portfolio as the purchaser of an Assignment may differ from, and be more limited than, those held by the assigning Lender. 6. SHORT SALES: Certain Portfolios may sell securities short. A short sale is a transaction in which a Portfolio sells securities it may or may not own, but has borrowed, in anticipation of a decline in the market price of the securities. The Portfolio is obligated to replace the borrowed securities at the market price at the time of replacement. The Portfolio may have to pay a premium to borrow the securities as well as pay any dividends or interest payable on the securities until they are replaced. Dividends and interest payable on such securities sold short are included in dividend expense and interest expense, respectively, in the Statements of Operations. A Portfolio's obligation to replace the securities borrowed in connection with a short sale will generally be secured by collateral deposited with the broker that consists of cash, U.S. government securities or other liquid, high grade debt obligations. In addition, the Portfolio will either designate on the Portfolio's records or place in a segregated account with its Custodian an amount of cash, U.S. government securities or other liquid high grade debt obligations equal to the difference, if any, between (1) the market value of the securities sold at the time they were sold short and (2) cash, U.S. government securities or other liquid high grade debt obligations deposited as collateral with the broker in connection with the short sale. Short sales by the Portfolios involve certain risks and special considerations. Possible losses from short sales differ from losses that could be incurred from the purchase of a security, because losses from short sales may be unlimited, whereas losses from purchases cannot exceed the total amount invested. 7. SECURITIES LENDING: Certain Portfolios may lend securities to qualified financial institutions, such as broker-dealers, to earn additional income. Any increase or decrease in the fair value of the securities loaned that might occur and any interest earned or dividends declared on those securities during the term of the loan would remain in the Portfolio. Portfolios that lend securities receive cash or securities as collateral in an amount equal to or exceeding 100% of the current fair value of the loaned securities. The collateral is marked to market daily, by the securities lending agent, to ensure that a minimum of 100% collateral coverage is maintained. Based on pre-established guidelines, the securities lending agent invests any cash collateral that is received in high-quality short-term investments. Securities lending income is generated from the earnings on the invested collateral and borrowing fees, less any rebates owed to the borrowers and compensation to the lending agent, and is included in the Portfolios' Statements of Operations in interest income. Risks in securities lending transactions are that a borrower may not provide additional collateral when required or return the securities when due, and that the value of the short-term investments will be less than the amount of cash collateral plus any rebate that is required to be returned to the borrower. 129 2004 ANNUAL REPORT December 31, 2004 NOTES TO FINANCIAL STATEMENTS (CONT'D) The value of loaned securities and related collateral outstanding at December 31, 2004 are as follows:
VALUE OF LOANED VALUE OF SECURITIES COLLATERAL PORTFOLIO (000) (000) ------------------------------------------------------------- Active International Allocation $ 62,888 $ 66,163 Emerging Markets 67,299 69,758 International Equity 1,006,675 1,058,940 International Magnum 10,169 10,703
The following Portfolios had income from securities lending (after rebates to borrowers and fee paid to securities lending agent):
NET INTEREST EARNED BY PORTFOLIO PORTFOLIO (000) ------------------------------------------------------------- Active International Allocation $ 252 Emerging Markets 531 International Equity 4,444 International Magnum 58
8. STRUCTURED SECURITIES: The Emerging Markets Debt Portfolio may invest in interests in entities organized and operated solely for the purpose of restructuring the investment characteristics of sovereign debt obligations. This type of restructuring involves the deposit with or purchase by an entity of specified instruments and the issuance by that entity of one or more classes of securities ("Structured Securities") backed by, or representing interests in, the underlying instruments. Structured Securities generally will expose the Portfolio to credit risks of the underlying instruments as well as of the issuer of the structured security. Structured securities are typically sold in private placement transactions with no active trading market. Investments in Structured Securities may be more volatile than their underlying instruments; however, any loss is limited to the amount of the original investment. 9. FUTURES: Certain Portfolios may purchase and sell futures contracts. Futures contracts provide for the sale by one party and purchase by another party of a specified amount of a specified security, index, instrument or basket of instruments. Futures contracts (secured by cash, government securities or other high grade liquid investments deposited with brokers or custodians as "initial margin") are valued based upon their quoted daily settlement prices; changes in initial settlement value (represented by cash paid to or received from brokers as "variation margin") are accounted for as unrealized appreciation (depreciation). When futures contracts are closed, the difference between the opening value at the date the contract was entered into and the value at closing is recorded as a realized gain or loss in the Statements of Operations. Due from (to) broker includes both initial margin and variation margin, as stated in the Statements of Assets and Liabilities. Certain Portfolios may use futures contracts in order to manage their exposure to the stock and bond markets, to hedge against unfavorable changes in the value of securities or to remain fully invested and to reduce transaction costs. Futures contracts involve market risk in excess of the amounts recognized in the Statements of Assets and Liabilities. Risks arise from the possible movements in security values underlying these instruments. The change in value of futures contracts primarily corresponds with the value of their underlying instruments, which may not correlate with the change in value of hedged investments. 10. PURCHASED AND WRITTEN OPTIONS: Certain Portfolios may write covered call and put options on portfolio securities and other financial instruments. Premiums are received and are recorded as liabilities. The liabilities are subsequently adjusted to reflect the current value of the options written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or are closed are added to or offset against the proceeds or amount paid on the transaction to determine the net realized gain or loss. By writing a covered call option, a Portfolio, in exchange for the premium, foregoes the opportunity for capital appreciation above the exercise price should the market price of the underlying security increase. By writing a put option, a Portfolio, in exchange for the premium, accepts the risk of having to purchase a security at an exercise price that is above the current market price. Certain Portfolios may purchase call and put options on their portfolio securities or other financial instruments. Each Portfolio may purchase call options to protect against an increase in the price of the security or financial instrument it anticipates purchasing. Each Portfolio may purchase put options on securities which it holds or other financial instruments to protect against a decline in the value of the security or financial instrument or to close out covered written put positions. Risks may arise from an imperfect correlation between the change in market value of the securities held by the Portfolio and the prices of options relating to the securities purchased or sold by the Portfolio and from the possible lack of a liquid secondary market for an option. The maximum exposure to loss for any purchased option is limited to the premium initially paid for the option. 130 2004 ANNUAL REPORT December 31, 2004 NOTES TO FINANCIAL STATEMENTS (CONT'D) 11. UNFUNDED COMMITMENTS: Subject to the terms of a Subscription Agreement between the U.S. Real Estate Portfolio and Cabot Industrial Value Fund, Inc., the Portfolio has made a subscription commitment of $5,000,000 for which it will receive 10,000 shares of common stock. As of December 31, 2004, Cabot Industrial Value Fund, Inc. has drawn down $952,000, which represents 19.0% of the commitment. Subject to the terms of a Subscription Agreement between the U.S. Real Estate Portfolio and BRCP REIT LLC I, the Portfolio has made a subscription commitment of $7,000,000 for which it will receive 7,000,000 shares of common stock. As of December 31, 2004, BRCP REIT LLC I has drawn down $2,117,638, which represents 30.3% of the commitment. 12. REDEMPTION FEES: Shares of the Active International Allocation, Emerging Markets, European Real Estate, Global Franchise, Global Value Equity, International Equity, International Magnum, International Small Cap and Emerging Markets Debt Portfolios redeemed within 60 days of purchase may be subject to a 2% redemption fee. The redemption fee is designed to protect the Portfolio and remaining shareholders from the effects of short-term trading. These fees, if any, are included on the Statement of Changes in Net Assets. 13. RESTRICTED SECURITIES: Certain Portfolios may invest in unregistered or otherwise restricted securities. The term restricted securities refers to securities that are unregistered or are held by control persons of the issuer and securities that are subject to contractual restrictions on their resale. As a result, restricted securities may be more difficult to value and the Portfolio may have difficulty disposing of such assets either in a timely manner or for a reasonable price. In order to dispose of an unregistered security, the Portfolio, where it has contractual rights to do so, may have to cause such security to be registered. A considerable period may elapse between the time the decision is made to sell the security and the time the security is registered so that the Fund could sell it. Contractual restrictions on the resale of securities vary in length and scope and are generally the result of a negotiation between the issuer and acquiror of the securities. The Portfolio would, in either case, bear market risks during that period. 14. OTHER: Security transactions are accounted for on the date the securities are purchased or sold. Realized gains and losses on the sale of investment securities are determined on the specific identified cost basis. Dividend income is recorded on the ex-dividend date (except for certain foreign dividends which may be recorded as soon as the Fund is informed of such dividends) net of applicable withholding taxes. Interest income is recognized on the accrual basis except where collection is in doubt. Discounts and premiums on securities purchased are amortized according to the effective yield method over their respective lives. Most expenses of the Fund can be directly attributed to a particular Portfolio. Expenses which cannot be directly attributed are apportioned among the Portfolios based upon relative net assets. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses are allocated to each class of shares based upon their relative net assets. Dividends to the shareholders of the Money Market and the Municipal Money Market Portfolios are accrued daily and are distributed on or about the 15th of each month. Distributions for the remaining Portfolios are recorded on the ex-distribution date. The U.S. Real Estate Portfolio owns shares of real estate investment trusts ("REITs") which report information on the source of their distributions annually. A portion of distributions received from REITs during the year is estimated to be a return of capital and is recorded as a reduction of their cost. B. INVESTMENT ADVISORY FEES: Morgan Stanley Investment Management Inc. (the "Adviser" or "MS Investment Management"), a wholly-owned subsidiary of Morgan Stanley, provides the Fund with investment advisory services under the terms of an investment advisory agreement (the "Agreement"). Prior to November 1, 2004, MS Investment Management provided such services at the annual rates of the average daily net assets indicated below. MS Investment Management has voluntarily agreed to waive fees payable to it and to reimburse the Portfolios, if necessary, if the annual operating expenses, as defined, expressed as a percentage of average daily net assets, exceed the maximum ratios indicated as follows:
MAXIMUM EXPENSE RATIO ADVISORY ----------------------- PORTFOLIO FEE CLASS A CLASS B ---------------------------------------------------------------------------- Active International Allocation 0.65% 0.80% 1.05% European Real Estate 0.80 1.00 1.25 Global Franchise 0.80 1.00 1.25 Global Value Equity 0.80 1.00 1.25 International Equity 0.80 1.00 1.25 International Magnum 0.80 1.00 1.25 International Small Cap 0.95 1.15 N/A Equity Growth 0.60 0.80 1.05 Focus Equity 0.80 1.00 1.25 Small Company Growth 1.00 1.10 1.35 U.S. Real Estate 0.80 1.00 1.25 Value Equity 0.50 0.70 0.95 Emerging Markets Debt (1) 0.75 1.00 1.25 Money Market 0.30 0.55 N/A
131 2004 ANNUAL REPORT December 31, 2004 NOTES TO FINANCIAL STATEMENTS (CONT'D)
MAXIMUM EXPENSE RATIO ADVISORY ----------------- PORTFOLIO FEE CLASS A CLASS B ----------------------------------------------------------------------------- Municipal Money Market 0.30% 0.57% N/A AVERAGE DAILY NET ASSETS Emerging Markets(2) First $1.0 billion 1.25 1.65 1.90% Next $1.0 billion 1.20 1.65 1.90 Over $2.0 billion 1.00 1.65 1.90
(1)Prior to May 1, 2004, the Maximum Expense Ratios for the Emerging Markets Debt Portfolio's Class A shares and Class B shares were 1.75% and 2.00%, respectively. (2)Prior to May 1, 2004, the Advisory Fee for the Emerging Markets Portfolio was 1.25%. Effective November 1, 2004, MS Investment Management has agreed to waive fees payable to it and to reimburse the Emerging Markets Portfolio, if necessary, to the extent that the annual operating expenses, excluding bank overdraft, certain foreign taxes and extraordinary expenses, expressed as a percentage of average daily net assets, exceed the maximum ratio of 1.65% for Class A shares and 1.90% for Class B shares. Prior to November 1, 2004, these maximum ratios were 1.75% for Class A shares and 2.00% for Class B shares. Effective November 1, 2004, the investment advisory fees of some of the Portfolios were reduced as follows:
FEE PRIOR TO FEE EFFECTIVE PORTFOLIO NOVEMBER 1, 2004 NOVEMBER 1, 2004 ------------------------------------------------------------------------------ Emerging Markets 1.25% first $1 billion 1.25% first $500 million 1.20% next $1 billion 1.20% next $500 million 1.00% over $2 billion 1.15% next $1.5 billion 1.00% over $2.5 billion Global Franchise 0.80% 0.80% first $500 million 0.75% next $500 million 0.70% over $1 billion Global Value Equity 0.80% 0.67% first $1 billion 0.645% next $500 million 0.62% next $1 billion 0.595% next $1 billion 0.57% next $1 billion 0.545% over $4.5 billion International Magnum 0.80% 0.80% first $500 million 0.75% next $500 million 0.70% over $1 billion Equity Growth 0.60% 0.50% first $1 billion 0.45% next $1 billion 0.40% next $1 billion 0.35% over $3 billion Small Company Growth 1.00% 0.92% first $1 billion 0.85% over $1 billion U.S. Real Estate 0.80% 0.80% first $500 million 0.75% next $500 million 0.70% over $1 billion Value Equity 0.50% 0.50% first $150 million 0.45% next $100 million 0.40% next $100 million 0.35% over $350 million Emerging Markets Debt 0.75% 0.75% first $500 million 0.70% next $500 million 0.65% over $1 billion
For the year ended December 31, 2004, the Portfolios had advisory fees waived as follows:
ADVISORY FEES WAIVED PORTFOLIO (000) -------------------------------------------------------------- Active International Allocation $ 424 European Real Estate 127 Global Franchise 109 Global Value Equity 68 International Magnum 199 International Small Cap 138 Focus Equity 69 Small Company Growth 628 Value Equity 72 Emerging Markets Debt 22
The Adviser has entered into Sub-Advisory Agreements with Morgan Stanley Investment Advisors Inc., Morgan Stanley Investment Management Limited, Morgan Stanley Asset & Investment Trust Management Co., Limited and Morgan Stanley Investment Management Company (each a "Sub-Adviser"), all wholly-owned subsidiaries of Morgan Stanley. The Sub-Advisers, subject to the control and supervision of the Fund, its officers, Directors and the Adviser, and in accordance with the investment objectives, policies and restrictions of the Portfolios, make certain day-to-day investment decisions for certain Portfolios and place certain of the Portfolios' purchase and sales orders. The Adviser pays the Sub-Advisers on a monthly basis a portion of the net advisory fees the Adviser receives from the Portfolios which receive these services. C. ADMINISTRATION FEES: Prior to November 1, 2004, MS Investment Management (the "Administrator") also provided the Fund with administrative services pursuant to an administration agreement for a monthly fee, which on an annual basis equaled 0.15% of the average daily net assets of each Portfolio, plus reimbursement of out-of-pocket expenses. Under an agreement between the Administrator and J.P. Morgan Investor Services Co. ("JPMIS"), a corporate affiliate of JPMorgan Chase Bank, JPMIS provides certain administrative services to the Fund. For such services, the Administrator pays JPMIS a portion of the fee the Administrator receives from the Fund. An employee of JPMIS is an officer of the Fund. In addition, the Fund incurs local administration fees in connection with doing business in certain emerging market countries. Effective November 1, 2004, Morgan Stanley Investment Management Inc. (MSIM) serves as Administrator to the Fund pursuant to an Amended and Restated Administration Agreement. Under the Amended and Restated Administration Agreement, the Administration Fee was reduced to 0.08% of the average daily net assets of each non-money market Portfolio and 0.05% of the average daily net assets of each money market Portfolio. JPMIS will continue to provide certain administrative services pursuant to an Amended and Restated 132 2004 ANNUAL REPORT December 31, 2004 NOTES TO FINANCIAL STATEMENTS (CONT'D) Sub-Administration Agreement with MSIM and receives compensation from MSIM for these services. Expenses covered by the Administration Fee will change. Administration costs (including out-of-pocket expenses incurred in the ordinary course of providing services under the Agreement, which were previously borne by the Fund), except pricing services and extraordinary expenses, will now be covered under the Administration Fee. Transfer Agency expenses will no longer be paid by MSIM, but will be borne by the Fund. D. DISTRIBUTION FEES: Morgan Stanley & Co., Incorporated (the "Distributor"), a wholly-owned subsidiary of Morgan Stanley, and an affiliate of MS Investment Management, serves as the distributor of the Fund and provides Class B shareholders of the applicable Portfolios with distribution services pursuant to a Distribution Plan (the "Plan") in accordance with Rule 12b-1 under the 1940 Act. Under the Plan, the Distributor is entitled to receive from each applicable Portfolio, a distribution fee, which is accrued daily and paid quarterly, at an annual rate of 0.25% of the Class B shares' average daily net assets. The Distributor may voluntarily waive from time to time all or any portion of its distribution fee. E. CUSTODIAN FEES: JPMorgan Chase Bank serves as custodian for the Fund in accordance with a custodian agreement. The Custodian holds cash, securities, and other assets of the Fund as required by the 1940 Act. F. PURCHASES AND SALES: During the year ended December 31, 2004, purchases and sales of investment securities, other than long-term U.S. Government securities and short-term investments, were:
PURCHASES SALES PORTFOLIO (000) (000) --------------------------------------------------------------------------------- Active International Allocation $ 218,259 $ 91,941 Emerging Markets 775,361 768,913 European Real Estate 26,342 13,513 Global Franchise 13,752 39,756 Global Value Equity 25,849 26,027 International Equity 3,535,908 2,804,265 International Magnum 40,483 55,471 International Small Cap 487,983 397,334 Equity Growth 1,444,378 1,525,097 Focus Equity 102,381 119,095 Small Company Growth 1,422,976 1,079,273 U.S. Real Estate 215,205 230,228 Value Equity 143,141 182,143 Emerging Markets Debt 119,921 95,686
There were no purchases and sales of long-term U.S. Government securities for the year ended December 31, 2004. During the year ended December 31, 2004, the following Portfolios paid brokerage commissions to Morgan Stanley & Co., an affiliated broker/dealer:
BROKERAGE COMMISSIONS PORTFOLIO (000) -------------------------------------------------------------------------------- Emerging Markets $ 57 Global Value Equity 1 International Magnum 1 Equity Growth 9 Focus Equity 1 Value Equity 3
Additionally, during the year ended December 31, 2004, International Magnum Portfolio paid $141 brokerage commissions to China International Capital Corporation, an affiliated broker/dealer. G. FEDERAL INCOME TAXES: It is each Portfolio's intention to qualify as a regulated investment company and distribute all of its taxable and tax-exempt income. Accordingly, no provision for Federal income taxes is required in the financial statements. A Portfolio may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based on net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned. Taxes may also be based on the movement of foreign currency and are accrued based on the value of investments denominated in such currency. The tax character of distributions paid may differ from the character of distributions shown on the Statements of Changes in Net Assets due to short-term capital gains being treated as ordinary income for tax purposes. The Municipal Money Market Portfolio's ordinary income distributions shown below include tax-exempt as well as taxable components. 133 2004 ANNUAL REPORT December 31, 2004 NOTES TO FINANCIAL STATEMENTS (CONT'D) The tax character of distributions paid during 2004 and 2003 were as follows:
2004 DISTRIBUTIONS 2003 DISTRIBUTIONS PAID FROM: PAID FROM: --------------------------- --------------------------- ORDINARY LONG-TERM ORDINARY LONG-TERM INCOME CAPITAL GAIN INCOME CAPITAL GAIN PORTFOLIO (000) (000) (000) (000) -------------------------------------------------------------------------------------------- Active International Allocation $ 10,343 $ -- $ 6,218 $ -- Emerging Markets 9,929 -- 12,401 -- European Real Estate 832 -- 632 -- Global Franchise 973 3,259 440 359 Global Value Equity 1,126 272 812 472 International Equity 231,683 446,239 104,424 -- International Magnum 1,928 -- 1,640 -- International Small Cap 37,896 68,519 13,275 9,855 Equity Growth 3,214 -- 1,970 -- Focus Equity 103 -- 137 -- Small Company Growth -- 40,919 -- -- U.S. Real Estate 25,591 41,350 27,350 7,144 Value Equity 2,112 -- 2,028 -- Emerging Markets Debt 5,272 -- 3,765 -- Money Market 5,834 -- 7,531 -- Municipal Money Market 3,503 -- 4,229 --
The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from U.S. generally accepted accounting principles. The book/tax differences are either considered temporary or permanent in nature. Temporary differences are generally due to differing book and tax treatments for the timing of the recognition of gains and losses on securities, forwards and futures, including Post October losses. Permanent differences are generally due to REIT adjustments, gain (loss) on in-kind redemptions, foreign currency transactions, distribution reclass, paydown adjustments and gains on certain equity securities designated as issued by "passive foreign investment companies". Permanent book and tax basis differences may result in reclassification among undistributed (distributions in excess of ) net investment income (or accumulated net investment loss), accumulated net realized gain (loss) and paid-in capital. At December 31, 2004, the components of distributable earnings on a tax basis were as follows:
UNDISTRIBUTED UNDISTRIBUTED LONG-TERM ORDINARY INCOME CAPITAL GAIN PORTFOLIO (000) (000) ---------------------------------------------------------------- Active International Allocation $ 4,062 $ -- European Real Estate 127 -- Global Franchise 127 1,115 Global Value Equity -- 1,034 International Magnum 413 -- International Small Cap 3,405 23,528 Equity Growth 940 -- Focus Equity 97 -- Small Company Growth -- 4,483 U.S. Real Estate 2,500 34,174 Money Market 134 -- Municipal Money Market 77 --
Any Portfolios not shown above had no distributable earnings on a tax basis at December 31, 2004. The undistributed ordinary income for the Municipal Money Market represents tax-exempt income. At December 31, 2004, cost, unrealized appreciation, unrealized depreciation, and net unrealized appreciation (depreciation) for U.S. Federal income tax purposes of the investments of each of the Portfolios were:
NET APPRECIATION COST APPRECIATION DEPRECIATION (DEPRECIATION) PORTFOLIO (000) (000) (000) (000) ------------------------------------------------------------------------------------------------------ Active International Allocation $ 569,865 $ 83,427 $ (16,937) $ 66,490 Emerging Markets 1,100,832 337,366 (41,411) 295,955 European Real Estate 36,044 15,338 (2) 15,336 Global Franchise 45,520 18,182 (764) 17,418 Global Value Equity 85,709 15,665 (2,116) 13,549 International Equity 7,470,094 1,696,378 (26,525) 1,669,853 International Magnum 90,032 18,012 (2,673) 15,339 International Small Cap 924,092 375,028 (22,083) 352,945 Equity Growth 692,486 72,081 (4,105) 67,976 Focus Equity 55,561 6,742 (1,222) 5,520 Small Company Growth 1,158,987 239,136 (20,294) 218,842 U.S. Real Estate 773,534 477,119 (6,407) 470,712 Value Equity 148,331 18,230 (704) 17,526 Emerging Markets Debt 75,906 4,159 (1,697) 2,462 Money Market 547,852 -- -- -- Municipal Money Market 469,241 -- -- --
At December 31, 2004, the following Portfolios had available capital loss carryforwards to offset future net capital gains, to the extent provided by regulations, through the indicated expiration dates:
EXPIRATION DATE DECEMBER 31, (000) ------------------------------------------------------------------------------------------------------------ PORTFOLIO 2006 2007 2008 2009 2010 2011 2012 TOTAL ------------------------------------------------------------------------------------------------------------ Active International Allocation $ -- $ -- $ -- $ 5,749 $ 60,663 $ 25,582 $ -- $ 91,994 Emerging Markets -- -- -- 109,167 102,772 -- -- 211,939 European Real Estate -- -- 197 101 -- -- -- 298 International Magnum -- -- -- 5,073 4,936 2,377 -- 12,386 Equity Growth -- -- -- -- 86,561 22,405 -- 108,966 Focus Equity -- -- -- 10,195 21,111 -- 296 31,602 Small Company Growth* -- -- -- 11,988 18,090 -- -- 30,078 Value Equity -- -- -- -- 4,493 -- -- 4,493 Emerging Markets Debt 75,356 9,761 -- 778 -- -- -- 85,895
*Capital loss carryover from target fund. The amounts reflected in the capital loss carryforward table above represent capital loss carryforward from MSIFT Small 134 2004 ANNUAL REPORT December 31, 2004 NOTES TO FINANCIAL STATEMENTS (CONT'D) Cap Growth Portfolio after limitations pursuant to Internal Revenue Code, Section 383. Due to the limitation on utilization of capital loss carryforwards of $4,659,000 per year, only $30,078,000 of the $102,883,000 will actually be eligible to offset future capital gains. Consequently, the difference of $72,805,000 has been recorded as a reduction of paid in capital in 2004. During the year ended December 31, 2004, the following Portfolios utilized capital loss carryforwards for U.S. Federal income tax purposes of approximately:
CAPITAL LOSS CARRYFORWARD UTILIZED PORTFOLIO (000) -------------------------------------------------------------- Active International Allocation $ 14,601 Emerging Markets 117,710 European Real Estate 3,679 Global Value Equity 3,058 International Equity* 41,510 International Magnum 6,808 Equity Growth 63,490 Small Company Growth 35,937 Value Equity 18,313 Emerging Markets Debt 861
* Amounts based on October 31, tax year end. In addition to the $35,937,000 utilized capital loss carryforward attributed to the Small Company Growth Portfolio in the table above, approximately $8,822,000 of capital losses acquired from MSIFT Small Cap Growth Portfolio were utilized for federal tax purposes during the year ended December 31, 2004. To the extent that capital loss carryovers are used to offset any future capital gains realized during the carryover period as provided by U.S. Federal income tax regulations, no capital gains tax liability will be incurred by a Portfolio for gains realized and not distributed. To the extent that capital gains are offset, such gains will not be distributed to the shareholders. Net capital, passive investment company (PFIC), and currency losses incurred after October 31, and within the taxable year are deemed to arise on the first day of the Portfolio's next taxable year. For the year ended December 31, 2004, the Portfolio deferred to January 1, 2005 for U.S. Federal income tax purposes, post-October capital, PFIC and currency losses as indicated:
CAPITAL CURRENCY LOSSES LOSSES PORTFOLIO (000) (000) --------------------------------------------------------- Emerging Markets $ -- $ 2,692 European Real Estate -- 1 Global Franchise -- 582 International Small Cap -- 35 Focus Equity 512 --
For the year ended December 31, 2004, the Global Franchise Portfolio realized gains from in-kind redemptions of $2,600,000. For the fiscal year ended December 31, 2003, the Global Franchise and International Equity Portfolios realized gains from in-kind redemptions of $584,000 and $14,820,000, respectively. H. CONTRACTUAL OBLIGATIONS: The Fund enters into contracts that contain a variety of indemnifications. The Fund's maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote. I. OTHER: The net assets of certain Portfolios include foreign denominated securities and currency. Changes in currency exchange rates will affect the U.S. dollar value of and investment income from such securities. Further, at times certain of the Portfolios' investments are concentrated in a limited number of countries and regions. This concentration may further increase the risk of the Portfolio. The Emerging Markets Debt Portfolio holds a significant portion of its investments in securities which are traded by a small number of market makers who may also be utilized by the Portfolio to provide pricing information used to value such investments. The amounts realized upon disposition of these securities may differ from the value reflected on the Statements of Assets and Liabilities. Settlement and registration of foreign securities transactions may be subject to significant risks not normally associated with investments in the United States. In certain markets, including Russia, ownership of shares is defined according to entries in the issuer's share register. In Russia, currently no central registration system exists and the share registrars may not be subject to effective state supervision. It is possible that a Portfolio could lose its share registration through fraud, negligence or even mere oversight. In addition, shares being delivered for sales and cash being paid for purchases may be delivered before the exchange is complete. This may subject the Portfolio to further risk of loss in the event of a counterparty's failure to complete the transaction. 135 2004 ANNUAL REPORT December 31, 2004 NOTES TO FINANCIAL STATEMENTS (CONT'D) A portion of the securities of the Municipal Money Market Portfolio are insured by certain companies specializing in the insurance of municipal debt obligations. At December 31, 2004, approximately 20.0% of the net assets of the Municipal Money Market Portfolio are covered by such insurance. The insurers and their obligations are as follows:
PERCENTAGE OF INSURER NET ASSETS ----------------------------------------------- MBIA 8.0% FGIC 5.3 FSA 4.6 AMBAC 1.5 FHA 0.6
At December 31, 2004, certain Portfolios had otherwise unaffiliated record owners of 10% or greater. Investment activities of these shareholders could have a material impact on these Portfolios. These Portfolios and the aggregate percentage of such owners were as follows:
PERCENTAGE OF OWNERSHIP ----------------------- PORTFOLIO CLASS A CLASS B ------------------------------------------------------------- Active International Allocation 53.3% 78.7% Emerging Markets 10.2 93.1 European Real Estate 48.9 96.4 Global Franchise 56.1 11.4 Global Value Equity 70.3 88.0 International Equity -- 73.8 International Magnum 89.4 78.2 International Small Cap 29.2 N/A Equity Growth 73.2 75.7 Focus Equity 64.8 40.3 Small Company Growth 26.0 51.5 U.S. Real Estate 39.3 71.3 Value Equity 75.7 92.8 Emerging Markets Debt 84.5 96.9
J. SUBSEQUENT EVENTS: Effective January 31, 2005, the Fund has suspended offering shares of the International Small Cap Portfolio and the International Equity Portfolio to new investors, except as follows. The Fund will continue to offer shares of the Portfolios (1) through certain retirement plan accounts, (2) to clients of registered investment advisors who currently offer shares of the Portfolios in their discretionary asset allocation programs, (3) through certain endowments and foundations, (4) to clients of family office practices where shares of the Portfolios are held by family members of such clients, (5) to directors and trustees of the Morgan Stanley Funds, (6) to Morgan Stanley and its affiliates and their employees, and (7) to benefit plans sponsored by Morgan Stanley and its affiliates. The Fund will continue to offer shares of the Portfolios to existing shareholders and may recommence offering shares of the Portfolios to other new investors in the future. Effective January 31, 2005, the Fund will suspend offering shares of the Global Franchise Portfolio to new investors when assets in the Portfolio reach $100 million, except as follows. Following the general suspension of the offering of shares of the Portfolio to new investors, the Fund will continue to offer shares of the Portfolio (1) through certain retirement plan accounts, (2) to clients of registered investment advisors who currently offer shares of the Portfolio in their discretionary asset allocation programs, (3) through certain endowments and foundations, (4) to clients of family office practices where shares of the Portfolio are held by family members of such clients, (5) to directors and trustees of the Morgan Stanley Funds, (6) to Morgan Stanley and its affiliates and their employees, and (7) to benefit plans sponsored by Morgan Stanley and its affiliates. Also following the general suspension of the offering of shares of the Portfolio to new investors, the Fund will continue to offer shares of the Portfolio to existing shareholders and may recommence offering shares of the Portfolio to other new investors in the future. 136 2004 ANNUAL REPORT December 31, 2004 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF MORGAN STANLEY INSTITUTIONAL FUND, INC. We have audited the accompanying statements of assets and liabilities, including the portfolios of investments, of the Morgan Stanley Institutional Fund, Inc. (comprising, respectively, the Active International Allocation Portfolio, Emerging Markets Portfolio, European Real Estate Portfolio, Global Franchise Portfolio, Global Value Equity Portfolio, International Equity Portfolio, International Magnum Portfolio, International Small Cap Portfolio, Equity Growth Portfolio, Focus Equity Portfolio, Small Company Growth Portfolio, U.S. Real Estate Portfolio, Value Equity Portfolio, Emerging Markets Debt Portfolio, Money Market Portfolio and Municipal Money Market Portfolio) (the "Fund") as of December 31, 2004, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial high-lights based on out audits. lights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are a appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opionion An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2004, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the respective portfolios constituting the Morgan Stanley Institutional Fund, Inc. at December 31, 2004, the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Boston, Massachusetts February 11, 2005 137 2004 ANNUAL REPORT December 31, 2004 FEDERAL TAX INFORMATION (UNAUDITED) For the year ended December 31, 2004, the percentage of dividends paid that qualify for the 70% dividend received deduction for corporate shareholders for the Global Franchise, Global Value Equity, Equity Growth, Focus Equity, U.S. Real Estate and Value Equity Portfolios are 36.2%, 60.4%, 100.0%, 100.0%, 4.5% and 100.0%, respectively. For the year ended December 31, 2004, the percentage of income earned from direct U.S. Treasury Obligations for the Money Market Portfolio is 6.0%. For the year ended December 31, 2004, the percentage of exempt interest dividends paid by the Municipal Money Market Portfolios is 98.9%. For the year ended December 31, 2004, the following Portfolios intend to pass through foreign tax credits and have derived gross income from sources within foreign countries amounting to:
FOREIGN FOREIGN TAX CREDIT SOURCE PASS-THROUGH INCOME PORTFOLIO (000) (000) --------------------------------------------------------------- Active International Allocation $ 655 $ 8,885 Emerging Markets 2,696 27,268 European Real Estate 147 1,157 Global Franchise 179 1,690 Global Value Equity 134 1,384 International Equity* 12,152 117,980 International Magnum 142 1,931 International Small Cap 2,969 26,348
Each applicable Portfolio hereby designates the following amount as long-term capital gain dividends for the purpose of the dividend paid deduction on its federal tax return:
LONG-TERM LONG-TERM CAPITAL GAIN - 20% PORTFOLIO (000) --------------------------------------------------------------- Global Franchise $ 3,259 Global Value Equity 272 International Equity 446,239 International Small Cap 68,519 Small Company Growth 40,919 U.S. Real Estate 41,350
S For the year ended December 31, 2004, qualified dividend income for each applicable Portfolio totaled:
QUALIFYING DIVIDEND INCOME PORTFOLIO (000) --------------------------------------------------------------- Active International Allocation $ 5,687 Emerging Markets 11,881 European Real Estate 750 Global Value Equity 1,265 Global Franchise 1,152 International Equity 68,837 International Magnum 1,243 International Small Cap 19,151 Equity Growth 3,214 Focus Equity 103 Value Equity 2,112
138 2004 ANNUAL REPORT December 31, 2004 DIRECTOR AND OFFICER INFORMATION (UNAUDITED) INDEPENDENT DIRECTORS:
NUMBER OF PORTFOLIOS IN POSITION(S) TERM OF OFFICE FUND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS DIRECTOR REGISTRANT TIME SERVED* DURING PAST 5 YEARS DIRECTOR** HELD BY DIRECTOR --------------------------- ------------ -------------- ---------------------------------- ------------- --------------------------- Michael Bozic (63) Director Director since Private investor; Director or 197 Director of various c/o Kramer Levin Naftalis & July 2003 Trustee of the Retail Funds (since business organizations. Frankel LLP April 1994) and the Institutional Counsel to the Independent Funds (since July 2003); formerly Directors Vice Chairman of Kmart Corporation 919 Third Avenue (December 1998-October 2000), New York, NY 10022-3902 Chairman and Chief Executive Officer of Levitz Furniture Corporation (November 1995-November 1998) and President and Chief Executive Officer of Hills Department Stores (May 1991-July 1995); formerly variously Chairman, Chief Executive Officer, President and Chief Operating Officer (1987-1991) of the Sears Merchandise Group of Sears Roebuck & Co. Edwin J. Garn (72) Director Director since Consultant. Director or Trustee of 197 Director of Franklin Covey 1031 N. Chartwell Court July 2003 the Retail Funds (since January (time management systems), Salt Lake City, UT 84103 1993) and the Institutional Funds BMW Bank of North America, (since July 2003); member of the Inc. (industrial loan Utah Regional Advisory Board of corporation), Escrow Bank Pacific Corp.; formerly Managing USA (industrial loan Director of Summit Ventures LLC corporation), United Space (2000 - 2004), United States Alliance (joint venture Senator (R- Utah) (1974-1992) and between Lockheed Martin and Chairman, Senate Banking Committee The Boeing Company) and (1980-1986), Mayor of Salt Lake Nuskin Asia Pacific City, Utah (1971-1974), Astronaut, (multilevel marketing); Space Shuttle Discovery (April member of the board of 12-19, 1985), and Vice Chairman, various civic and Huntsman Corporation (chemical charitable organizations. company). Wayne E. Hedien (70) Director Director since Retired; Director or Trustee of 197 Director of the PMI Group c/o Kramer Levin Naftalis & July 2003 the Retail Funds (since September Inc. (private mortgage Frankel LLP 1997) and the Institutional Funds insurance); Trustee and Counsel to the (since July 2003); formerly Vice Chairman of The Field Independent Directors associated with the Allstate Museum of Natural History; 919 Third Avenue Companies (1966-1994), most director of various other New York, NY 10022-3902 recently as Chairman of The business and charitable Allstate Corporation (March organizations. 1993-December 1994) and Chairman and Chief Executive Officer of its wholly-owned subsidiary, Allstate Insurance Company (July 1989-December 1994). Dr. Manuel H. Johnson (55) Director Director since Senior Partner, Johnson Smick 197 Director of NVR, Inc. (home c/o Johnson Smick July 2003 International, Inc., a consulting construction); Director of International, Inc. firm; Chairman of the Audit KFX Energy; Director of RBS 2099 Pennsylvania Avenue, Committee and Director or Trustee Greenwich Capital Holdings NW Suite 950 of the Retail Funds (since July (financial holdings Washington, D.C. 20006 1991) and the Institutional Funds company). (since July 2003); Co-Chairman and a founder of the Group of Seven Council (G7C), an international economic commission; formerly Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury. Joseph J. Kearns (62) Director Director since President, Kearns & Associates LLC 198 Director of Electro Rent c/o Kearns & Associates LLC August 1994 (investment consulting); Deputy Corporation (equipment PMB754 Chairman of the Audit Committee leasing), The Ford Family 23852 Pacific Coast Highway and Director or Trustee of the Foundation and the UCLA Malibu, CA 90265 Retail Funds (since July 2003) and Foundation. the Institutional Funds (since August 1994); previously Chairman of the Audit Committee of the Institutional Funds (October 2001- July 2003); formerly CFO of the J. Paul Getty Trust. Michael E. Nugent (68) Director Director since General Partner of Triumph 197 Director of various c/o Triumph Capital, L.P. July 2001 Capital, L.P., a private business organizations. 445 Park Avenue, 10th Floor investment partnership; Chairman New York, NY 10022 of the Insurance Committee and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2001); formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988). Fergus Reid (72) Director Director since Chairman of Lumelite Plastics 198 Trustee and Director of c/o Lumelite Plastics June 1992 Corporation; Chairman of the certain investment Corporation Governance Committee and Director companies in the J.P. 85 Charles Coleman Blvd. or Trustee of the Retail Funds Morgan Funds complex Pawling, NY 12564 (since July 2003) and the managed by J.P. Morgan Institutional Funds (since June Investment Management Inc. 1992).
139 2004 ANNUAL REPORT December 31, 2004 DIRECTOR AND OFFICER INFORMATION (CONT'D) INTERESTED DIRECTORS:
NUMBER OF PORTFOLIOS IN POSITION(S) TERM OF OFFICE FUND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS DIRECTOR REGISTRANT TIME SERVED* DURING PAST 5 YEARS DIRECTOR** HELD BY DIRECTOR --------------------------- ------------ -------------- ---------------------------------- ------------- --------------------------- Charles A. Fiumefreddo (71) Chairman and Chairman of Chairman and Director or Trustee 197 None. c/o Morgan Stanley Trust Director of the Board and of the Retail Funds (since July Harborside Financial Center the Board Director since 1991) and the Institutional Funds Plaza Two 3rd Floor July 2003 (since July 2003); formerly Chief Jersey City, NJ 07311 Executive Officer of the Retail Funds (until September 2002). James F. Higgins (56) Director Director since Director or Trustee of the Retail 197 Director of AXA Financial, c/o Morgan Stanley Trust July 2003 Funds (since June 2000) and the Inc. and The Equitable Life Harborside Financial Center Institutional Funds (since July Assurance Society of the Plaza Two 2nd Floor 2003); Senior Advisor of Morgan United States (financial Jersey City, NJ 07311 Stanley (since August 2000); services). Director of Morgan Stanley Distributors Inc. and Dean Witter Realty Inc.; previously President and Chief Operating Officer of the Private Client Group of Morgan Stanley (May 1999-August 2000), and President and Chief Operating Officer of Individual Securities of Morgan Stanley (February 1997-May 1999).
---------- * This is the earliest date the Director began serving the Institutional Funds. Each Director serves an indefinite term, until his or her successor is elected. ** The Fund Complex includes all funds advised by Morgan Stanley Investment Management Inc. and funds that have an investment advisor that is an affiliated entity of Morgan Stanley Investment Management Inc. (including, but not limited to, Morgan Stanley Investments LP and Morgan Stanley Investment Advisors Inc.). Additional information about the Fund's Directors can be found in the Fund's Statement of Additional Information (SAI). The SAI may be obtained without charge upon request, by calling the Fund at 1-800-548-7786 or by accessing the Morgan Stanley Investment Management's website at www.morganstanley.com/im. You may also retrieve this information on-line at the Securities and Exchange Commission's web site at www.sec.gov. 140 2004 ANNUAL REPORT December 31, 2004 DIRECTOR AND OFFICER INFORMATION (CONT'D) OFFICERS:
POSITION(S) TERM OF OFFICE HELD WITH AND LENGTH OF NAME, AGE AND ADDRESS OF EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS ------------------------------------------- --------------- ---------------- -------------------------------------------------- Mitchell M. Merin (51) President President President and Chief Operating Officer of Morgan Morgan Stanley Investment Management Inc. since July Stanley Investment Management Inc.; President, 1221 Avenue of the Americas 33rd Floor 2003 Director and Chief Executive Officer of Morgan New York, NY 10020 Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc.; Chairman and Director of Morgan Stanley Distributors Inc.; Chairman and Director of Morgan Stanley Trust; Director of various Morgan Stanley subsidiaries; President of the Institutional Funds (since July 2003) and President of the Retail Funds (since May 1999); Director (since July 2003) and President (since December 2002) of the Van Kampen Closed-End Funds; Trustee (since May 1999) and President (since October 2002) of the Van Kampen Open-End Funds. Ronald E. Robison (65) Executive Executive Vice Principal Executive Officer of Funds in the Fund Morgan Stanley Investment Management Inc. Vice President President and complex (since May 2003); Managing Director of 1221 Avenue of the Americas 33rd Floor and Principal Principal Morgan Stanley & Co. Incorporated, Managing New York, NY 10020 Executive Executive Director of Morgan Stanley; Managing Director, Officer Officer since Chief Administrative Officer and Director of July 2003 Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc.; Director of Morgan Stanley Trust; Managing Director and Director of Morgan Stanley Distributors Inc.; Executive Vice President and Principal Executive Officer of the Retail Funds (since April 2003) and the Institutional Funds (since July 2003); previously President and Director of the Retail Funds (March 2001 - July 2003) and Chief Global Operations Officer and Managing Director of Morgan Stanley Investment Management Inc. Joseph J. McAlinden (61) Vice President Vice President Managing Director and Chief Investment Officer of Morgan Stanley Investment Management Inc. since July Morgan Stanley Investment Advisors Inc. and Morgan 1221 Avenue of the Americas 33rd Floor 2003 Stanley Investment Management Inc.; Director of New York, NY 10020 Morgan Stanley Trust; Chief Investment Officer of the Van Kampen Funds; Vice President of the Institutional Funds (since July 2003) and the Retail Funds (since July 1995). Barry Fink (49) Vice President Vice President General Counsel (since May 2000) and Managing Morgan Stanley Investment Management Inc. since July Director (since December 2000) of Morgan Stanley 1221 Avenue of the Americas 22nd Floor 2003 Investment Management; Managing Director (since New York, NY 10020 December 2000), Secretary (since February 1997) and Director (since July 1998) of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc.; Vice President of the Retail Funds; Assistant Secretary of Morgan Stanley DW Inc.; Vice President of the Institutional Funds (since July 2003); Managing Director, Secretary and Director of Morgan Stanley Distributors Inc.; previously Secretary of the Retail Funds and General Counsel (February 1997- April 2004) of the Retail Funds; Vice President and Assistant General Counsel of Morgan Stanley Investment Advisors Inc. and Morgan Stanley Services Company Inc. (February 1997- December 2001). Amy R. Doberman (42) Vice President Vice President Managing Director and General Counsel, U.S. Morgan Stanley Investment Management Inc. since July Investment Management; Managing Director of the 1221 Avenue of the Americas 22nd Floor 2004 Investment Manager and Morgan Stanley Investment New York, NY 10020 Advisor Inc.; Vice President of the Institutional and Retail Funds (since July 2004); Vice President of the Van Kampen Funds (since August 2004); previously, Managing Director and General Counsel - Americas, UBS Global Asset Management (July 2000-July 2004) and General Counsel, Aeltus Investment Management, Inc. (January 1997-July 2000). Carsten Otto (41) Chief Chief Executive Director and U.S. Director of Compliance Morgan Stanley Investment Management Inc. Compliance Compliance for Morgan Stanley Investment Management (since 1221 Avenue of the Americas 22nd Floor Officer Officer since October 2004); Executive Director of Morgan New York, NY 10020 2004 Stanley Investment Advisors Inc. and Morgan Stanley Investment Management Inc.; formerly Assistant Secretary and Assistant General Counsel of the Morgan Stanley Retail Funds. Stefanie V. Chang (38) Vice President Vice President Executive Director of Morgan Stanley & Co. Morgan Stanley Investment Management Inc. since Incorporated, Morgan Stanley Investment Management 1221 Avenue of the Americas 22nd Floor December Inc. and Morgan Stanley Investment Advisors Inc.; New York, NY 10020 1997 Vice President of the Institutional Funds and the Retail Funds; formerly practiced law with the New York law firm of Rogers & Wells (now Clifford Chance US LLP). James W. Garrett (36) Treasurer and Treasurer Executive Director of Morgan Stanley & Co. Morgan Stanley Investment Management Inc. Chief since February Incorporated and Morgan Stanley Investment 1221 Avenue of the Americas 34th Floor Financial 2002; Chief Management Inc.; Treasurer and Chief Financial New York, NY 10020 Officer Financial Officer of the Institutional Funds; previously Officer since with PriceWaterhouse LLP (now July 2003 PriceWaterhouseCoopers LLP). Michael J. Leary (38) Assistant Assistant Assistant Director and Vice President of Fund J.P. Morgan Investor Services Co. Treasurer Treasurer Administration, JPMorgan Investor Services Co. 73 Tremont Street since March (formerly Chase Global Funds Services Company); Boston, MA 02108 2003 formerly Audit Manager at Ernst & Young LLP. Mary E. Mullin (37) Secretary Secretary Executive Director of Morgan Stanley & Co. Morgan Stanley Investment Management Inc. since June Incorporated, Morgan Stanley Investment Management 1221 Avenue of the Americas 22nd Floor 1999 Inc. and Morgan Stanley Investment Advisors Inc.; New York, NY 10020 Secretary of the Institutional Funds and (since July 2003) the Retail Funds; formerly practiced law with the New York law firms of McDermott, Will & Emery and Skadden, Arps, Slate, Meagher & Flom LLP.
---------- * This is the date the Officer began serving the Institutional Funds. Each Officer serves an indefinite term, until his or her successor is elected. 141 2004 ANNUAL REPORT December 31, 2004 INVESTMENT ADVISER AND ADMINISTRATOR Morgan Stanley Investment Management Inc. 1221 Avenue of the Americas New York, NY 10020 DISTRIBUTOR Morgan Stanley & Co., Incorporated 1221 Avenue of the Americas New York, NY 10020 CUSTODIAN JPMorgan Chase Bank 270 Park Avenue New York, NY 10017 LEGAL COUNSEL Clifford Chance US LLP 31 West 52nd Street New York, NY 10019 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Ernst & Young LLP 200 Clarendon Street Boston, MA 02116-5072 REPORTING TO SHAREHOLDERS Each Morgan Stanley fund provides a complete schedule of portfolio holdings in its semi-annual 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 semi-annual reports are filed on Form N-CSRS and the annual reports are filed on Form N-CSR. Morgan Stanley also delivers the semi-annual and annual reports to fund shareholders and makes these reports available on its public website, 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 website. 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 website, 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 1(800) SEC-0330. You can also request copies of these materials, upon payment of a duplicating fee, by electronic request at the SEC's email address (publicinfo@sec.gov) or by writing the Public Reference section of the SEC, Washington, DC 20549-0102. PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD A copy of (1) the Fund's policies and procedures with respect to the voting of proxies relating to the Fund's portfolio securities; and (2) how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge, upon request, by calling 1-800-548-7786 or by visiting our website at www.morganstanley.com/im. This information is also available on the SEC's website at www.sec.gov. This report is authorized for distribution only when preceded or accompanied by the prospectuses of the Morgan Stanley Institutional Fund, Inc. which describes in detail each Investment Portfolio's investment policies, risks, fees and expenses. Please read the prospectus carefully before you invest or send money. For additional information, including information regarding the investments comprising the Portfolio, please visit our website at www.morganstanley.com/im or call 1-800-548-7786. 142 Printed in U.S.A. This Report has been prepared for shareholders and may be distributed to others only if preceded or accompanied by a current prospectus. Morgan Stanley Investment Management Inc. 1221 Avenue of the Americas New York, NY 10020 MSIF: (800) 548-7786 (C)2005 Morgan Stanley [MORGAN STANLEY LOGO] 1231-fibaleqseman-0205 Item 2. Code of Ethics. (a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Fund or a third party. (b) No information need be disclosed pursuant to this paragraph. (c) The Fund has amended its Code of Ethics during the period covered by the shareholder report presented in Item 1 hereto to delete from the end of the following paragraph on page 2 of the Code the phrase "to the detriment of the Fund." (d) Not applicable. (e) Not applicable. (f) (1) The Fund's Code of Ethics is attached hereto as Exhibit A. (2) Not applicable. (3) Not applicable. Item 3. Audit Committee Financial Expert. The Fund's Board of Directors has determined that it has two "audit committee financial experts" serving on its audit committee, each of whom are "independent" Directors: Dr. Manuel H. Johnson and Joseph J. Kearns. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Directors in the absence of such designation or identification. Item 4. Principal Accountant Fees and Services. (a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2004 REGISTRANT COVERED ENTITIES(1) AUDIT FEES $ 461,270 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ $ 115,000 (2) TAX FEES $ 43,750 (3) $ 100,829 (4) ALL OTHER FEES $ $ 60,985 (6) TOTAL NON-AUDIT FEES $ 43,750 $ 276,814 TOTAL $ 505,020 $ 276,814 2003 REGISTRANT COVERED ENTITIES(1) AUDIT FEES $ 539,617 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ $ 93,000 (2) TAX FEES $ 54,693 (3) $ 163,414 (5) ALL OTHER FEES $ $ 341,775 (6) TOTAL NON-AUDIT FEES $ 54,693 $ 598,189 TOTAL $ 594,310 $ 598,189
N/A- Not applicable, as not required by Item 4. (1) Covered Entities include the Adviser (excluding sub-advisors) and any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Registrant. (2) Audit-Related Fees represent assurance and related services provided that are reasonably related to the performance of the audit of the financial statements of the Covered Entities' and funds advised by the Adviser or its affiliates, specifically attestation services provided in connection with a SAS 70 Report. (3) Tax Fees represent tax advice and compliance services provided in connection with the review of the Registrant's tax returns. (4) Tax Fees represent tax advice services provided to Covered Entities, including research and identification of PFIC entities. 2 (5) All Other Fees represent attestation services provided in connection with performance presentation standards. (6) All Other Fees represent attestation services provided in connection with performance presentation standards, general industry education seminars provided, and a regulatory review project performed. 3 (e)(1) The audit committee's pre-approval policies and procedures are as follows: AUDIT COMMITTEE AUDIT AND NON-AUDIT SERVICES PRE-APPROVAL POLICY AND PROCEDURES OF THE MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS AS ADOPTED AND AMENDED JULY 23, 2004,(1) - Statement of Principles The Audit Committee of the Board is required to review and, in its sole discretion, pre-approve all Covered Services to be provided by the Independent Auditors to the Fund and Covered Entities in order to assure that services performed by the Independent Auditors do not impair the auditor's independence from the Fund. The SEC has issued rules specifying the types of services that an independent auditor may not provide to its audit client, as well as the audit committee's administration of the engagement of the independent auditor. The SEC's rules establish two different approaches to pre-approving services, which the SEC considers to be equally valid. Proposed services either: may be pre-approved without consideration of specific case-by-case services by the Audit Committee ("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee believes that the combination of these two approaches in this Policy will result in an effective and efficient procedure to pre-approve services performed by the Independent Auditors. As set forth in this Policy, unless a type of service has received general pre-approval, it will require specific pre-approval by the Audit Committee (or by any member of the Audit Committee to which pre-approval authority has been delegated) if it is to be provided by the Independent Auditors. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval by the Audit Committee. The appendices to this Policy describe the Audit, Audit-related, Tax and All Other services that have the general pre-approval of the Audit Committee. The term of any general pre-approval is 12 months from the date of pre-approval, unless the Audit Committee considers and provides a different period and states otherwise. The Audit Committee will annually review and pre-approve the services that may be provided by the Independent Auditors without obtaining specific pre-approval from the Audit Committee. The Audit Committee will add to or subtract from the list of general pre-approved services from time to time, based on subsequent determinations. ---------- (1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and Procedures (the "POLICY"), adopted as of the date above, supersedes and replaces all prior versions that may have been adopted from time to time. 4 The purpose of this Policy is to set forth the policy and procedures by which the Audit Committee intends to fulfill its responsibilities. It does not delegate the Audit Committee's responsibilities to pre-approve services performed by the Independent Auditors to management. The Fund's Independent Auditors have reviewed this Policy and believes that implementation of the Policy will not adversely affect the Independent Auditors' independence. - Delegation As provided in the Act and the SEC's rules, the Audit Committee may delegate either type of pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting. - Audit Services The annual Audit services engagement terms and fees are subject to the specific pre-approval of the Audit Committee. Audit services include the annual financial statement audit and other procedures required to be performed by the Independent Auditors to be able to form an opinion on the Fund's financial statements. These other procedures include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating to the audit. The Audit Committee will approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope, Fund structure or other items. In addition to the annual Audit services engagement approved by the Audit Committee, the Audit Committee may grant general pre-approval to other Audit services, which are those services that only the Independent Auditors reasonably can provide. Other Audit services may include statutory audits and services associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4, etc.), periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings. The Audit Committee has pre-approved the Audit services in Appendix B.1. All other Audit services not listed in Appendix B.1 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). - Audit-related Services Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Fund's financial statements and, to the extent they are Covered Services, the Covered Entities or that are traditionally performed by the Independent Auditors. Because the Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor and is consistent with the SEC's rules on auditor independence, the Audit Committee may grant general pre-approval to Audit-related services. Audit-related services include, among others, accounting consultations related to accounting, financial reporting or disclosure matters 5 not classified as "Audit services"; assistance with understanding and implementing new accounting and financial reporting guidance from rulemaking authorities; agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters; and assistance with internal control reporting requirements under Forms N-SAR and/or N-CSR. The Audit Committee has pre-approved the Audit-related services in Appendix B.2. All other Audit-related services not listed in Appendix B.2 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). - Tax Services The Audit Committee believes that the Independent Auditors can provide Tax services to the Fund and, to the extent they are Covered Services, the Covered Entities, such as tax compliance, tax planning and tax advice without impairing the auditor's independence, and the SEC has stated that the Independent Auditors may provide such services. Pursuant to the preceding paragraph, the Audit Committee has pre-approved the Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). - All Other Services The Audit Committee believes, based on the SEC's rules prohibiting the Independent Auditors from providing specific non-audit services, that other types of non-audit services are permitted. Accordingly, the Audit Committee believes it may grant general pre-approval to those permissible non-audit services classified as All Other services that it believes are routine and recurring services, would not impair the independence of the auditor and are consistent with the SEC's rules on auditor independence. The Audit Committee has pre-approved the All Other services in Appendix B.4. Permissible All Other services not listed in Appendix B.4 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). - Pre-Approval Fee Levels or Budgeted Amounts Pre-approval fee levels or budgeted amounts for all services to be provided by the Independent Auditors will be established annually by the Audit Committee. Any proposed services exceeding these levels or amounts will require specific pre-approval by the Audit Committee. The Audit Committee is mindful of the overall relationship of fees for audit and non-audit services in determining whether to pre-approve any such services. - Procedures All requests or applications for services to be provided by the Independent Auditors that do not require specific approval by the Audit Committee will be submitted to the Fund's Chief Financial Officer and must include a detailed description of the services to be 6 rendered. The Fund's Chief Financial Officer will determine whether such services are included within the list of services that have received the general pre-approval of the Audit Committee. The Audit Committee will be informed on a timely basis of any such services rendered by the Independent Auditors. Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by both the Independent Auditors and the Fund's Chief Financial Officer, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC's rules on auditor independence. The Audit Committee has designated the Fund's Chief Financial Officer to monitor the performance of all services provided by the Independent Auditors and to determine whether such services are in compliance with this Policy. The Fund's Chief Financial Officer will report to the Audit Committee on a periodic basis on the results of its monitoring. Both the Fund's Chief Financial Officer and management will immediately report to the chairman of the Audit Committee any breach of this Policy that comes to the attention of the Fund's Chief Financial Officer or any member of management. - Additional Requirements The Audit Committee has determined to take additional measures on an annual basis to meet its responsibility to oversee the work of the Independent Auditors and to assure the auditor's independence from the Fund, such as reviewing a formal written statement from the Independent Auditors delineating all relationships between the Independent Auditors and the Fund, consistent with Independence Standards Board No. 1, and discussing with the Independent Auditors its methods and procedures for ensuring independence. - Covered Entities Covered Entities include the Fund's investment adviser(s) and any entity controlling, controlled by or under common control with the Fund's investment adviser(s) that provides ongoing services to the Fund(s). Beginning with non-audit service contracts entered into on or after May 6, 2003, the Fund's audit committee must pre-approve non-audit services provided not only to the Fund but also to the Covered Entities if the engagements relate directly to the operations and financial reporting of the Fund. This list of Covered Entities would include: MORGAN STANLEY RETAIL FUNDS Morgan Stanley Investment Advisors Inc. Morgan Stanley & Co. Incorporated Morgan Stanley DW Inc. Morgan Stanley Investment Management Inc. Morgan Stanley Investment Management Limited Morgan Stanley Investment Management Private Limited Morgan Stanley Asset & Investment Trust Management Co., Limited Morgan Stanley Investment Management Company Van Kampen Asset Management gt Morgan Stanley Services Company, Inc. Morgan Stanley Distributors Inc. Morgan Stanley Trust FSB 7 MORGAN STANLEY INSTITUTIONAL FUNDS Morgan Stanley Investment Management Inc. Morgan Stanley Investment Advisors Inc. Morgan Stanley Investment Management Limited Morgan Stanley Investment Management Private Limited Morgan Stanley Asset & Investment Trust Management Co., Limited Morgan Stanley Investment Management Company Morgan Stanley & Co. Incorporated Morgan Stanley Distribution, Inc. Morgan Stanley AIP GP LP Morgan Stanley Alternative Investment Partners LP (e)(2) Beginning with non-audit service contracts entered into on or after May 6, 2003, the audit committee also is required to pre-approve services to Covered Entities to the extent that the services are determined to have a direct impact on the operations or financial reporting of the Registrant. 100% of such services were pre-approved by the audit committee pursuant to the Audit Committee's pre-approval policies and procedures (attached hereto). (f) Not applicable. (g) See table above. (h) The audit committee of the Board of Directors has considered whether the provision of services other than audit services performed by the auditors to the Registrant and Covered Entities is compatible with maintaining the auditors' independence in performing audit services. Item 5. Audit Committee of Listed Registrants. (a) The Fund has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act whose members are: Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J. Kearns, Michael Nugent and Fergus Reid. (b) Not applicable. Item 6. Schedule of Investments Refer to Item 1. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. 8 Applicable only to annual reports filed by closed-end funds. Item 8. Portfolio Managers of Closed-End Management Investment Companies Not Applicable 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) The Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. 9 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. (Registrant) Morgan Stanley Institutional Fund, Inc. -------------------------------------------------------------------- By: /s/ Ronald E. Robison ----------------------------------------------------------------------------- Name: Ronald E. Robison Title: Principal Executive Officer Date: 2/17/2005 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. By: /s/ Ronald E. Robison ----------------------------------------------------------------------------- Name: Ronald E. Robison Title: Principal Executive Officer Date: 2/17/2005 By: /s/ James W. Garrett ----------------------------------------------------------------------------- Name: James W. Garrett Title: Chief Financial Officer Date: 2/17/2005