N-CSR 1 a08-4224_1ncsr.htm N-CSR

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM N-CSR

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES

 

Investment Company Act file number

811-05624

 

Morgan Stanley Institutional Fund, Inc.

(Exact name of registrant as specified in charter)

 

522 Fifth Avenue New York, NY

 

10036

(Address of principal executive offices)

 

(Zip code)

 

Ronald E. Robison
522 Fifth Avenue New York, New York 10036

(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:

12/31/07

 

 

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:

 


 

2007 Annual Report

 

December 31, 2007

 

 

Morgan Stanley Institutional Fund, Inc.

 

Global and International Equity Portfolios

U.S. Real Estate

 

U.S. Small/Mid Cap Value

Active International Allocation

 

Emerging Markets

Fixed Income Portfolio

Global Franchise

 

Global Real Estate

Emerging Markets Debt

Global Value Equity

 

International Equity

 

International Growth Active Extension

 

International Growth Equity

 

International Magnum

 

International Real Estate

 

International Small Cap

 

 

 

U.S. Equity Portfolios

 

 

 

Disciplined Large Cap Value Active Extension

 

Focus Equity

 

Large Cap Relative Value

 

Small Company Growth

 

Systematic Active Large Cap Core

 

Systematic Active Small Cap Core

 

Systematic Active Small Cap Growth

 

Systematic Active Small Cap Value

 

Systematic Large Cap Core Active Extension

 

U.S. Large Cap Growth

 

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Table of Contents

 

Shareholder’s Letter

3

Performance Summary

4

Investment Overview and Portfolios of Investments Global and International Equity Portfolios:

 

Active International Allocation

6

Emerging Markets

23

Global Franchise

30

Global Real Estate

34

Global Value Equity

41

International Equity

46

International Growth Active Extension

52

International Growth Equity

58

International Magnum

63

International Real Estate

70

International Small Cap

76

U.S. Equity Portfolios:

 

Disciplined Large Cap Value Active Extension

81

Focus Equity

88

Large Cap Relative Value

92

Small Company Growth

97

Systematic Active Large Cap Core

102

Systematic Active Small Cap Core

109

Systematic Active Small Cap Growth

118

Systematic Active Small Cap Value

126

Systematic Large Cap Core Active Extension

135

U.S. Large Cap Growth

143

U.S. Real Estate

147

U.S. Small/Mid Cap Value

153

Fixed Income Portfolio:

 

Emerging Markets Debt

158

Statements of Assets and Liabilities

163

Statements of Operations

175

Statements of Changes in Net Assets

180

Statements of Cash Flows

192

Financial Highlights

193

Notes to Financial Statements

218

Report of Independent Registered

 

Public Accounting Firm

231

Federal Income Tax Information

232

U.S. Privacy Policy

234

Director and Officer Information

236

 

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 website: www.morganstanley.com/msim.

Market forecasts provided in this report may not necessarily come to pass. There is no guarrantee that any sectors mentioned will continue to perform as discussed herein or that securities in such sectors will be held by the Fund in the future. There is no assurance that a Fund will achieve its investment objective. Funds are subject to market risk, which is the possibility that market values of securities owned by the Fund will decline and, therefore, the value of the Fund’s shares may be less than what you paid for them. Accordingly, you can lose money investing in Funds. Please see the prospectus for more complete information on investment risks.

 

 

 

1

 

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2

 

 

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Shareholder’s Letter

 

Dear Shareholders:

 

We are pleased to present to you the Fund’s Annual Report for the year ended December 31, 2007. Our Fund currently offers 24 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) and fixed income (e.g., short, medium, and long duration; investment grade and high yield).

 

 

Sincerely,

 

 

Ronald E. Robison

President and Principal Executive Officer

 

 

January 2008

 

 

 

3

 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Performance Summary

 

 

 

Inception Dates

 

 

 

One Year
Total Return

 

 

 

 

Class A

 

Class B

 

Class A

 

Class B

 

Comparable
Indices

 

Global and International Equity Portfolios:

 

 

 

 

 

 

 

 

 

 

 

 

Active International Allocation

 

1/17/92

 

1/2/96

 

15.30

%

14.95

%

11.17

%

(1)

Emerging Markets

 

9/25/92

 

1/2/96

 

41.56

 

41.20

 

39.39

 

(2)

Global Franchise

 

11/28/01

 

11/28/01

 

9.58

 

9.26

 

9.04

 

(3)

Global Real Estate

 

8/30/06

 

8/30/06

 

(7.87

)

(8.15

)

(7.06

)

(4)

Global Value Equity

 

7/15/92

 

1/2/96

 

6.65

 

6.37

 

9.04

 

(3)

International Equity

 

8/4/89

 

1/2/96

 

9.84

 

9.52

 

11.17

 

(1)

International Growth Active Extension†

 

7/31/07

 

7/31/07

 

—

 

—

 

—

 

(1)

International Growth Equity

 

12/27/05

 

12/27/05

 

15.22

 

15.03

 

11.17

 

(1)

International Magnum

 

3/15/96

 

3/15/96

 

14.77

 

14.47

 

11.17

 

(1)

International Real Estate

 

10/1/97

 

10/1/97

 

(17.59

)

(17.76

)

(17.88

)

(5)

International Small Cap

 

12/15/92

 

—

 

(3.22

)

—

 

1.45

 

(6)

U.S. Equity Portfolios:

 

 

 

 

 

 

 

 

 

 

 

 

Disciplined Large Cap Value Active Extension††

 

5/31/07

 

5/31/07

 

—

 

—

 

—

 

(7)

Focus Equity

 

3/8/95

 

1/2/96

 

24.02

 

23.70

 

11.81

 

(8)

Large Cap Relative Value

 

1/31/90

 

1/2/96

 

2.90

 

2.72

 

(0.17

)

(7)

Small Company Growth

 

11/1/89

 

1/2/96

 

3.04

 

2.81

 

7.05

 

(9)

Systematic Active Large Cap Core

 

4/28/06

 

4/28/06

 

6.07

 

5.81

 

5.49

 

(10)

Systematic Active Small Cap Core

 

4/28/06

 

4/28/06

 

(8.35

)

(8.49

)

(1.57

)

(11)

Systematic Active Small Cap Growth

 

4/28/06

 

4/28/06

 

0.82

 

0.50

 

7.05

 

(9)

Systematic Active Small Cap Value

 

4/28/06

 

4/28/06

 

(14.78

)

(15.03

)

(9.78

)

(12)

Systematic Large Cap Core Active Extension††

 

5/31/07

 

5/31/07

 

—

 

—

 

—

 

(10)

U.S. Large Cap Growth

 

4/2/91

 

1/2/96

 

22.29

 

21.93

 

11.81

 

(8)

U.S. Real Estate

 

2/24/95

 

1/2/96

 

(16.63

)

(16.80

)

(15.69

)

(13)

U.S. Small/Mid Cap Value†††

 

9/27/07

 

9/27/07

 

—

 

—

 

—

 

(14)

Fixed Income Portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

Emerging Markets Debt

 

2/1/94

 

1/2/96

 

4.68

 

4.29

 

6.84

 

(15)

 

†

Performance figures are cumulative since inception as the Portfolio commenced operations on July 31, 2007.

 

 

††

Performance figures are cumulative since inception as the Portfolios commenced operations on May 31, 2007.

 

 

†††

Performance figures are cumulative since inception as the Portfolio commenced operations on September 27, 2007.

 

4

 

 

 

 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Performance Summary (cont’d)

 

Five Year
Average Annual Total Return

 

 

 

Ten Year
Average Annual Total Return

 

 

Since Inception
Average Annual Total Return

 

 

Class A

 

Class B

 

Comparable
Indices

 

 

 

 

Class A

 

Class B

 

Comparable
Indices

 

 

 

Class A

 

Comparable
Indices -
Class A

 

Class B

 

Comparable
Indices -
Class B

 

 

 

20.75

%

20.40

%

21.59

%

 

(1)

 

9.14

%

8.88

%

8.66

%

 

(1)

8.97

%

8.40

%

8.87

%

7.85

%

 

(1)

38.26

 

37.88

 

37.02

 

 

(2)

 

15.44

 

15.13

 

14.30

 

 

(2)

13.58

 

12.35

 

13.32

 

11.12

 

 

(2)

16.76

 

16.46

 

16.96

 

 

(3)

 

—

 

—

 

—

 

 

(3)

15.92

 

9.97

 

15.59

 

9.97

 

 

(3)

—

 

—

 

—

 

 

(4)

 

—

 

—

 

—

 

 

(4)

5.91

 

6.48

 

5.60

 

6.48

 

 

(4)

15.10

 

14.81

 

16.96

 

 

(3)

 

7.38

 

7.09

 

7.00

 

 

(3)

11.69

 

9.32

 

9.55

 

8.20

 

 

(3)

17.93

 

17.63

 

21.59

 

 

(1)

 

11.57

 

11.32

 

8.66

 

 

(1)

11.86

 

6.43

 

12.09

 

7.85

 

 

(1)

—

 

—

 

—

 

 

(1)

 

—

 

—

 

—

 

 

(1)

6.60

 

1.89

 

6.50

 

1.89

 

 

(1)

—

 

—

 

—

 

 

(1)

 

—

 

—

 

—

 

 

(1)

20.85

 

18.16

 

20.55

 

18.16

 

 

(1)

19.63

 

19.27

 

21.59

 

 

(1)

 

7.54

 

7.27

 

8.66

 

 

(1)

7.66

 

8.02

 

7.37

 

8.02

 

 

(1)

25.56

 

25.26

 

26.15

 

 

(5)

 

15.46

 

15.17

 

14.84

 

 

(5)

14.51

 

13.41

 

14.23

 

13.41

 

 

(5)

20.99

 

—

 

26.37

 

 

(6)

 

12.79

 

—

 

11.11

 

 

(6)

12.82

 

7.89

 

—

 

—

 

 

(6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

—

 

—

 

—

 

 

(7)

 

—

 

—

 

—

 

 

(7)

(13.93

)

(8.22

)

(14.06

)

(8.22

)

 

(7)

15.98

 

15.68

 

12.11

 

 

(8)

 

6.58

 

6.33

 

3.83

 

 

(8)

13.41

 

9.03

 

10.82

 

7.27

 

 

(8)

14.70

 

14.40

 

14.63

 

 

(7)

 

7.82

 

7.56

 

7.68

 

 

(7)

10.90

 

12.03

 

10.07

 

10.81

 

 

(7)

17.59

 

17.30

 

16.50

 

 

(9)

 

13.63

 

13.34

 

4.32

 

 

(9)

12.85

 

7.65

 

12.31

 

5.57

 

 

(9)

—

 

—

 

—

 

 

(10)

 

—

 

—

 

—

 

 

(10)

8.35

 

9.07

 

8.09

 

9.07

 

 

(10)

—

 

—

 

—

 

 

(11)

 

—

 

—

 

—

 

 

(11)

(5.30

)

1.35

 

(5.48

)

1.35

 

 

(11)

—

 

—

 

—

 

 

(9)

 

—

 

—

 

—

 

 

(9)

(0.83

)

3.77

 

(1.09

)

3.77

 

 

(9)

—

 

—

 

—

 

 

(12)

 

—

 

—

 

—

 

 

(12)

(6.79

)

(1.26

)

(7.03

)

(1.26

)

 

(12)

—

 

—

 

—

 

 

(10)

 

—

 

—

 

—

 

 

(10)

(4.09

)

(3.01

)

(4.20

)

(3.01

)

 

(10)

14.94

 

14.65

 

12.11

 

 

(8)

 

6.13

 

5.87

 

3.83

 

 

(8)

11.17

 

8.92

 

9.62

 

7.27

 

 

(8)

20.81

 

20.51

 

18.17

 

 

(13)

 

12.18

 

11.89

 

10.49

 

 

(13)

16.09

 

13.47

 

15.10

 

13.17

 

 

(13)

—

 

—

 

—

 

 

(14)

 

—

 

—

 

—

 

 

(14)

(5.21

)

(7.58

)

(5.31

)

(7.58

)

 

(14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13.22

 

12.89

 

12.79

 

 

(15)

 

7.92

 

7.64

 

10.15

 

 

(15)

10.85

 

10.62

 

11.42

 

12.09

 

 

(15)

 

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/msim 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 Net

(3)

 

MSCI World

(4)

 

FTSE EPRA/NAREIT Global Real Estate (Net)

(5)

 

FTSE EPRA/NAREIT Global ex-North America Real Estate (80% Europe/20% Asia)

(6)

 

MSCI EAFE Small Cap Total Return

(7)

 

Russell 1000® Value

(8)

 

Russell 1000® Growth

(9)

 

Russell 2000® Growth

(10)

 

S&P 500®

(11)

 

Russell 2000®

(12)

 

Russell 2000® Value

(13)

 

FTSE NAREIT Equity REIT

(14)

 

Russell 2500® Value

(15)

 

J.P. Morgan EMBI Global Bond Index/J.P. Morgan GBI-EM Global Diversified Bond Index

 

 

 

5

 


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (unaudited)

 

Active International Allocation Portfolio

 

 

 

* Minimum Investment

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares based upon its different inception date and will be negatively impacted by additional fees assessed to this class.

 

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
Year

 

Five
Years

 

Ten
Years

 

Since
Inception(6)

 

Portfolio – Class A (4)

 

15.30

%

20.75

%

9.14

%

8.97

%

MSCI EAFE Index

 

11.17

 

21.59

 

8.66

 

8.40

 

Lipper International Large-Cap

 

 

 

 

 

 

 

 

 

Core Funds Index

 

12.51

 

20.03

 

9.17

 

10.01

 

Portfolio – Class B (5)

 

14.95

 

20.40

 

8.88

 

8.87

 

MSCI EAFE Index

 

11.17

 

21.59

 

8.66

 

7.85

 

Lipper International Large-Cap

 

 

 

 

 

 

 

 

 

Core Funds Index

 

12.51

 

20.03

 

9.17

 

9.60

 

 

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 www.morganstanley.com/msim. 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.

 

(1)

The Morgan Stanley Capital International (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 term “free float” represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. 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. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)

The Lipper 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 30 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 fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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 operations 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.

 

The Active International Allocation Portfolio (the “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, attempt to replicate broad market indices.

 

6


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

Active International Allocation Portfolio

 

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 risks of investing in emerging-market countries are greater than the risks generally associated with foreign investments.

 

Performance

 

For the year ended December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of 15.30%, net of fees, for Class A shares and 14.95%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares outperformed against their benchmark, the Morgan Stanley Capital International (MSCI) EAFE Index (the “Index”) which returned 11.17%.

 

Factors Affecting Performance

 

·

For the 12-month period ended December 31, 2007, the Index returned 11.17% in U.S. dollar terms and 3.5% in local currency terms. Asia ex-Japan (up 30.7% in U.S. dollar terms) led performance, followed by Europe ex-U.K. (up 16.7%). Japan (down 4.2%) was the only major market with a negative return during the period, and the U.S. market had a modestly positive gain (up 5.4%). The emerging markets again outperformed the developed regions, appreciating 39.4%. All major currencies gained against the U.S. dollar, with the Australian dollar and Euro rising 11.4% and 10.9%, respectively. The Japanese yen showed greater strength in the second half of the year, to finish the year up 6.7% versus the U.S. dollar. The British pound rose a modest 1.7% relative to the U.S. dollar.

·

In the U.S., consensus estimates for fourth quarter gross domestic product (GDP) now average around 1.1%, and we expect the estimates to continue falling, given the broad-based weakening across the U.S. economy and with the housing sector especially fragile. New housing starts fell to a cycle low that has not been seen since 1995, and house prices continued to decline. The Institute of Supply Management (ISM) Manufacturing survey fell to 47.7, indicating falling manufacturing output. Job creation also stalled in December, although November’s non-farm payroll figure was revised upward. More worrisome was the increase in the unemployment rate to 5%, but its magnitude may have been partially influenced by a five-year revision to the base figure. Inflationary pressures remained elevated at year end. However, inflation is a lagging indicator, and we believe it should not be a problem if the U.S. enters a recession.

·

European economic growth (excluding the U.K.) generally deteriorated as the year progressed, but ticked upward at year end. Inflationary pressures mounted due to energy and food price increases, and given these strong inflation readings, the European Central Bank (ECB) remained hawkish going into the new year. European financials are feeling the negative impact of the U.S. subprime problems and credit slump – but Europe only experienced pockets of housing overinvestment (notably in Ireland and Spain). The U.K. housing sector has been an issue – not due to overinvestment, but rather because of sharp price rises from greater demand than supply. House prices are falling again there, as is the pound sterling. This is negative in the medium term, but a weaker currency and looser monetary and fiscal conditions could set up the U.K. economy nicely for a rebound by second half of 2008.

·

The Japanese economy was weak overall during the year. Housing starts have recovered from their lows and construction expectations are moving up. While real income growth is flat to down, Japan’s unemployment rate fell again and headline inflation rose. We believe this should be a positive for Japan, but caution is warranted as core inflation is still negative. Japanese equities were the worst performing major market in the year, although the yen has rebounded from its previous lows. We believe relative equity valuations have been getting more and more compelling here.

·

The Portfolio’s returns were aided by the allocations to Germany, Hong Kong, Singapore and the emerging markets. The Portfolio was underweight financials throughout the year, which was additive to performance. However, underexposure to Australia and the U.K. detracted from performance, as did the above- Index allocation to Japan earlier in the year.

 

Management Strategies

 

·

Global equities faced increasing headwinds in the fourth quarter of 2007, which continue to buffet markets in early 2008. The subprime mortgage crisis clearly spread to other areas of the financial markets (prime mortgages, asset backed paper, other collateralized debt obligations, and equity financings) and mindboggling write-offs were announced by many firms. The authorities have responded, but with less conviction than the markets crave – and credit spreads have remained wide.

·

Heated discussion continues as to whether or not the U.S. is in (or entering) a recession or in a mid-cycle slowdown. While seemingly pedantic, this is an important distinction. In general, a recession would mean rising unemployment, sharp earnings drops and a

 

7


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

Active International Allocation Portfolio

 

 

negative global stock market bias. In this scenario, the emerging markets would correct. A mid-cycle slowdown, on the other hand, would bring sideways employment and mildly negative to flat earnings, followed by economic resurgence and global equities moving decisively up out of their multi-month trading range.

·

While we remain in the mid-cycle slowdown camp, we are admittedly worried by recent poor stock market action, continued financial distress, falling earnings and poor economic numbers. Positive offsets to this are good corporate and consumer balance sheets/wealth, still- decent disposable income growth, and very low real bond yields combined with (hopefully more) prospective rate cuts.

·

We have positioned the Portfolio more defensively, as we have been doing for the past couple of quarters. We trimmed our emerging market and cyclical positions, have added some to defensive sectors and have raised cash to about 5% of the Portfolio. With the exception of global financial and retailing sectors, we do not think a significant slowdown has been priced in. We remain watchful.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning
Account Value
July 1, 2007

 

Ending Account
Value
December 31,
2007

 

Expenses Paid
During Period*
July 1, 2007 —
 December 31,
2007

 

Class A

 

 

 

 

 

 

 

Actual

 

$1,000.00

 

$1,020.60

 

$4.07

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,021.17

 

4.08

 

 

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

 

Actual

 

1,000.00

 

1,018.80

 

5.34

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,019.91

 

5.35

 

*  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 184/365 (to reflect the one-half year period).

 

8


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

Active International Allocation Portfolio

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

* Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

9

 


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments

 

Active International Allocation Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Common Stocks (90.9%)

 

 

 

 

 

Australia (3.3%)

 

 

 

 

 

AGL Energy Ltd.

 

14,942

 

$    174

 

Alumina Ltd.

 

91,525

 

507

 

Amcor Ltd.

 

71,068

 

430

 

AMP Ltd.

 

42,736

 

372

 

Ansell Ltd.

 

5,679

 

60

 

Asciano Group

 

(c)12,151

 

74

 

Australia & New Zealand Banking Group Ltd.

 

(c)46,465

 

1,114

 

BHP Billiton Ltd.

 

249,722

 

8,757

 

BlueScope Steel Ltd.

 

(c)62,766

 

529

 

Boral Ltd.

 

47,082

 

252

 

Brambles Ltd.

 

31,812

 

321

 

Caltex Australia Ltd.

 

29,853

 

505

 

Coca-Cola Amatil Ltd.

 

17,210

 

143

 

Commonwealth Bank of Australia

 

(c)38,394

 

1,983

 

CSL Ltd.

 

8,526

 

271

 

CSR Ltd.

 

(c)77,935

 

212

 

Fairfax Media Ltd.

 

(c)32,240

 

132

 

Foster’s Group Ltd.

 

65,602

 

377

 

Insurance Australia Group Ltd.

 

(c)54,613

 

197

 

James Hardie Industries N.V.

 

37,648

 

212

 

Leighton Holdings Ltd.

 

(c)7,115

 

379

 

Lend Lease Corp., Ltd.

 

13,618

 

206

 

Macquarie Group Ltd.

 

(c)6,715

 

445

 

Macquarie Infrastructure Group

 

74,866

 

198

 

National Australia Bank Ltd.

 

51,258

 

1,691

 

Newcrest Mining Ltd.

 

26,212

 

755

 

OneSteel Ltd.

 

44,821

 

241

 

Orica Ltd.

 

23,038

 

640

 

Origin Energy Ltd.

 

213,888

 

1,657

 

PaperlinX Ltd.

 

36,382

 

85

 

QBE Insurance Group Ltd.

 

22,311

 

650

 

Rio Tinto Ltd.

 

(c)22,901

 

2,674

 

Santos Ltd.

 

157,070

 

1,949

 

Sonic Healthcare Ltd.

 

5,616

 

82

 

Stockland REIT

 

1,074

 

8

 

Suncorp-Metway Ltd.

 

(c)17,718

 

262

 

Symbion Health Ltd.

 

28,935

 

101

 

TABCORP Holdings Ltd.

 

13,036

 

169

 

Telstra Corp., Ltd.

 

69,366

 

285

 

Toll Holdings Ltd.

 

12,293

 

123

 

Transurban Group

 

(c)24,712

 

148

 

Wesfarmers Ltd., Class P

 

(a)4,906

 

175

 

Wesfarmers Ltd.

 

(c)12,365

 

438

 

Westpac Banking Corp.

 

54,298

 

1,323

 

Woodside Petroleum Ltd.

 

87,804

 

3,862

 

Woolworths Ltd.

 

33,517

 

995

 

 

 

 

 

36,163

 

Austria (0.8%)

 

 

 

 

 

Andritz AG

 

3,900

 

234

 

Boehler - Uddeholm AG

 

2,303

 

232

 

Erste Bank der Oesterreichischen Sparkassen AG

 

8,250

 

586

 

Flughafen Wien AG

 

1,465

 

169

 

IMMOFINANZ AG

 

(c)36,096

 

364

 

Mayr-Melnhof Karton AG

 

1,194

 

$    129

 

Meinl European Land Ltd.

 

(a)11,846

 

164

 

OMV AG

 

33,891

 

2,727

 

Raiffeisen International Bank Holding AG

 

5,402

 

814

 

Telekom Austria AG

 

50,283

 

1,393

 

Verbund-Oesterreichische Elektrizitaetswirtschafts AG, Class A

 

10,670

 

743

 

Voestalpine AG

 

10,008

 

717

 

Wiener Staedtische Allgemeine Versicherung AG

 

2,862

 

230

 

Wienerberger AG

 

7,967

 

440

 

 

 

 

 

8,942

 

Belgium (0.7%)

 

 

 

 

 

AGFA-Gevaert N.V.

 

4,251

 

65

 

Bekaert S.A.

 

539

 

72

 

Belgacom S.A.

 

7,474

 

367

 

Dexia S.A.

 

60,615

 

1,523

 

Fortis

 

68,182

 

1,772

 

InBev N.V.

 

16,863

 

1,391

 

KBC Group N.V.

 

8,355

 

1,167

 

Solvay S.A., Class A

 

3,603

 

502

 

UCB S.A.

 

6,548

 

295

 

Umicore

 

1,532

 

378

 

 

 

 

 

7,532

 

Brazil (1.8%)

 

 

 

 

 

All America Latina Logistica S.A.

 

86,400

 

1,107

 

Aracruz Celulose S.A., Class B (Preference)

 

16,145

 

120

 

Banco Bradesco S.A. (Preference)

 

32,725

 

1,047

 

Banco do Brasil S.A.

 

69,100

 

1,165

 

Banco Itau Holding Financeira S.A. (Preference)

 

63,527

 

1,645

 

Brasil Telecom Participacoes S.A. (Preference)

 

8,591

 

128

 

Centrias Eletricas Brasilieras, Class B (Preference)

 

8,147

 

104

 

Cia Brasileira de Distribuicao Grupo Pao de Acucar ADR (Preference)

 

500

 

18

 

Cia de Bebidas das Americas

 

2,415

 

166

 

Cia de Bebidas das Americas (Preference)

 

2,539

 

181

 

Cia Energetica de Minas Gerias (Preference)

 

10,763

 

198

 

Cia Siderurgica Nacional S.A.

 

2,976

 

267

 

Cia Vale do Rio Doce, Class A (Preference)

 

91,102

 

2,554

 

Contax Participacoes S.A. (Preference)

 

491

 

14

 

Cyrela Brazil Realty S.A.

 

42,900

 

574

 

Cyrela Commercial Properties S.A. Empreendimentos e Participacoes

 

(a)8,580

 

58

 

Embratel Participacoes S.A. (Preference)

 

7,170,555

 

27

 

Empresa Brasileira de Aeronautica S.A.

 

19,596

 

223

 

Gerdau S.A. (Preference)

 

11,731

 

340

 

Gol Linhas Aereas Inteligentes S.A. ADR

 

(c)39,200

 

973

 

Klabin S.A. (Preference)

 

26,365

 

97

 

Lojas Renner S.A.

 

29,100

 

582

 

Perdigao S.A.

 

41,900

 

1,025

 

Petroleo Brasileiro S.A. (Preference)

 

79,975

 

3,864

 

Sadia S.A. (Preference)

 

174,759

 

998

 

Souza Cruz S.A.

 

3,876

 

104

 

Tele Norte Leste Participacoes S.A. (Preference)

 

13,121

 

253

 

Unibanco Uniao de Bancos Brasileiros S.A. GDR

 

(c)8,150

 

1,138

 

 

10

The accompanying notes are an integral part of the financial statements.

 


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Active International Allocation Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Brazil (cont’d)

 

 

 

 

 

Usiminas Siderurgicas de Minas Gerias S.A., Class A (Preference)

 

5,601

 

$    253

 

Vivo Participacoes S.A. (Preference)

 

15,829

 

87

 

Votorantim Celulose e Papel S.A. (Preference)

 

3,048

 

91

 

 

 

 

 

19,401

 

Colombia (0.1%)

 

 

 

 

 

BanColombia S.A. ADR

 

(c)16,100

 

548

 

Denmark (0.6%)

 

 

 

 

 

AP Moller - Maersk A/S

 

74

 

784

 

Danske Bank A/S

 

46,745

 

1,812

 

DSV A/S

 

11,750

 

255

 

GN Store Nord

 

(a)67,329

 

526

 

Novo-Nordisk A/S, Class B

 

28,460

 

1,858

 

Novozymes A/S, Class B

 

2,864

 

323

 

Vestas Wind Systems A/S

 

(a)10,650

 

1,139

 

 

 

 

 

6,697

 

Finland (1.5%)

 

 

 

 

 

Cargotec Corp., Class B

 

(c)2,604

 

120

 

Fortum Oyj

 

16,886

 

756

 

Kesko Oyj, Class B

 

5,410

 

297

 

Kone Oyj, Class B

 

(c)5,208

 

362

 

Metso Oyj

 

(c)20,949

 

1,130

 

Neste Oil Oyj

 

(c)8,252

 

289

 

Nokia Oyj

 

267,836

 

10,313

 

Outokumpu Oyj

 

(c)15,450

 

471

 

Rautaruukki Oyj

 

6,293

 

268

 

Sampo Oyj, Class A

 

21,019

 

550

 

Stora Enso Oyj, Class R

 

41,550

 

617

 

TietoEnator Oyj

 

12,781

 

285

 

UPM-Kymmene Oyj

 

36,167

 

724

 

Uponor Oyj

 

2,904

 

72

 

Wartsila Oyj, Class B

 

4,034

 

305

 

 

 

 

 

16,559

 

France (8.2%)

 

 

 

 

 

Accor S.A.

 

17,180

 

1,363

 

Air Liquide

 

(c)17,786

 

2,635

 

Alcatel - Lucent

 

116,127

 

844

 

Alstom

 

21,368

 

4,541

 

ArcelorMittal

 

59,440

 

4,570

 

Arkema

 

(a)2,887

 

188

 

Atos Origin S.A.

 

(a)1,889

 

97

 

AXA S.A.

 

76,954

 

3,064

 

BNP Paribas

 

56,928

 

6,119

 

Bouygues

 

18,764

 

1,556

 

Business Objects S.A.

 

(a)(c)5,580

 

340

 

Cap Gemini S.A.

 

15,920

 

989

 

Carrefour S.A.

 

(c)31,579

 

2,448

 

Casino Guichard Perrachon S.A.

 

4,458

 

485

 

Cie de Saint - Gobain

 

18,247

 

1,729

 

Cie Generale d’Optique Essilor International S.A.

 

21,786

 

1,387

 

CNP Assurances

 

4,936

 

640

 

Compagnie Generale des Establissements Michelin, Class B

 

(c)4,696

 

538

 

Credit Agricole S.A.

 

(c)28,577

 

959

 

Dassault Systemes S.A.

 

5,148

 

$    303

 

European Aeronautic Defense & Space Co. N.V.

 

(c)14,611

 

464

 

France Telecom S.A.

 

(c)98,884

 

3,549

 

Gecina S.A. REIT

 

2,351

 

369

 

Groupe Danone

 

(c)27,890

 

2,492

 

Hermes International

 

3,740

 

476

 

Imerys S.A.

 

2,205

 

181

 

Klepierre REIT

 

5,946

 

302

 

L’Oreal S.A.

 

12,076

 

1,724

 

Lafarge S.A.

 

(c)15,530

 

2,811

 

Lagardere S.C.A.

 

(c)8,523

 

636

 

LVMH Moet Hennessy Louis Vuitton S.A.

 

(c)21,401

 

2,572

 

Neopost S.A.

 

3,273

 

336

 

Pernod-Ricard S.A.

 

1,304

 

300

 

Peugeot S.A.

 

(c)5,348

 

402

 

PPR

 

2,823

 

451

 

Publicis Groupe

 

(c)4,217

 

164

 

Renault S.A.

 

(c)5,505

 

772

 

Safran S.A.

 

(c)4,910

 

100

 

Sanofi-Aventis S.A.

 

(c)56,814

 

5,193

 

Schneider Electric S.A.

 

(c)20,308

 

2,715

 

Societe BIC S.A.

 

1,627

 

116

 

Societe Generale

 

(c)23,415

 

3,346

 

Societe Television Francaise 1

 

11,185

 

298

 

Sodexho Alliance S.A.

 

(c)9,509

 

583

 

STMicroelectronics N.V.

 

49,380

 

703

 

Suez S.A.

 

(c)31,273

 

2,120

 

Suez S.A.

 

2,940

 

198

 

Technip S.A.

 

7,405

 

586

 

Thales S.A.

 

6,720

 

398

 

Thomson

 

10,855

 

153

 

Total S.A.

 

(c)159,524

 

13,239

 

Unibail-Rodamco REIT

 

(c)2,618

 

570

 

Valeo S.A.

 

5,295

 

217

 

Vallourec

 

2,536

 

683

 

Veolia Environnement

 

(c)34,946

 

3,174

 

Vinci S.A.

 

(c)16,860

 

1,239

 

Vivendi

 

39,320

 

1,792

 

Zodiac S.A.

 

(a)631

 

40

 

 

 

 

 

90,259

 

Germany (7.0%)

 

 

 

 

 

Adidas AG

 

16,450

 

1,225

 

Allianz SE (Registered)

 

21,656

 

4,632

 

Altana AG

 

3,752

 

91

 

Arcandor AG

 

(a)4,851

 

115

 

BASF AG

 

27,879

 

4,120

 

Bayer AG

 

41,596

 

3,793

 

Beiersdorf AG

 

8,080

 

624

 

Celesio AG

 

(c)6,488

 

400

 

Commerzbank AG

 

42,694

 

1,616

 

Continental AG

 

7,896

 

1,024

 

DaimlerChrysler AG

 

49,424

 

4,787

 

Deutsche Bank AG (Registered)

 

15,036

 

1,945

 

Deutsche Boerse AG

 

(c)12,506

 

2,468

 

Deutsche Lufthansa AG (Registered)

 

13,860

 

367

 

Deutsche Post AG (Registered)

 

43,545

 

1,488

 

 

The accompanying notes are an integral part of the financial statements.

11

 


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Active International Allocation Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Germany (cont’d)

 

 

 

 

 

Deutsche Postbank AG

 

3,517

 

$    311

 

Deutsche Telekom AG

 

(c)191,355

 

4,185

 

E.ON AG

 

43,979

 

9,338

 

Fresenius Medical Care AG

 

15,577

 

833

 

Heidelberger Druckmaschinen AG

 

(c)3,177

 

106

 

Henkel KGaA (Non-Voting Shares)

 

11,107

 

623

 

Hochtief AG

 

3,367

 

448

 

Hypo Real Estate Holding AG

 

13,469

 

701

 

Infineon Technologies AG

 

(a)35,063

 

410

 

Linde AG

 

7,963

 

1,049

 

MAN AG

 

9,453

 

1,555

 

Merck KGaA

 

3,771

 

484

 

Metro AG

 

19,246

 

1,606

 

Muenchener Rueckversicherungs AG (Registered)

 

10,932

 

2,113

 

Porsche Automobil Holding SE (Non-Voting Shares)

 

900

 

1,814

 

Puma AG Rudolf Dassler Sport

 

768

 

305

 

Qiagen N.V.

 

(a)(c)8,326

 

179

 

RWE AG

 

(c)28,097

 

3,937

 

RWE AG (Non-Voting Shares)

 

2,201

 

267

 

SAP AG

 

106,235

 

5,489

 

Siemens AG (Registered)

 

48,828

 

7,666

 

Suedzucker AG

 

(c)28,507

 

671

 

ThyssenKrupp AG

 

22,130

 

1,235

 

TUI AG

 

(a)(c)12,933

 

359

 

Volkswagen AG

 

9,553

 

2,173

 

Volkswagen AG (Non-Voting Shares)

 

5,703

 

828

 

 

 

 

 

77,380

 

Greece (0.7%)

 

 

 

 

 

Alpha Bank A.E.

 

38,383

 

1,401

 

EFG Eurobank Ergasias S.A.

 

24,405

 

862

 

National Bank of Greece S.A.

 

42,490

 

2,927

 

OPAP S.A.

 

12,910

 

515

 

Piraeus Bank S.A.

 

37,600

 

1,465

 

Titan Cement Co., S.A.

 

3,950

 

180

 

 

 

 

 

7,350

 

Hong Kong (2.9%)

 

 

 

 

 

Agile Property Holdings Ltd.

 

291,280

 

523

 

Air China Ltd., Class H

 

131,000

 

191

 

Aluminum Corp. of China Ltd., Class H

 

132,000

 

269

 

Angang Steel Co. Ltd., Class H

 

6,000

 

16

 

Anhui Conch Cement Co., Ltd., Class H

 

2,000

 

17

 

Anhui Expressway Co., Class H

 

369,000

 

341

 

Bank of China Ltd., Class H

 

(c)686,000

 

327

 

Bank of Communications Co., Ltd., Class H

 

452,000

 

618

 

Bank of East Asia Ltd.

 

73,263

 

496

 

BOC Hong Kong Holdings Ltd.

 

168,000

 

464

 

Cathay Pacific Airways Ltd.

 

48,000

 

125

 

Chaoda Modern Agriculture

 

170,100

 

153

 

Cheung Kong Holdings Ltd.

 

70,000

 

1,276

 

Cheung Kong Infrastructure Holdings Ltd.

 

(c)26,000

 

97

 

China Communications Construction Co. Ltd., Class H

 

319,000

 

823

 

China Construction Bank, Class H

 

1,684,835

 

1,413

 

China Cosco Holdings Co. Ltd., Class H

 

115,450

 

$    315

 

China Infrastructure Machinery Holdings Ltd.

 

224,000

 

352

 

China Life Insurance Co., Ltd.

 

225,000

 

1,145

 

China Petroleum & Chemical Corp., Class H

 

528,000

 

785

 

China Resources Enterprise

 

102,000

 

434

 

China Resources Land Ltd.

 

145,000

 

316

 

China Shenhua Energy Co., Ltd.

 

106,500

 

632

 

China Shipping Development Co., Ltd., Class H

 

51,891

 

135

 

China Telecom Corp., Ltd., Class H

 

502,000

 

392

 

China Travel International Investment Hong Kong Ltd.

 

768,000

 

499

 

China Water Affairs Group Ltd.

 

(a)(c)1,731,741

 

1,062

 

Chow Sang Sang Holdings

 

57,438

 

99

 

CLP Holdings Ltd.

 

78,811

 

536

 

COSCO Pacific Ltd.

 

152,000

 

402

 

Datang International Power Generation Co., Ltd., Class H

 

118,000

 

103

 

Dongfeng Motor Group Co., Ltd.

 

80,324

 

56

 

Esprit Holdings Ltd.

 

43,800

 

644

 

Guangdong Investment Ltd.

 

1,456,000

 

819

 

Guangzhou R&F Properties Co., Ltd., Class H

 

33,200

 

117

 

Hang Lung Properties Ltd.

 

234,500

 

1,049

 

Hang Seng Bank Ltd.

 

(c32,600

)

667

 

Henderson Land Development Co., Ltd.

 

34,000

 

315

 

Hong Kong & China Gas Co., Ltd.

 

190,424

 

580

 

Hong Kong Exchanges & Clearing Ltd.

 

48,500

 

1,364

 

HongKong Electric Holdings Ltd.

 

63,500

 

364

 

Hopewell Highway Infrastructure Ltd.

 

(c)343,231

 

294

 

Hopewell Holdings Ltd.

 

30,000

 

138

 

Huaneng Power International, Inc., Class H

 

130,000

 

136

 

Hutchison Telecommunications International, Ltd.

 

(c)64,000

 

96

 

Hutchison Whampoa Ltd.

 

96,282

 

1,083

 

Hysan Development Co., Ltd.

 

31,732

 

90

 

Jiangxi Copper Co., Ltd., Class H

 

46,000

 

112

 

Johnson Electric Holdings Ltd.

 

(c)73,063

 

40

 

Kerry Properties Ltd.

 

20,215

 

161

 

Kingboard Chemical Holdings Ltd.

 

32,000

 

189

 

Li & Fung Ltd.

 

235,757

 

942

 

Li Ning Co. Ltd.

 

94,000

 

345

 

Link REIT (The)

 

77,539

 

168

 

MTR Corp.

 

66,687

 

243

 

New World China Land Ltd.

 

(c)271,600

 

242

 

New World Development Ltd.

 

109,563

 

385

 

NWS Holdings Ltd.

 

130,592

 

414

 

PCCW Ltd.

 

171,490

 

101

 

PetroChina Co., Ltd., Class H

 

496,000

 

875

 

Ping An Insurance Group Co. of China Ltd., Class H

 

41,000

 

435

 

Prime Success International Group Ltd.

 

321,200

 

237

 

Rexcapital Financial Holdings Ltd.

 

(a)891,948

 

169

 

Shanghai Electric Group Co., Ltd., Class H

 

26,000

 

22

 

Shangri-La Asia Ltd.

 

48,636

 

151

 

Sino Land Co.

 

56,197

 

197

 

Sinofert Holdings Ltd.

 

(c)916,000

 

849

 

Sinopec Shangai Petrochemical Co., Ltd., Class H

 

32,000

 

20

 

 

12

The accompanying notes are an integral part of the financial statements.

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Active International Allocation Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Hong Kong (cont’d)

 

 

 

 

 

Sun Hung Kai Properties Ltd.

 

89,500

 

$    1,883

 

Swire Pacific Ltd., Class A

 

42,000

 

575

 

Techtronic Industries Co.

 

42,500

 

42

 

Television Broadcasts Ltd.

 

14,000

 

84

 

Wasion Meters Group Ltd.

 

186,379

 

111

 

Wharf Holdings Ltd.

 

56,662

 

292

 

Yanzhou Coal Mining Co., Ltd., Class H

 

72,000

 

140

 

Yue Yuen Industrial Holdings Ltd.

 

(c)27,500

 

98

 

Zhejiang Expressway Co., Ltd.

 

18,000

 

28

 

Zijin Mining Group Co., Ltd.

 

123,500

 

189

 

 

 

 

 

31,907

 

India (1.5%)

 

 

 

 

 

ABB Ltd.

 

3,735

 

143

 

ACC Ltd.

 

1,409

 

36

 

Axis Bank Ltd.

 

5,400

 

133

 

Bajaj Auto Ltd.

 

1,485

 

99

 

Bharat Forge Ltd.

 

4,739

 

42

 

Bharat Heavy Electricals Ltd.

 

26,557

 

1,734

 

Bharti Airtel Ltd.

 

(a)40,943

 

1,029

 

Cipla Ltd.

 

8,807

 

47

 

Dish TV India Ltd.

 

(a)8,026

 

21

 

Dr. Reddy's Laboratories Ltd.

 

4,849

 

90

 

GAIL India Ltd.

 

12,345

 

169

 

GlaxoSmithKline Pharmaceuticals Ltd.

 

898

 

23

 

Glenmark Pharmaceuticals Ltd.

 

5,851

 

88

 

Grasim Industries Ltd.

 

(d)1,671

 

157

 

HDFC Bank Ltd.

 

16,278

 

710

 

Hero Honda Motors Ltd.

 

3,953

 

70

 

Hindalco Industries Ltd.

 

25,800

 

139

 

Hindustan Lever Ltd.

 

39,177

 

212

 

Housing Development Finance Corp.

 

8,718

 

631

 

I-Flex Solutions Ltd.

 

(a)867

 

33

 

ICICI Bank Ltd.

 

29,787

 

932

 

ICICI Bank Ltd. ADR

 

(c)5,600

 

344

 

Infosys Technologies Ltd.

 

18,793

 

839

 

ITC Ltd.

 

52,100

 

277

 

IVRCL Infrastructures & Projects Ltd.

 

73,900

 

1,039

 

Larsen & Toubro Ltd.

 

4,922

 

518

 

Mahanagar Telephone Nigam Ltd.

 

9,050

 

44

 

Mahindra & Mahindra Ltd.

 

4,939

 

108

 

Maruti Suzuki India Ltd.

 

3,345

 

84

 

Oil & Natural Gas Corp., Ltd.

 

11,554

 

360

 

Ranbaxy Laboratories Ltd.

 

7,151

 

77

 

Reliance Communications Ltd.

 

61,700

 

1,164

 

Reliance Energy Ltd.

 

2,888

 

156

 

Reliance Industries Ltd.

 

30,673

 

2,241

 

Satyam Computer Services Ltd.

 

22,065

 

252

 

Sun Pharma Advanced Research Co., Ltd.

 

(a)1,644

 

7

 

Sun Pharmaceutical Industries Ltd.

 

2,255

 

69

 

Tata Consultancy Services Ltd.

 

6,104

 

166

 

Tata Motors Ltd.

 

9,131

 

171

 

Tata Steel Ltd.

 

(d)6,392

 

153

 

Unitech Ltd.

 

147,912

 

1,828

 

Wipro Ltd.

 

9,530

 

127

 

Wire and Wireless India Ltd.

 

(a)3,588

 

9

 

Zee Entertainment Enterprises Ltd.

 

9,845

 

$      82

 

Zee News Ltd.

 

(a)(d)3,244

 

7

 

 

 

 

 

16,660

 

Indonesia (0.5%)

 

 

 

 

 

Astra International Tbk PT

 

258,000

 

743

 

Bank Central Asia Tbk PT

 

1,960,500

 

1,508

 

Bank Mandiri Persero Tbk PT

 

856,500

 

316

 

Bank Rakyat Indonesia Tbk PT

 

536,500

 

419

 

Bumi Resources Tbk PT

 

1,867,500

 

1,178

 

United Tractors Tbk PT

 

1,323,000

 

1,522

 

 

 

 

 

5,686

 

Italy (1.2%)

 

 

 

 

 

Alleanza Assicurazioni S.p.A.

 

2,521

 

32

 

Assicurazioni Generali S.p.A.

 

66,961

 

3,002

 

Atlantia S.p.A.

 

3,681

 

139

 

Autogrill S.p.A.

 

1,797

 

30

 

Banca Monte dei Paschi di Siena S.p.A.

 

(c)2,336

 

12

 

Banca Popolare di Milano Scarl

 

695

 

9

 

Banco Popolare Scarl

 

(a)3,074

 

68

 

Benetton Group S.p.A.

 

456

 

8

 

Bulgari S.p.A.

 

24,753

 

345

 

Enel S.p.A.

 

9,815

 

116

 

ENI S.p.A.

 

60,164

 

2,192

 

Fiat S.p.A.

 

3,080

 

79

 

Finmeccanica S.p.A.

 

3,429

 

109

 

Intesa San Paolo S.p.A.

 

291,793

 

2,289

 

Intesa San Paolo S.p.A. RNC

 

2,270

 

16

 

Italcementi S.p.A.

 

370

 

8

 

Luxottica Group S.p.A.

 

(c)1,328

 

42

 

Mediaset S.p.A.

 

7,072

 

71

 

Mediobanca S.p.A.

 

6,639

 

136

 

Mediolanum S.p.A.

 

611

 

5

 

Pirelli & C S.p.A.

 

(a)27,686

 

30

 

Seat Pagine Gialle S.p.A.

 

(c)13,264

 

5

 

Snam Rete Gas S.p.A.

 

(c)1,548

 

10

 

Telecom Italia S.p.A., Class S

 

118,151

 

366

 

Telecom Italia S.p.A. RNC

 

67,652

 

159

 

Tiscali S.p.A.

 

(a)(c)935

 

3

 

UniCredito Italiano S.p.A.

 

455,445

 

3,791

 

Unione di Banche Italiane SCPA

 

20,600

 

567

 

 

 

 

 

13,639

 

Japan (19.2%)

 

 

 

 

 

77 Bank Ltd. (The)

 

79,000

 

493

 

Acom Co., Ltd.

 

1,980

 

40

 

Advantest Corp.

 

(c)18,190

 

512

 

Aeon Co., Ltd.

 

38,900

 

568

 

Aeon Credit Service Co., Ltd.

 

(c)2,300

 

34

 

Aiful Corp.

 

(c)1,750

 

31

 

Ajinomoto Co., Inc.

 

62,400

 

706

 

Alps Electric Co., Ltd.

 

(c)13,900

 

180

 

Amada Co., Ltd.

 

25,000

 

220

 

Asahi Breweries Ltd.

 

18,900

 

320

 

Asahi Glass Co., Ltd.

 

108,800

 

1,443

 

Asahi Kasei Corp.

 

(c)102,000

 

680

 

Asatsu - DK, Inc.

 

(c)3,300

 

92

 

 

The accompanying notes are an integral part of the financial statements.

13

 


 

2007 Annual Report

 

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Active International Allocation Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Japan (cont’d)

 

 

 

 

 

Astellas Pharma, Inc.

 

39,700

 

$    1,732

 

Bank of Kyoto Ltd. (The)

 

26,000

 

307

 

Bank of Yokohama Ltd. (The)

 

180,000

 

1,273

 

Benesse Corp.

 

5,100

 

217

 

Bridgestone Corp.

 

77,400

 

1,363

 

Canon, Inc.

 

81,800

 

3,737

 

Casio Computer Co., Ltd.

 

33,300

 

388

 

Central Japan Railway Co.

 

128

 

1,089

 

Chiba Bank Ltd. (The)

 

75,000

 

608

 

Chiyoda Corp.

 

(c)18,000

 

206

 

Chubu Electric Power Co., Inc.

 

(c)41,900

 

1,094

 

Chugai Pharmaceutical Co., Ltd.

 

20,907

 

299

 

Citizen Holdings Co., Ltd.

 

(c)28,400

 

276

 

Coca-Cola West Holdings Co., Ltd.

 

(c)700

 

16

 

COMSYS Holdings Corp.

 

16,000

 

131

 

Credit Saison Co., Ltd.

 

4,600

 

126

 

CSK Holdings Corp.

 

6,200

 

201

 

Dai Nippon Printing Co., Ltd.

 

37,600

 

548

 

Daicel Chemical Industries Ltd.

 

(c)13,000

 

78

 

Daiichi Sankyo Co., Ltd.

 

54,000

 

1,659

 

Daikin Industries Ltd.

 

(c)15,700

 

877

 

Dainippon Ink & Chemicals, Inc.

 

(c)54,000

 

270

 

Daito Trust Construction Co., Ltd.

 

14,000

 

777

 

Daiwa House Industry Co., Ltd.

 

(c)72,600

 

934

 

Daiwa Securities Group, Inc.

 

144,000

 

1,327

 

Denki Kagaku Kogyo KK

 

36,000

 

155

 

Denso Corp.

 

55,550

 

2,258

 

Dowa Holdings Co., Ltd.

 

49,000

 

345

 

East Japan Railway Co.

 

314

 

2,578

 

Ebara Corp.

 

(c)29,800

 

102

 

Eisai Co., Ltd.

 

18,602

 

733

 

FamilyMart Co., Ltd.

 

5,100

 

159

 

Fanuc Ltd.

 

16,400

 

1,600

 

Fast Retailing Co., Ltd.

 

(a)(c)7,700

 

548

 

Fuji Electric Holdings Co., Ltd.

 

(c)15,000

 

52

 

Fuji Soft, Inc.

 

3,000

 

47

 

Fuji Television Network, Inc.

 

31

 

51

 

FUJIFILM Holdings Corp.

 

38,900

 

1,649

 

Fujikura Ltd.

 

22,000

 

112

 

Fujitsu Ltd.

 

147,200

 

985

 

Fukuoka Financial Group, Inc.

 

105,000

 

626

 

Furukawa Electric Co., Ltd.

 

52,800

 

204

 

H2O Retailing Corp.

 

(c)9,000

 

70

 

Hirose Electric Co., Ltd.

 

(c)2,300

 

266

 

Hitachi Construction Machinery Co., Ltd.

 

2,700

 

81

 

Hitachi Ltd.

 

(c)266,000

 

1,949

 

Hokkaido Electric Power Co., Inc.

 

8,400

 

182

 

Hokuhoku Financial Group, Inc.

 

202,000

 

580

 

Honda Motor Co., Ltd.

 

132,004

 

4,364

 

Hoya Corp.

 

32,900

 

1,050

 

Ibiden Co., Ltd.

 

9,700

 

670

 

IHI Corp.

 

(c)92,000

 

191

 

Index Holdings, Inc.

 

(c)94

 

28

 

Inpex Holdings, Inc.

 

39

 

420

 

Isetan Co., Ltd.

 

(c)15,900

 

215

 

Ito En Ltd.

 

(c)2,100

 

$      40

 

Ito En Ltd. (Preference)

 

630

 

9

 

Itochu Corp.

 

146,000

 

1,419

 

Itochu Techno - Solutions Corp.

 

2,500

 

84

 

J Front Retailing Co., Ltd.

 

(a)33,000

 

290

 

Japan Airlines Corp.

 

(a)(c)77,000

 

175

 

Japan Real Estate Investment Corp. REIT

 

(c)69

 

853

 

Japan Retail Fund Investment Corp. REIT

 

(c)64

 

451

 

Japan Tobacco, Inc.

 

332

 

1,969

 

JFE Holdings, Inc.

 

31,800

 

1,602

 

JGC Corp.

 

23,000

 

395

 

Joyo Bank Ltd. (The)

 

141,000

 

786

 

JS Group Corp.

 

(c)21,700

 

348

 

JSR Corp.

 

12,800

 

331

 

Kajima Corp.

 

112,400

 

368

 

Kamigumi Co., Ltd.

 

(c)1,000

 

7

 

Kaneka Corp.

 

21,000

 

174

 

Kansai Electric Power Co., Inc. (The)

 

(c)59,800

 

1,395

 

Kao Corp.

 

50,000

 

1,504

 

Kawasaki Heavy Industries Ltd.

 

92,000

 

271

 

Kawasaki Kisen Kaisha Ltd.

 

(c)5,000

 

49

 

Keihin Electric Express Railway Co., Ltd.

 

(c)33,000

 

202

 

Keio Corp.

 

20,000

 

121

 

Keyence Corp.

 

2,900

 

710

 

Kikkoman Corp.

 

(c)10,000

 

138

 

Kinden Corp.

 

1,000

 

8

 

Kintetsu Corp.

 

(c)146,200

 

453

 

Kirin Brewery Co., Ltd.

 

(c)47,400

 

695

 

Kobe Steel Ltd.

 

164,000

 

532

 

Kokuyo Co., Ltd.

 

(c)5,700

 

51

 

Komatsu Ltd.

 

95,700

 

2,588

 

Konami Corp.

 

8,600

 

281

 

Konica Minolta Holdings, Inc.

 

36,500

 

642

 

Kubota Corp.

 

131,000

 

897

 

Kuraray Co., Ltd.

 

29,500

 

356

 

Kurita Water Industries Ltd.

 

(c)19,900

 

605

 

Kyocera Corp.

 

13,000

 

1,137

 

Kyowa Hakko Kogyo Co., Ltd.

 

(c)23,028

 

245

 

Kyushu Electric Power Co., Inc.

 

26,100

 

643

 

Lawson, Inc.

 

4,800

 

170

 

Leopalace21 Corp.

 

15,100

 

405

 

Mabuchi Motor Co., Ltd.

 

2,300

 

139

 

Marubeni Corp.

 

266,000

 

1,868

 

Marui Co., Ltd.

 

(c)35,500

 

351

 

Matsui Securities Co., Ltd.

 

(c)14,400

 

113

 

Matsushita Electric Industrial Co., Ltd.

 

175,000

 

3,580

 

Matsushita Electric Works Ltd.

 

27,000

 

299

 

Meiji Dairies Corp.

 

(c)17,000

 

87

 

Meiji Seika Kaisha Ltd.

 

(c)19,000

 

81

 

Meitec Corp.

 

(c)2,300

 

69

 

Millea Holdings, Inc.

 

64,352

 

2,175

 

Minebea Co., Ltd.

 

32,000

 

205

 

Mitsubishi Chemical Holdings Corp.

 

75,000

 

575

 

Mitsubishi Corp.

 

129,800

 

3,536

 

Mitsubishi Electric Corp.

 

185,800

 

1,919

 

Mitsubishi Estate Co., Ltd.

 

139,000

 

3,332

 

 

14

The accompanying notes are an integral part of the financial statements.

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Active International Allocation Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Japan (cont’d)

 

 

 

 

 

Mitsubishi Heavy Industries Ltd.

 

314,000

 

$    1,344

 

Mitsubishi Logistics Corp.

 

(c)7,000

 

79

 

Mitsubishi Materials Corp.

 

160,000

 

680

 

Mitsubishi Rayon Co., Ltd.

 

42,000

 

203

 

Mitsubishi UFJ Financial Group, Inc.

 

848,380

 

7,897

 

Mitsui & Co., Ltd.

 

156,800

 

3,327

 

Mitsui Chemicals, Inc.

 

42,000

 

275

 

Mitsui Fudosan Co., Ltd.

 

99,400

 

2,148

 

Mitsui Mining & Smelting Co., Ltd.

 

(c)95,000

 

380

 

Mitsui OSK Lines Ltd.

 

(c)14,000

 

178

 

Mitsui Sumitomo Insurance Co., Ltd.

 

108,000

 

1,054

 

Mitsui Trust Holdings, Inc.

 

59,545

 

462

 

Mitsukoshi Ltd.

 

(c)32,000

 

145

 

Mizuho Financial Group, Inc.

 

1,036

 

4,915

 

Murata Manufacturing Co., Ltd.

 

16,100

 

936

 

Namco Bandai Holdings, Inc.

 

(c)2,400

 

38

 

NEC Corp.

 

159,400

 

736

 

NEC Electronics Corp.

 

(a)(c)4,800

 

115

 

Net One Systems Co., Ltd.

 

(c)50

 

56

 

NGK Insulators Ltd.

 

(c)33,600

 

907

 

NGK Spark Plug Co., Ltd.

 

(c)20,000

 

349

 

Nidec Corp.

 

(c)8,600

 

638

 

Nikon Corp.

 

(c)26,000

 

887

 

Nintendo Co., Ltd.

 

6,300

 

3,825

 

Nippon Building Fund, Inc. REIT

 

83

 

1,162

 

Nippon Electric Glass Co., Ltd.

 

24,500

 

398

 

Nippon Express Co., Ltd.

 

77,800

 

398

 

Nippon Meat Packers, Inc.

 

18,600

 

187

 

Nippon Mining Holdings, Inc.

 

43,000

 

276

 

Nippon Oil Corp.

 

133,800

 

1,090

 

Nippon Paper Group, Inc.

 

69

 

207

 

Nippon Sheet Glass Co., Ltd.

 

(c)37,000

 

186

 

Nippon Steel Corp.

 

(c)415,000

 

2,556

 

Nippon Telegraph & Telephone Corp.

 

243

 

1,203

 

Nippon Yusen KK

 

98,000

 

780

 

Nishi-Nippon Bank Ltd. (The)

 

55,000

 

136

 

Nissan Chemical Industries Ltd.

 

11,000

 

143

 

Nissan Motor Co., Ltd.

 

196,100

 

2,123

 

Nisshin Seifun Group, Inc.

 

12,500

 

125

 

Nisshinbo Industries, Inc.

 

(c)6,000

 

73

 

Nissin Food Products Co., Ltd.

 

(c)6,400

 

207

 

Nitto Denko Corp.

 

17,700

 

935

 

Nomura Holdings, Inc.

 

207,100

 

3,462

 

Nomura Research Institute Ltd.

 

10,900

 

358

 

NSK Ltd.

 

(c)62,000

 

644

 

NTN Corp.

 

44,000

 

381

 

NTT Data Corp.

 

(c)121

 

539

 

NTT DoCoMo, Inc.

 

331

 

548

 

Obayashi Corp.

 

76,000

 

383

 

Obic Co., Ltd.

 

710

 

131

 

OJI Paper Co., Ltd.

 

(c)95,400

 

468

 

Oki Electric Industry Co., Ltd.

 

(a)(c)44,000

 

69

 

Okumura Corp.

 

(c)21,000

 

101

 

Olympus Corp.

 

(c)11,000

 

451

 

Omron Corp.

 

17,800

 

421

 

Onward Kashiyama Co., Ltd.

 

(c)17,000

 

$     174

 

Oracle Corp. Japan

 

(c)2,900

 

128

 

Oriental Land Co., Ltd.

 

(c)5,600

 

338

 

Osaka Gas Co., Ltd.

 

155,600

 

613

 

Pioneer Corp.

 

(c)14,654

 

132

 

Promise Co., Ltd.

 

(c)2,350

 

58

 

Resona Holdings, Inc.

 

(c)504

 

922

 

Ricoh Co., Ltd.

 

52,000

 

956

 

Rohm Co., Ltd.

 

13,100

 

1,140

 

Sanken Electric Co., Ltd.

 

(c)14,000

 

74

 

Sanyo Electric Co., Ltd.

 

(a)146,000

 

202

 

Sapporo Holdings Ltd.

 

(c)10,000

 

80

 

SBI E*Trade Securities Co., Ltd.

 

(c)191

 

180

 

Secom Co., Ltd.

 

14,500

 

794

 

Seiko Epson Corp.

 

(c)9,700

 

211

 

Sekisui Chemical Co., Ltd.

 

(c)44,000

 

297

 

Sekisui House Ltd.

 

(c)87,600

 

949

 

Seven & I Holdings Co., Ltd.

 

64,000

 

1,861

 

Sharp Corp.

 

(c)72,200

 

1,293

 

Shimachu Co., Ltd.

 

(c)5,500

 

156

 

Shimamura Co., Ltd.

 

2,100

 

177

 

Shimano, Inc.

 

(c)8,600

 

310

 

Shimizu Corp.

 

80,600

 

351

 

Shin-Etsu Chemical Co., Ltd.

 

33,696

 

2,107

 

Shinko Securities Co., Ltd.

 

52,000

 

216

 

Shinsei Bank Ltd.

 

(c)172,000

 

632

 

Shionogi & Co., Ltd.

 

(c)22,000

 

388

 

Shiseido Co., Ltd.

 

31,000

 

734

 

Shizuoka Bank Ltd. (The)

 

64,000

 

704

 

Showa Denko KK

 

54,000

 

194

 

Showa Shell Sekiyu KK

 

14,500

 

161

 

SMC Corp.

 

5,700

 

678

 

Softbank Corp.

 

(c)80,700

 

1,661

 

Sompo Japan Insurance, Inc.

 

73,000

 

658

 

Sony Corp.

 

61,597

 

3,343

 

Stanley Electric Co., Ltd.

 

6,000

 

149

 

Sumitomo Bakelite Co., Ltd.

 

11,000

 

66

 

Sumitomo Chemical Co., Ltd.

 

116,600

 

1,037

 

Sumitomo Corp.

 

(c)95,100

 

1,354

 

Sumitomo Electric Industries Ltd.

 

(c)59,400

 

946

 

Sumitomo Heavy Industries Ltd.

 

(c)38,000

 

349

 

Sumitomo Metal Industries Ltd.

 

247,000

 

1,141

 

Sumitomo Metal Mining Co., Ltd.

 

(c)89,800

 

1,538

 

Sumitomo Mitsui Financial Group, Inc.

 

496

 

3,691

 

Sumitomo Realty & Development Co., Ltd.

 

(c)43,000

 

1,058

 

Sumitomo Trust & Banking Co., Ltd. (The)

 

138,000

 

919

 

T&D Holdings, Inc.

 

20,250

 

1,048

 

Taiheiyo Cement Corp.

 

(c)53,000

 

127

 

Taisei Corp.

 

(c)109,000

 

294

 

Taisho Pharmaceutical Co., Ltd.

 

(c)1 1,441

 

220

 

Taiyo Yuden Co., Ltd.

 

(c)7,000

 

113

 

Takara Holdings, Inc.

 

(c)6,000

 

36

 

Takashimaya Co., Ltd.

 

(c)32,000

 

386

 

Takeda Pharmaceutical Co., Ltd.

 

65,600

 

3,835

 

Takefuji Corp.

 

(c)3,010

 

72

 

TDK Corp.

 

10,000

 

742

 

 

The accompanying notes are an integral part of the financial statements.

15

 


 

2007 Annual Report

 

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Active International Allocation Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Japan (cont’d)

 

 

 

 

 

Teijin Ltd.

 

73,400

 

$    314

 

Terumo Corp.

 

17,100

 

901

 

THK Co., Ltd.

 

3,400

 

69

 

TIS, Inc.

 

(c)2,904

 

50

 

Tobu Railway Co., Ltd.

 

(c)79,400

 

371

 

Toho Co., Ltd.

 

(c)6,300

 

141

 

Tohoku Electric Power Co., Inc.

 

35,200

 

793

 

Tokyo Broadcasting System, Inc.

 

9,000

 

193

 

Tokyo Electric Power Co., Inc. (The)

 

87,400

 

2,264

 

Tokyo Electron Ltd.

 

19,900

 

1,216

 

Tokyo Gas Co., Ltd.

 

(c)182,600

 

853

 

Tokyo Tatemono Co., Ltd.

 

(c)33,000

 

311

 

Tokyu Corp.

 

88,400

 

583

 

TonenGeneral Sekiyu KK

 

(c)29,000

 

286

 

Toppan Printing Co., Ltd.

 

(c)36,600

 

361

 

Toray Industries, Inc.

 

(c)102,100

 

793

 

Toshiba Corp.

 

(c)272,000

 

2,028

 

Tosoh Corp.

 

40,000

 

172

 

Toto Ltd.

 

(c)43,600

 

344

 

Toyo Seikan Kaisha Ltd.

 

16,400

 

290

 

Toyoba Co., Ltd.

 

5,000

 

10

 

Toyoda Gosei Co., Ltd.

 

(c)800

 

28

 

Toyota Industries Corp.

 

8,150

 

332

 

Toyota Motor Corp.

 

213,400

 

11,486

 

Trend Micro, Inc.

 

(a)9,200

 

330

 

Unicharm Corp.

 

(c)3,400

 

214

 

Uniden Corp.

 

(c)5,000

 

29

 

UNY Co., Ltd.

 

10,000

 

85

 

Ushio, Inc.

 

(c)3,500

 

77

 

USS Co., Ltd.

 

2,700

 

168

 

Wacoal Holdings Corp.

 

(c)6,000

 

78

 

West Japan Railway Co.

 

33

 

163

 

Yahoo! Japan Corp.

 

1,439

 

642

 

Yakult Honsha Co., Ltd.

 

(c)8,700

 

201

 

Yamada Denki Co., Ltd.

 

9,620

 

1,095

 

Yamaha Corp.

 

8,800

 

201

 

Yamaha Motor Co., Ltd.

 

2,700

 

65

 

Yamato Holdings Co., Ltd.

 

(c)23,000

 

332

 

Yamazaki Baking Co., Ltd.

 

(c)8,000

 

78

 

Yokogawa Electric Corp.

 

(c)16,900

 

185

 

 

 

 

 

210,690

 

Malaysia (0.2%)

 

 

 

 

 

IJM Corp. Bhd

 

303,900

 

787

 

IOI Corp. Bhd

 

267,300

 

621

 

Kuala Lumpur Kepong Bhd

 

60,800

 

318

 

 

 

 

 

1,726

 

Mexico (0.2%)

 

 

 

 

 

Corp. GEO S.A.B. de C.V.

 

(a)91,400

 

263

 

Desarrolladora Homex S.A.B. de C.V. ADR

 

(a)(c)8,600

 

425

 

Grupo Financiero Banorte S.A.B. de C.V., Class O

 

232,400

 

961

 

Urbi Desarrollos Urbanos S.A. de C.V.

 

(a)46,400

 

160

 

Wal-Mart de Mexico S.A.B. de C.V., Class V

 

163,200

 

569

 

 

 

 

 

2,378

 

Netherlands (2.6%)

 

 

 

 

 

Aegon N.V.

 

(c)140,227

 

$    2,460

 

Akzo Nobel N.V.

 

15,671

 

1,248

 

ASML Holding N.V.

 

(a)30,941

 

978

 

Corio N.V. REIT

 

4,462

 

359

 

Fugro N.V. CVA

 

3,443

 

264

 

Hagemeyer N.V.

 

(c)4,613

 

31

 

Heineken N.V.

 

66,985

 

4,314

 

ING Groep N.V. CVA

 

85,155

 

3,324

 

Koninklijke DSM N.V.

 

8,803

 

412

 

Koninklijke Philips Electronics N.V.

 

56,394

 

2,444

 

OCE N.V.

 

8,354

 

150

 

Reed Elsevier N.V.

 

(c)39,386

 

781

 

Royal KPN N.V.

 

117,591

 

2,127

 

Royal Numico N.V.

 

9,003

 

724

 

SBM Offshore N.V.

 

8,260

 

259

 

TNT N.V.

 

59,756

 

2,487

 

Unilever N.V. CVA

 

148,457

 

5,435

 

Wereldhave N.V. REIT

 

1,818

 

198

 

Wolters Kluwer N.V.

 

(c)21,906

 

716

 

 

 

 

 

28,711

 

New Zealand (0.0%)

 

 

 

 

 

Telecom Corp. of New Zealand Ltd.

 

(c)19,672

 

66

 

Norway (1.7%)

 

 

 

 

 

Acergy S.A.

 

(c)26,400

 

582

 

Aker Kvaerner ASA

 

37,660

 

993

 

DNB NOR ASA

 

24,024

 

364

 

Norsk Hydro ASA

 

55,145

 

780

 

Norske Skogindustrier ASA

 

(c)12,100

 

99

 

Ocean Rig ASA

 

(a)(c)13,600

 

98

 

Orkla ASA

 

52,500

 

1,011

 

Prosafe SE

 

(c)23,040

 

397

 

Renewable Energy Corp. A/S

 

(a)13,900

 

695

 

SeaDrill Ltd.

 

(a)47,400

 

1,141

 

StatoilHydro ASA

 

269,546

 

8,334

 

Tandberg ASA

 

14,060

 

290

 

Telenor ASA

 

(a)48,800

 

1,154

 

TGS Nopec Geophysical Co. ASA

 

(a)(c)26,200

 

356

 

Yara International ASA

 

(c)58,377

 

2,681

 

 

 

 

 

18,975

 

Philippines (0.6%)

 

 

 

 

 

Ayala Corp.

 

50,300

 

680

 

Ayala Land, Inc.

 

3,746,651

 

1,294

 

Banco de Oro - EPCI, Inc.

 

309,055

 

449

 

Bank of the Philippine Islands

 

438,860

 

647

 

Globe Telecom, Inc.

 

10,400

 

395

 

Manila Electric Co.

 

176,500

 

349

 

Megaworld Corp.

 

3,479,000

 

316

 

Metropolitan Bank and Trust

 

153,200

 

202

 

Philippines Long Distance Telephone Co.

 

19,370

 

1,483

 

PNOC Energy Development Corp.

 

2,359,550

 

372

 

SM Investments Corp.

 

56,710

 

463

 

SM Prime Holdings, Inc.

 

1,431,000

 

352

 

 

 

 

 

7,002

 

 

16

The accompanying notes are an integral part of the financial statements.

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Active International Allocation Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Poland (0.6%)

 

 

 

 

 

Agora S.A.

 

5,609

 

$    126

 

Bank BPH S.A.

 

1,394

 

59

 

Bank Pekao S.A.

 

23,721

 

2,168

 

Bank Zachodni WBK S.A.

 

3,886

 

393

 

Grupa Kety S.A.

 

163

 

10

 

KGHM Polska Miedz S.A.

 

19,397

 

826

 

Polski Koncern Naftowy Orlen

 

(a)45,510

 

951

 

Powszechna Kasa Oszczednosci Bank Polski S.A.

 

56,862

 

1,217

 

Prokom Software S.A.

 

1,723

 

93

 

Telekomunikacja Polska S.A.

 

105,261

 

959

 

 

 

 

 

6,802

 

Portugal (0.2%)

 

 

 

 

 

Banco Comercial Portugues S.A. (Registered)

 

(c)121,871

 

517

 

Brisa — Auto Estradas de Portugal S.A.

 

(c)23,604

 

346

 

Energias de Portugal S.A.

 

24,260

 

158

 

Portugal Telecom SGPS S.A. (Registered)

 

44,891

 

583

 

PT Multimedia Servicos de Telecomunicacoes e Multimedia SGPS S.A.

 

17,166

 

239

 

 

 

 

 

1,843

 

Russia (1.8%)

 

 

 

 

 

LUKOIL ADR

 

(c)27,780

 

2,385

 

MMC Norilsk Nickel ADR

 

11,136

 

2,993

 

Mobile Telesystems OJSC ADR

 

15,600

 

1,588

 

Novolipetsk Steel OJSC GDR

 

11,500

 

456

 

OAO Gazprom ADR

 

74,960

 

4,221

 

OAO Gazprom ADR

 

16,337

 

920

 

OGK-5 Holding

 

298,628

 

52

 

Polyus Gold Co. ADR

 

(c)9,300

 

427

 

Sberbank GDR

 

(a)1,135

 

621

 

Severstal GDR

 

22,600

 

514

 

Surgutneftegaz ADR

 

(c)12,800

 

779

 

Surgutneftegaz ADR (Preference)

 

6,200

 

402

 

Tatneft GDR

 

5,900

 

708

 

TGK-5 Holding

 

9,856,375

 

9

 

Unified Energy System GDR

 

(a)7,250

 

942

 

Vimpel-Communications ADR

 

41,000

 

1,706

 

Wimm-Bill-Dann Foods OJSC ADR

 

5,600

 

734

 

 

 

 

 

19,457

 

Singapore (2.1%)

 

 

 

 

 

Ascendas REIT

 

158,000

 

269

 

CapitaLand Ltd.

 

(c)193,000

 

830

 

CapitaMall Trust REIT

 

140,500

 

334

 

Chartered Semiconductor Manufacturing Ltd.

 

(a)(c)227,000

 

152

 

City Developments Ltd.

 

(c)85,719

 

835

 

ComfortDelgro Corp., Ltd.

 

304,477

 

383

 

Cosco Corp. Singapore Ltd.

 

132,000

 

519

 

Creative Technology Ltd.

 

(c)13,267

 

58

 

DBS Group Holdings Ltd.

 

171,612

 

2,432

 

Fraser & Neave, Ltd.

 

204,000

 

826

 

Hyflux Ltd.

 

(c)95,000

 

209

 

Jardine Cycle & Carriage Ltd.

 

27,034

 

403

 

K-REIT Asia

 

9,200

 

14

 

Keppel Corp. Ltd.

 

174,000

 

1,558

 

Keppel Land Ltd.

 

57,000

 

$    287

 

Neptune Orient Lines Ltd.

 

(c)113,000

 

304

 

Olam International Ltd.

 

160,000

 

314

 

Oversea-Chinese Banking Corp.

 

387,712

 

2,237

 

Parkway Holdings Ltd.

 

100,000

 

272

 

Raffles Education Corp., Ltd.

 

26,431

 

56

 

SembCorp Industries Ltd.

 

133,183

 

532

 

SembCorp Marine Ltd.

 

126,000

 

351

 

Singapore Airlines Ltd.

 

84,000

 

1,005

 

Singapore Exchange Ltd.

 

(c)123,539

 

1,129

 

Singapore Land Ltd.

 

37,000

 

203

 

Singapore Post Ltd.

 

243,000

 

189

 

Singapore Press Holdings Ltd.

 

244,028

 

761

 

Singapore Technologies Engineering Ltd.

 

(c)214,296

 

555

 

Singapore Telecommunications Ltd.

 

1,127,015

 

3,093

 

United Overseas Bank Ltd.

 

178,389

 

2,469

 

UOL Group Ltd.

 

98,189

 

306

 

Venture Corp., Ltd.

 

41,444

 

363

 

 

 

 

 

23,248

 

South Korea (0.5%)

 

 

 

 

 

Daelim Industrial Co.

 

(a)350

 

66

 

Daewoo Engineering & Construction Co., Ltd.

 

(a)2,534

 

66

 

Daewoo Securities Co., Ltd.

 

3,700

 

119

 

Daewoo Shipbuilding & Marine Engineering Co., Ltd.

 

(a)1,650

 

91

 

GS Engineering & Construction Corp.

 

(a)640

 

105

 

Hana Financial Group, Inc.

 

1,570

 

85

 

Hyundai Development Co.

 

(a)870

 

85

 

Hyundai Engineering & Construction Co., Ltd.

 

(a)970

 

90

 

Hyundai Heavy Industries

 

(a)470

 

219

 

Hyundai Mipo Dockyard

 

(a)170

 

51

 

Hyundai Mobis

 

(a)630

 

58

 

Hyundai Motor Co.

 

(a)1,980

 

151

 

Hyundai Steel Co.

 

(a)720

 

60

 

Kookmin Bank

 

(a)3,450

 

254

 

Korea Electric Power Corp.

 

(a)3,230

 

136

 

Korea Exchange Bank

 

(a)7,990

 

123

 

KT Corp.

 

1,980

 

103

 

KT&G Corp.

 

(a)1,490

 

127

 

LG Chem Ltd.

 

(a)1,090

 

104

 

LG Electronics, Inc.

 

(a)1,110

 

117

 

LG.Philips LCD Co., Ltd.

 

(a)1,150

 

61

 

Lotte Shopping Co., Ltd.

 

(a)200

 

88

 

NHN Corp.

 

(a)565

 

134

 

POSCO

 

732

 

443

 

S-Oil Corp.

 

1,000

 

84

 

Samsung Corp.

 

(a)2,090

 

159

 

Samsung Electro-Mechanics Co., Ltd.

 

(a)1,060

 

55

 

Samsung Electronics Co., Ltd.

 

1,348

 

792

 

Samsung Electronics Co., Ltd. (Preference)

 

216

 

98

 

Samsung Engineering Co., Ltd.

 

(a)640

 

63

 

Samsung Fire & Marine Insurance Co., Ltd.

 

490

 

132

 

Samsung Heavy Industries Co., Ltd.

 

(a)2,580

 

109

 

Samsung Securities Co., Ltd.

 

1,620

 

154

 

Samsung Techwin Co., Ltd.

 

(a)960

 

42

 

Shinhan Financial Group Co., Ltd.

 

(a)3,930

 

225

 

 

The accompanying notes are an integral part of the financial statements.

17

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Portfolio of Investments (cont’d)

 

Active International Allocation Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

South Korea (cont’d)

 

 

 

 

 

Shinsegae Co., Ltd.

 

(a)223

 

$    172

 

SK Holdings Co., Ltd.

 

(a)280

 

59

 

SK Energy Co., Ltd.

 

(a)770

 

148

 

 

 

 

 

5,228

 

Spain (2.8%)

 

 

 

 

 

Abertis Infraestructuras S.A.

 

(c)22,215

 

712

 

Acerinox S.A.

 

(c)13,440

 

328

 

Altadis S.A.

 

19,021

 

1,382

 

Antena 3 de Television S.A.

 

(c)6,882

 

105

 

Banco Bilbao Vizcaya Argentaria S.A.

 

134,005

 

3,291

 

Banco Popular Espanol S.A.

 

(c)37,309

 

630

 

Banco Santander S.A.

 

250,129

 

5,404

 

Cintra Concesiones de Infraestructuras de Transporte S.A.

 

10,671

 

160

 

Gamesa Corp. Tecnologica S.A.

 

12,793

 

592

 

Gas Natural SDG S.A.

 

(c)21,191

 

1,234

 

Iberdrola S.A.

 

124,444

 

1,884

 

Inditex S.A.

 

11,867

 

721

 

Indra Sistemas S.A.

 

3,324

 

89

 

Metrovacesa S.A.

 

1,164

 

139

 

Repsol YPF S.A.

 

55,394

 

1,975

 

Sociedad General de Aguas de Barcelona S.A., Class A

 

4,072

 

164

 

Telefonica S.A.

 

364,822

 

11,790

 

Union Fenosa S.A.

 

3,021

 

203

 

 

 

 

 

30,803

 

Sweden (2.4%)

 

 

 

 

 

Alfa Laval AB

 

1,250

 

70

 

Assa Abloy AB, Class B

 

(c)20,477

 

407

 

Atlas Copco AB, Class A

 

217,296

 

3,208

 

Atlas Copco AB, Class B

 

24,594

 

332

 

Ssab Svenskt Stal AB, Class A

 

(c)12,150

 

326

 

Electrolux AB, Class B

 

(c)12,800

 

213

 

Eniro AB

 

7,721

 

69

 

Fabege AB

 

5,031

 

51

 

Getinge AB, Class B

 

(c)33,047

 

883

 

Hennes & Mauritz AB, Class B

 

20,050

 

1,212

 

Holmen AB, Class B

 

(c)3,400

 

125

 

Husqvarna AB, Class A

 

(c)3,839

 

45

 

Husqvarna AB, Class B

 

12,800

 

151

 

Modern Times Group AB, Class B

 

(c)3,337

 

233

 

Nordea Bank AB

 

189,644

 

3,146

 

Sandvik AB

 

214,090

 

3,639

 

Scania AB, Class B

 

26,400

 

624

 

Securitas Systems AB, Class B

 

(c)800

 

3

 

Securitas AB, Class B

 

(c)800

 

11

 

Securitas Direct AB, Class B

 

(a)800

 

3

 

Skandinaviska Enskilda Banken AB, Class A

 

31,616

 

800

 

Skanska AB, Class B

 

20,351

 

380

 

SKF AB, Class B

 

(c)19,264

 

323

 

Svenska Cellulosa AB, Class B

 

38,766

 

682

 

Svenska Handelsbanken, Class A

 

53,011

 

1,681

 

Swedish Match AB

 

33,083

 

787

 

Tele2 AB, Class B

 

9,624

 

191

 

Telefonaktiebolaget LM Ericsson, Class B

 

1,351,959

 

3,161

 

TeliaSonera AB

 

100,987

 

$    939

 

Volvo AB, Class A

 

29,975

 

494

 

Volvo AB, Class B

 

145,025

 

2,404

 

Wihlborgs Fastigheter AB

 

1,320

 

23

 

 

 

 

 

26,616

 

Switzerland (5.7%)

 

 

 

 

 

ABB Ltd. ADR

 

47,500

 

1,368

 

ABB Ltd. (Registered)

 

121,224

 

3,495

 

Ciba Specialty Chemicals AG (Registered)

 

3,932

 

181

 

Clariant AG (Registered)

 

(a)13,237

 

122

 

Compagnie Financiere Richemont S.A., Class A

 

73,421

 

5,009

 

Credit Suisse Group (Registered)

 

40,338

 

2,425

 

Geberit AG (Registered)

 

2,430

 

331

 

Givaudan S.A. (Registered)

 

412

 

396

 

Holcim Ltd. (Registered)

 

19,256

 

2,046

 

Kudelski S.A.

 

3,786

 

74

 

Kuehne & Nagel International AG (Registered)

 

1,755

 

167

 

Logitech International S.A. (Registered)

 

(a)16,843

 

612

 

Lonza Group AG (Registered)

 

2,230

 

268

 

Micronas Semiconductor Holding AG (Registered)

 

(a)2,362

 

23

 

Nestle S.A. (Registered)

 

32,318

 

14,809

 

Nobel Biocare Holding AG

 

5,853

 

1,548

 

Novartis AG (Registered)

 

131,617

 

7,170

 

OC Oerlikon Corp. AG (Registered)

 

(a)461

 

192

 

Roche Holding AG (Genusschein)

 

39,567

 

6,816

 

Schindler Holding AG

 

4,210

 

269

 

Straumann Holding AG

 

2,665

 

732

 

Sulzer AG (Registered)

 

39

 

57

 

Swatch Group AG

 

3,443

 

201

 

Swatch Group AG, Class B

 

8,636

 

2,589

 

Swiss Reinsurance (Registered)

 

31,714

 

2,225

 

Swisscom AG (Registered)

 

1,337

 

519

 

Syngenta AG (Registered)

 

13,347

 

3,387

 

Synthes, Inc.

 

12,406

 

1,533

 

UBS AG (Registered)

 

60,249

 

2,798

 

Zurich Financial Services AG (Registered)

 

3,391

 

998

 

 

 

 

 

62,360

 

Thailand (0.1%)

 

 

 

 

 

Banpu Public Co., Ltd.

 

56,700

 

663

 

Turkey (1.4%)

 

 

 

 

 

Akbank T.A.S.

 

272,067

 

2,012

 

Aksigorta A.S.

 

45,067

 

265

 

Anadolu Efes Biracilik ve Malt Sanayii A.S.

 

62,863

 

745

 

Arcelik

 

35,471

 

246

 

Dogan Sirketler Grubu Holdings

 

(a)145,912

 

275

 

Dogan Yayin Holding

 

(a)67,770

 

273

 

Eregli Demir ve Celik Fabrikalari T.A.S.

 

106,473

 

933

 

Ford Otomotiv Sanayi A.S.

 

40,214

 

414

 

Haci Omer Sabanci Holding A.S.

 

128,900

 

708

 

KOC Holding A.S.

 

(a)111,653

 

603

 

Migros Turk T.A.S.

 

26,508

 

515

 

Tupras-Turkie Petrol Rafinerileri A.S.

 

33,576

 

979

 

Turk Sise ve Cam Fabrikalari A.S.

 

126,329

 

254

 

Turkcell Iletisim Hizmetleri A.S.

 

139,323

 

1,526

 

 

18

The accompanying notes are an integral part of the financial statements.

 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Active International Allocation Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Turkey (cont’d)

 

 

 

 

 

Turkiye Garanti Bankasi A.S.

 

251,842

 

$

2,247

 

Turkiye Is Bankasi, Class C

 

340,601

 

2,127

 

Turkiye Vakiflar Bankasi Tao, Class D

 

206,613

 

727

 

Yapi ve Kredi Bankasi A.S.

 

(a)170,749

 

599

 

 

 

 

 

15,448

 

United Kingdom (18.0%)

 

 

 

 

 

3I Group plc

 

34,680

 

689

 

Aegis Group plc

 

45,188

 

104

 

Amec plc

 

15,693

 

260

 

Anglo American plc

 

125,180

 

7,586

 

ARM Holdings plc

 

97,286

 

238

 

Arriva plc

 

7,994

 

125

 

AstraZeneca plc

 

84,424

 

3,628

 

Aviva plc

 

216,574

 

2,877

 

BAE Systems plc

 

223,581

 

2,190

 

Balfour Beatty plc

 

33,319

 

327

 

Barclays plc

 

376,548

 

3,814

 

Barratt Developments plc

 

10,060

 

92

 

BBA Aviation plc

 

29,049

 

118

 

Berkeley Group Holdings plc

 

(a)4,737

 

128

 

BG Group plc

 

230,050

 

5,297

 

BHP Billiton plc

 

(c)201,134

 

6,195

 

Biffa plc

 

32,703

 

214

 

BP plc

 

1,258,197

 

15,387

 

British Airways plc

 

(a)38,150

 

233

 

British American Tobacco plc

 

118,943

 

4,684

 

British Land Co. plc REIT

 

23,539

 

439

 

British Sky Broadcasting plc

 

98,100

 

1,203

 

BT Group plc

 

576,332

 

3,110

 

Bunzl plc

 

27,898

 

391

 

Burberry Group plc

 

48,823

 

550

 

Cadbury Schweppes plc

 

122,237

 

1,524

 

Capita Group plc

 

7,802

 

109

 

Carnival plc

 

13,876

 

609

 

Centrica plc

 

184,716

 

1,313

 

Close Brothers Group plc

 

16,573

 

311

 

Cobham plc

 

78,283

 

324

 

Compass Group plc

 

167,416

 

1,021

 

CSR plc

 

(a)9,333

 

111

 

Daily Mail & General Trust, Class A

 

17,441

 

171

 

Diageo plc

 

226,477

 

4,848

 

DSG International plc

 

77,930

 

152

 

Electrocomponents plc

 

52,439

 

216

 

Emap plc

 

12,142

 

221

 

Enterprise Inns plc

 

56,558

 

545

 

Experian Group Ltd.

 

33,018

 

262

 

Fiberweb plc

 

17,302

 

13

 

Firstgroup plc

 

26,030

 

420

 

FKI plc

 

7,577

 

9

 

Friends Provident plc

 

165,978

 

537

 

Galiform plc

 

(a)6,439

 

12

 

GKN plc

 

27,325

 

152

 

GlaxoSmithKline plc

 

317,025

 

8,045

 

Group 4 Securicor plc

 

13,896

 

67

 

Hammerson plc REIT

 

12,932

 

263

 

Hays plc

 

19,415

 

$

44

 

HBOS plc

 

235,429

 

3,414

 

Home Retail Group plc

 

33,004

 

212

 

HSBC Holdings plc

 

598,012

 

10,031

 

ICAP plc

 

4,863

 

70

 

IMI plc

 

30,958

 

240

 

Imperial Tobacco Group plc

 

54,520

 

2,968

 

Intercontinental Hotels Group plc

 

27,651

 

483

 

International Personal Finance plc

 

3,113

 

12

 

International Power plc

 

17,046

 

153

 

Invensys plc

 

(a)13,017

 

58

 

ITV plc

 

338,573

 

572

 

J. Sainsbury plc

 

82,787

 

697

 

Johnson Matthey plc

 

27,266

 

1,015

 

Kelda Group plc

 

28,714

 

618

 

Kesa Electricals plc

 

11,073

 

51

 

Kingfisher plc

 

47,091

 

136

 

Ladbrokes plc

 

45,479

 

290

 

Land Securities Group plc REIT

 

21,050

 

626

 

Legal & General Group plc

 

558,854

 

1,446

 

Liberty International plc REIT

 

11,276

 

240

 

Lloyds TSB Group plc

 

397,316

 

3,705

 

LogicaCMG plc

 

68,948

 

161

 

London Stock Exchange plc

 

2,799

 

110

 

Man Group plc

 

113,077

 

1,301

 

Marks & Spencer Group plc

 

67,228

 

745

 

Meggitt plc

 

35,372

 

233

 

Misys plc

 

35,640

 

130

 

Mitchells & Butlers plc

 

37,375

 

313

 

Mondi Ltd.

 

15,516

 

148

 

Mondi plc

 

38,791

 

325

 

National Express Group plc

 

8,059

 

197

 

National Grid plc

 

208,740

 

3,451

 

Next plc

 

10,558

 

339

 

Pearson plc

 

44,419

 

645

 

Persimmon plc

 

11,329

 

180

 

Provident Financial plc

 

1,556

 

26

 

Prudential plc

 

159,993

 

2,249

 

Punch Taverns plc

 

20,050

 

303

 

Reckitt Benckiser Group plc

 

68,984

 

3,985

 

Reed Elsevier plc

 

70,114

 

943

 

Rentokil Initial plc

 

22,066

 

53

 

Resolution plc

 

2,420

 

34

 

Reuters Group plc

 

82,342

 

1,039

 

Rexam plc

 

35,525

 

294

 

Rio Tinto plc

 

93,712

 

9,818

 

Rolls-Royce Group plc

 

(a)119,190

 

1,288

 

Rolls-Royce Group plc, Class B

 

4,816,671

 

11

 

Royal Bank of Scotland Group plc

 

581,112

 

5,224

 

Royal Dutch Shell plc, Class A

 

256,322

 

10,798

 

Royal Dutch Shell plc, Class B

 

179,108

 

7,491

 

SABMiller plc

 

74,348

 

2,092

 

Sage Group plc

 

116,443

 

530

 

Schroders plc

 

4,749

 

122

 

Scottish & Newcastle plc

 

16,660

 

245

 

Scottish & Southern Energy plc

 

65,754

 

2,136

 

 

The accompanying notes are an integral part of the financial statements.

19

 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Portfolio of Investments (cont’d)

 

Active International Allocation Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

United Kingdom (cont’d)

 

 

 

 

Segro plc REIT

 

17,100

 

$    159

Serco Group plc

 

5,648

 

52

Severn Trent plc

 

21,832

 

660

Signet Group plc

 

62,585

 

86

Smith & Nephew plc

 

149,103

 

1,714

Smiths Group plc

 

25,847

 

518

Stagecoach Group plc

 

20,194

 

113

Tate & Lyle plc

 

42,628

 

374

Taylor Wimpey plc

 

47,484

 

190

Tesco plc

 

465,421

 

4,395

TI Automotive Ltd., Class A

 

(a)(d)(l)1,505

 

—

Tomkins plc

 

66,611

 

235

Unilever plc

 

80,414

 

3,016

United Business Media plc

 

14,172

 

182

United Utilities plc

 

15,318

 

229

Vodafone Group plc

 

3,578,860

 

13,338

Whitbread plc

 

15,655

 

434

William Hill plc

 

32,757

 

340

Wolseley plc

 

39,504

 

579

WPP Group plc

 

134,008

 

1,716

Xstrata plc

 

62,671

 

4,413

Yell Group plc

 

35,425

 

281

 

 

 

 

198,198

Total Common Stocks (Cost $744,823)

 

 

 

998,937

 

 

 

 

 

 

 

No. of

 

 

 

 

Rights

 

 

Right (0.0%)

 

 

 

 

Japan (0.0%)

 

 

 

 

Dowa Mining Co., Ltd., expiring 1/29/10 (Cost $@—)

 

(a)49,000

 

@—

 

 

 

 

 

 

 

Face

 

 

 

 

Amount

 

 

 

 

(000)

 

 

Short-Term Investments (16.2%)

 

 

 

 

Short-Term Debt Securities held as Collateral on Loaned Securities (9.7%)

 

 

 

 

Alliance & Leicester plc,

 

 

 

 

5.26%, 9/2/08

 

$    (h)3,187

 

3,187

Bancaja,

 

 

 

 

5.35%, 8/12/08

 

1,593

 

1,593

Bank of New York Co., Inc.,

 

 

 

 

5.24%, 8/8/08

 

(h)1,593

 

1,593

BASF AG,

 

 

 

 

5.18%, 8/19/08

 

(h)1,593

 

1,593

BNP Paribas plc,

 

 

 

 

4.90%, 5/19/08

 

(h)3,187

 

3,187

CAM US Finance S.A. Unipersonal,

 

 

 

 

5.24%, 7/25/08

 

(h)6,372

 

6,372

Canadian Imperial Bank of Commerce, New York,

 

 

 

 

4.42%, 7/28/08

 

(h)3,187

 

3,187

CC USA, Inc.,

 

 

 

 

3.89%, 1/28/08

 

(h)1,593

 

1,593

CIT Group Holdings,

 

 

 

 

5.23%, 6/18/08

 

$    (h)5,736

 

$    5,736

Citigroup Global Markets Holdings, Inc.,

 

 

 

 

4.51%, 1/2/08

 

21,722

 

21,722

Credit Suisse First Boston, New York,

 

 

 

 

4.32%, 3/14/08

 

(h)3,187

 

3,187

First Tennessee Bank,

 

 

 

 

5.05%, 8/15/08

 

(h)1,593

 

1,593

5.06%, 8/15/08

 

(h)6,373

 

6,373

Goldman Sachs Group, Inc.,

 

 

 

 

4.62%, 2/13/09

 

(h)2,995

 

2,995

5.10%, 9/12/08

 

(h)1,593

 

1,593

HSBC Finance Corp.,

 

 

 

 

5.26%, 8/5/08

 

(h)1,593

 

1,593

IBM Corp.,

 

 

 

 

5.27%, 9/8/08

 

(h)6,373

 

6,373

Lehman Brothers, Inc.,

 

 

 

 

4.49%, 1/2/08

 

2,717

 

2,717

Macquarie Bank Ltd.,

 

 

 

 

4.95%, 8/20/08

 

(h)3,187

 

3,187

Metropolitan Life Global Funding,

 

 

 

 

4.89%, 8/21/08

 

(h)4,780

 

4,780

National Bank of Canada,

 

 

 

 

5.21%, 4/2/08

 

(h)6,372

 

6,372

National Rural Utilities Cooperative Finance Corp.,

 

 

 

 

5.24%, 9/2/08

 

(h)6,372

 

6,372

Nationwide Building Society,

 

 

 

 

4.92%, 7/28/08

 

(h)3,696

 

3,696

Unicredito Italiano Bank (Ireland) plc,

 

 

 

 

5.04%, 8/14/08

 

(h)3,505

 

3,505

5.26%, 8/8/08

 

(h)2,231

 

2,231

 

 

 

 

106,330

 

 

 

 

 

 

 

Shares

 

 

Investment Company (6.5%)

 

 

 

 

Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class

 

(o)71,487,516

 

71,488

Total Short-Term Investments (Cost $177,818)

 

 

 

177,818

Total Investments (107.1%) (Cost $922,641) — including $101,774 of Securities Loaned

 

 

 

(v)1,176,755

Liabilities in Excess of Other Assets (-7.1%)

 

 

 

(77,735)

Net Assets (100%)

 

 

 

$1,099,020

 

(a)

Non-income producing security.

(c)

All or a portion of security on loan at December 31, 2007.

(d)

Securities were valued at fair value — At December 31, 2007, the Portfolio held approximately $317,000 of fair valued securities, representing less than 0.05% of net assets.

(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, 2007.

(l)

Security has been deemed illiquid at December 31, 2007.

 

20

The accompanying notes are an integral part of the financial statements.

 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Active International Allocation Portfolio

 

(o)

 

See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class.

(v)

 

The approximate market value and percentage of the investments, $986,524,000 and 83.8%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note A within the Notes to Financial Statements.

ADR

 

American Depositary Receipt

CVA

 

Certificaten Van Aandelen

GDR

 

Global Depositary Receipt

REIT

 

Real Estate Investment Trust

RNC

 

Non-Convertible Savings Shares

@

 

Value is less than $500.

 

Foreign Currency Exchange Contract Information:

 

The Portfolio had the following foreign currency exchange contract(s) open at period end:

 

Currency
to
Deliver
(000)

 

Value
(000)

 

Settlement
Date

 

In
Exchange
For
(000)

 

Value
(000)

 

Net
Unrealized
Appreciation
(Depreciation)
(000)

 

EUR

72

 

$

105

 

 

1/2/08

 

USD

105

 

$

105

 

 

$    @—

 

 

EUR

191

 

 

279

 

 

1/2/08

 

USD

279

 

 

279

 

 

@—

 

 

EUR

448

 

 

655

 

 

1/3/08

 

USD

655

 

 

655

 

 

@—

 

 

EUR

2,544

 

 

3,723

 

 

3/13/08

 

USD

3,743

 

 

3,743

 

 

20

 

 

EUR

7,089

 

 

10,371

 

 

3/13/08

 

USD

10,425

 

 

10,425

 

 

54

 

 

GBP

38

 

 

76

 

 

1/2/08

 

USD

76

 

 

76

 

 

@—

 

 

GBP

13

 

 

25

 

 

3/13/08

 

USD

26

 

 

26

 

 

1

 

 

GBP

2,285

 

 

4,541

 

 

3/13/08

 

USD

4,645

 

 

4,645

 

 

104

 

 

GBP

1,221

 

 

2,426

 

 

3/13/08

 

USD

2,483

 

 

2,483

 

 

57

 

 

HKD

81

 

 

10

 

 

1/2/08

 

USD

10

 

 

10

 

 

@—

 

 

HKD

254,210

 

 

32,688

 

 

3/13/08

 

USD

32,712

 

 

32,712

 

 

24

 

 

JPY

8,324,831

 

 

75,091

 

 

3/13/08

 

USD

75,204

 

 

75,204

 

 

113

 

 

JPY

394,749

 

 

3,561

 

 

3/13/08

 

USD

3,568

 

 

3,568

 

 

7

 

 

JPY

742,833

 

 

6,700

 

 

3/13/08

 

USD

6,716

 

 

6,716

 

 

16

 

 

JPY

1,706,290

 

 

15,391

 

 

3/13/08

 

USD

15,040

 

 

15,040

 

 

(351

)

 

SEK

4,258

 

 

659

 

 

3/13/08

 

USD

665

 

 

665

 

 

6

 

 

SGD

12

 

 

8

 

 

1/2/08

 

USD

8

 

 

8

 

 

@—

 

 

USD

24,212

 

 

24,212

 

 

3/13/08

 

AUD

27,420

 

 

23,975

 

 

(237

)

 

USD

10,456

 

 

10,456

 

 

3/13/08

 

EUR

7,108

 

 

10,400

 

 

(56

)

 

USD

14,896

 

 

14,896

 

 

3/13/08

 

EUR

10,126

 

 

14,815

 

 

(81

)

 

USD

15,077

 

 

15,077

 

 

3/13/08

 

EUR

10,247

 

 

14,992

 

 

(85

)

 

USD

19,474

 

 

19,474

 

 

3/13/08

 

EUR

13,245

 

 

19,379

 

 

(95

)

 

USD

6,735

 

 

6,735

 

 

3/13/08

 

EUR

4,579

 

 

6,699

 

 

(36

)

 

USD

40,107

 

 

40,107

 

 

3/13/08

 

EUR

27,815

 

 

40,695

 

 

588

 

 

USD

5,954

 

 

5,954

 

 

3/13/08

 

EUR

4,047

 

 

5,920

 

 

(34

)

 

USD

1,128

 

 

1,128

 

 

3/13/08

 

GBP

555

 

 

1,103

 

 

(25

)

 

USD

16,634

 

 

16,634

 

 

3/13/08

 

GBP

8,186

 

 

16,265

 

 

(369

)

 

USD

3,333

 

 

3,333

 

 

3/13/08

 

GBP

1,640

 

 

3,258

 

 

(75

)

 

USD

3,065

 

 

3,065

 

 

3/13/08

 

HKD

23,820

 

 

3,063

 

 

(2

)

 

USD

24,685

 

 

24,685

 

 

3/13/08

 

JPY

2,733,098

 

 

24,653

 

 

(32

)

 

USD

10,827

 

 

10,827

 

 

3/13/08

 

JPY

1,197,280

 

 

10,799

 

 

(28

)

 

USD

27,366

 

 

27,366

 

 

3/13/08

 

JPY

3,028,464

 

 

27,317

 

 

(49

)

 

USD

309

 

 

309

 

 

3/13/08

 

JPY

34,157

 

 

308

 

 

(1

)

 

USD

12,339

 

 

12,339

 

 

3/13/08

 

JPY

1,364,559

 

 

12,309

 

 

(30

)

 

USD

2,536

 

 

2,536

 

 

3/13/08

 

JPY

284,758

 

 

2,568

 

 

32

 

 

USD

1,441

 

 

1,441

 

 

3/13/08

 

SEK

9,225

 

 

1,428

 

 

(13

)

 

 

 

 

 

$  396,883

 

 

 

 

 

 

 

 

$ 396,306

 

 

$    (577

)

 

 

AUD

—

Australian Dollar

EUR

—

Euro

GBP

—

British Pound

HKD

—

Hong Kong Dollar

JPY

—

Japanese Yen

SEK

—

Swedish Krona

SGD

—

Singapore Dollar

USD

—

United States Dollar

 

The accompanying notes are an integral part of the financial statements.

21

 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Portfolio of Investments (cont’d)

 

Active International Allocation Portfolio

 

Futures Contracts:

 

The Portfolio had the following futures contract(s) open at period end:

 

 

 

Number
of
Contracts

 

Value
(000)

 

Expiration
Date

 

Net
Unrealized
Appreciation
(Depreciation)
(000)

 

Long:

 

 

 

 

 

 

 

 

 

 

SPI 200

 

 

 

$19,090

 

 

Mar-08

 

$    475

 

 

(Australia)

 

 

137

 

 

 

 

 

 

 

 

 

CAC 40 Index

 

 

 

 

 

 

 

 

 

 

 

 

(France)

 

 

108

 

8,875

 

 

Jan-08

 

153

 

 

DAX Index

 

 

 

 

 

 

 

 

 

 

 

 

(Germany)

 

 

116

 

34,532

 

 

Mar-08

 

520

 

 

Hang Seng Index

 

 

 

 

 

 

 

 

 

 

 

 

(Hong Kong)

 

 

115

 

20,582

 

 

Jan-08

 

(227)

 

 

MSCI Index

 

 

 

 

 

 

 

 

 

 

 

 

(Singapore)

 

 

65

 

3,841

 

 

Jan-08

 

17

 

 

MSCI Index

 

 

 

 

 

 

 

 

 

 

 

 

(Taiwan)

 

 

300

 

10,005

 

 

Jan-08

 

430

 

 

Short:

 

 

 

 

 

 

 

 

 

 

 

 

TOPIX Index

 

 

 

 

 

 

 

 

 

 

 

 

(Japan)

 

 

87

 

11,448

 

 

Mar-08

 

787

 

 

 

 

 

 

 

 

 

 

$2,155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22

The accompanying notes are an integral part of the financial statements.

 


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (unaudited)

 

Emerging Markets Portfolio

 

 

 

* Minimum Investment

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares based upon its different inception date and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the Morgan Stanley Capital International (MSCI) Emerging Markets 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)

 

41.56

%

 

38.26

%

 

15.44

%

 

13.58

%

MSCI Emerging Markets Net Index

 

39.39

 

 

37.02

 

 

14.30

 

 

12.35

 

Lipper Emerging Markets Funds Index

 

36.26

 

 

36.33

 

 

13.98

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Portfolio – Class B (5)

 

41.20

 

 

37.88

 

 

15.13

 

 

13.32

 

MSCI Emerging Markets Net Index

 

39.39

 

 

37.02

 

 

14.30

 

 

11.12

 

Lipper Emerging Markets Funds Index

 

36.26

 

 

36.33

 

 

13.98

 

 

11.51

 

 

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 www.morganstanley.com/msim. 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.

 

(1)

The MSCI Emerging Markets Net Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The term “free float” represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The MSCI Emerging Markets Net Index consists of the following 25 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 and Turkey. 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. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)

The Lipper 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 fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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 operations 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.

 

The Emerging Markets Portfolio (the “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

 

23


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

Emerging Markets Portfolio

 

currency fluctuations and controls, restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. In addition, investing in emerging markets may involve a relative higher degree of volatility.

 

Performance

 

For the year ended December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of 41.56%, net of fees, for the Class A shares and 41.20%, net of fees, for the Class B shares. The Portfolio’s Class A and Class B shares outperformed against its benchmark the Morgan Stanley Capital International (MSCI) Emerging Markets Net Index (the “Index”) which returned 39.39%.

 

Factors Affecting Performance

 

·      Emerging markets equities posted their fifth consecutive calendar year of double-digit returns in 2007. The Index returned 39.4% for the year, following returns of 32.2% in 2006, 34% in 2005, 25.6% in 2004 and 55.8% in 2003. Moreover, the emerging markets continued their outperformance over the developed markets for the seventh consecutive year. In 2007, the emerging markets beat the S&P 500® Index by 33 percentage points and developed international markets (as measured by the MSCI Europe, Australasia and Far East Index) by 28 percentage points.

 

·      The strong year of performance occurred despite an increase in global risk aversion and two sharp sell-offs in February and August. Throughout the year, growing concern over a U.S. credit crisis and increased risk aversion continued to cause volatility in the markets. Argentina, down 4.0%, was the only country in the Index to post a negative return for the year. Latin America, up 50.4%, was the best performing region as Peru (+94.4%), Brazil (+79.5%), Chile (+23.1%), Colombia (+ 15.0%) and Mexico (+12.2%) all posted double-digit returns. Asia was up 41.1%, led by India (+73.1%), China (+66.2%) and Indonesia (+54.2%). All markets were also positive in the Emerging Europe, Middle East and Africa region, up 28.5%. The top performer in the region was Turkey (+74.1%), followed by Egypt (+58.4%), the Czech Republic (+55.3%), Morocco (+47.7%) and Israel (+39.2).

 

·      Overall, country allocation and stock selection contributed favorably to performance. Stock selection in China and Russia were the strongest contributors to performance. Other significant contributors included stock selection in South Africa, Morocco and Korea. An underweight allocation to Taiwan and an overweight allocation to China and Turkey also helped performance.

 

·      Conversely, an overweight allocation to Mexico and stock selection in the country hurt performance. Stock selection in Brazil, Egypt and the Czech Republic also detracted from performance.

 

Management Strategies

 

·      During the year, we shifted from an overweight to an underweight allocation to the Latin America region, owing to reduced positions in Mexico and Brazil. In Mexico, we sold our entire position in the media sector given changes in the regulatory environment. The government introduced several laws that may hurt the competitiveness and earnings growth potential of media companies. While we remain positive on the long-term outlook for Brazil, as its equity market has been a strong performer, it faces some short-term risks. In our view, the chief risk could come from an inflation outlook that could potentially halt interest rate reductions.

 

·      We reduced the Portfolio’s underweight in the Asia region by adding to Korea and China. We maintain our conviction that the robust economic growth, productivity gains, improving corporate governance and positive company earnings revisions in China support allocation to the country in a long-term portfolio. In Korea, we expect economic growth to reaccelerate going into 2008. Exports and investments remain the pillars of strength there, while we also believe momentum in local consumption is likely to materialize.

 

·      The Portfolio’s overweight allocations are in India, China, Poland, Turkey and Russia, and we remain underweight Taiwan, South Korea, Israel and Malaysia.

 

·      Even with the credit difficulties and consumer slowdown in the U.S., we remain positive on the long-term economic outlook for emerging markets, as their base of growth is becoming more solidly supported by local consumer expansion and increased investment and government infrastructure spending. According to JP Morgan research, emerging market economies in the five-year period through 2007 will account for nearly half of the incremental growth in global gross domestic product versus the U.S. contribution of just 16.7% in the same period.

 

·      Overall, earnings growth is weakening globally, but in our view remains relatively strong in many emerging markets. That said, inflation is beginning to climb in

 

24


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

Emerging Markets Portfolio

 

certain emerging market economies, as energy costs, higher food prices and rising domestic demand place upward pressure on overall inflation. In this environment, we believe the key to maintaining outperformance is to make strong country allocation decisions and to select companies with long-term growth potential that tend to do best in the latter stages of a bull market. Broadly speaking, we believe emerging markets should continue to advance, but more volatility is likely. Risks to emerging market equities include a resurgence of sustained inflation—particularly in China—a recession in the U.S., a sharp fall in commodities prices or a major rise in risk aversion.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you

determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning Account Value
July 1, 2007

 

Ending Account Value December 31,

2007

 

Expenses Paid During Period* July 1, 2007 — December 31,

2007

Class A

 

 

 

 

 

 

Actual

 

$1,000.00

 

$1,206.40

 

$7.40

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,018.50

 

6.77

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

Actual

 

1,000.00

 

1,204.80

 

8.78

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,017.24

 

8.03

 

*

Expenses are equal to Class A and Class B annualized net expense ratios of 1.33% and 1.58%, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

*

Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

25


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments

 

Emerging Markets Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Common Stocks (98.0%)

 

 

 

 

 

Argentina (0.8%)

 

 

 

 

 

Tenaris S.A. ADR

 

(c)658,738

 

$

29,465

 

Austria (0.7%)

 

 

 

 

 

Raiffeisen International Bank Holding AG

 

(c)166,764

 

25,126

 

Brazil (12.5%)

 

 

 

 

 

All America Latina Logistica S.A.

 

1,203,952

 

15,422

 

Banco do Brasil S.A.

 

985,304

 

16,610

 

Banco Itau Holding Financeira S.A. (Preference)

 

688,664

 

17,839

 

Banco Itau Holding Financeira S.A. ADR

 

(c)659,999

 

17,068

 

Banco Nacional S.A. (Preference)

 

(a)(d)(l)295,998,880

 

—

 

Cia Energetica de Sao Paulo, Class B (Preference)

 

(a)339,058

 

8,163

 

Cia Siderurgica Nacional S.A.

 

279,470

 

25,040

 

CVRD ADR

 

(c)4,182,919

 

117,038

 

CVRD, Class A (Preference)

 

56,084

 

1,572

 

Cyrela Brazil Realty S.A.

 

1,282,373

 

17,156

 

Gerdau S.A. ADR

 

(c)235,772

 

6,840

 

Gerdau S.A. (Preference)

 

329,650

 

9,555

 

Investimentos Itau S.A. (Preference)

 

1,650,022

 

10,769

 

NET Servicos de Comunicacao S.A. (Preference)

 

(a)1,058,372

 

12,685

 

Petroleo Brasileiro S.A. ADR

 

(c)775,877

 

74,655

 

Petroleo Brasileiro S.A. ADR

 

130,015

 

14,983

 

Petroleo Brasileiro S.A. (Preference)

 

509,136

 

24,600

 

Unibanco - Uniao de Bancos Brasileiros S.A.

 

377,442

 

5,266

 

Unibanco - Uniao de Bancos Brasileiros S.A. GDR

 

296,287

 

41,373

 

Usinas Siderurgicas de Minas Gerais S.A., Class A (Preference)

 

1

 

@—

 

 

 

 

 

436,634

 

China/Hong Kong (17.9%)

 

 

 

 

 

Bank of China Ltd., Class H

 

(c)60,237,000

 

28,700

 

Belle International Holdings Ltd.

 

1,324,000

 

1,985

 

BYD Electronic International Co., Ltd.

 

(a)7,157,500

 

13,861

 

China Coal Energy Co.

 

18,765,000

 

57,653

 

China Communications Construction Co. Ltd., Class H

 

(c)11,108,000

 

28,645

 

China Construction Bank Corp., Class H

 

(c)69,680,000

 

58,443

 

China COSCO Holdings Co., Ltd., Class H

 

(c)12,937,500

 

35,301

 

China Mobile Ltd.

 

(c)5,989,500

 

103,794

 

China Overseas Land & Investment Ltd.

 

1,688,000

 

3,461

 

China Petroleum & Chemical Corp., Class H

 

29,410,000

 

43,742

 

China Resources Power Holdings Co.

 

7,599,000

 

25,799

 

COSCO Pacific Ltd.

 

(c)5,662,000

 

14,958

 

Datang International Power Generation Co., Ltd., Class H

 

(c)9,852,000

 

8,622

 

Dongfeng Motor Group Co., Ltd., Class H

 

(c)31,091,000

 

$

21,699

 

GOME Electrical Appliances Holdings Ltd.

 

(c)15,365,000

 

38,862

 

Harbin Power Equipment, Class H

 

10,294,000

 

32,680

 

Industrial & Commercial Bank of China, Class H

 

(c)61,982,000

 

44,057

 

Maanshan Iron & Steel, Class H

 

(c)25,131,000

 

16,364

 

Ping An Insurance Group Co. of China Ltd., Class H

 

(c)2,422,000

 

25,693

 

Shanghai Industrial Holdings Ltd.

 

(c)4,775,000

 

20,588

 

Sino-Ocean Land Holdings Ltd.

 

(a)382,000

 

468

 

 

 

 

 

625,375

 

Czech Republic (1.2%)

 

 

 

 

 

Central European Media Enterprises Ltd.

 

(a)(c)255,800

 

29,668

 

Komercni Banka A/S

 

57,400

 

13,796

 

 

 

 

 

43,464

 

Egypt (0.7%)

 

 

 

 

 

El Sewedy Cables Holding Co.

 

(a)1,053,592

 

22,639

 

India (10.5%)

 

 

 

 

 

Aban Offshore Ltd.

 

149,100

 

18,699

 

ABB Ltd. India

 

670,410

 

25,648

 

Axis Bank Ltd.

 

1,107,400

 

27,216

 

Bharat Heavy Electricals Ltd.

 

469,790

 

30,682

 

Bharti Airtel Ltd.

 

(a)673,773

 

16,935

 

Deccan Chronicle Holdings Ltd.

 

2,099,120

 

11,566

 

Glenmark Pharmaceuticals Ltd.

 

1,259,400

 

19,013

 

GVK Power & Infrastructure Ltd.

 

(a)553,344

 

11,204

 

HCL Technologies Ltd.

 

1,425,900

 

11,888

 

HDFC Bank Ltd.

 

552,900

 

24,115

 

HDFC Bank Ltd. ADR

 

166,800

 

21,759

 

Housing Development Finance Corp.

 

209,000

 

15,121

 

India Cements Ltd.

 

1,140,692

 

8,948

 

Infosys Technologies Ltd.

 

407,772

 

18,209

 

Maruti Suzuki India Ltd.

 

501,500

 

12,575

 

Praj Industries Ltd.

 

1,116,500

 

6,791

 

Reliance Communications Ltd.

 

760,500

 

14,345

 

Reliance Industries Ltd.

 

589,700

 

43,089

 

Steel Authority of India Ltd.

 

1,552,500

 

11,141

 

Television Eighteen India Ltd.

 

(d)335,100

 

4,706

 

Zee Entertainment Enterprises Ltd.

 

1,576,000

 

13,048

 

 

 

 

 

366,698

 

Indonesia (3.6%)

 

 

 

 

 

Astra International Tbk PT

 

6,492,000

 

18,690

 

Bank Central Asia Tbk PT

 

15,423,500

 

11,868

 

Bank Mandiri Persero Tbk PT

 

11,645,500

 

4,293

 

Bank Rakyat Indonesia

 

14,337,500

 

11,187

 

Bumi Resources Tbk PT

 

53,764,500

 

33,928

 

International Nickel Indonesia Tbk PT

 

1,577,000

 

16,044

 

Tambang Batubara Bukit Asam Tbk PT

 

7,723,500

 

9,766

 

Telekomunikasi Indonesia Tbk PT

 

17,873,000

 

19,327

 

 

 

 

 

125,103

 

 

26

The accompanying notes are an integral part of the financial statements.

 


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Emerging Markets Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Luxembourg (0.6%)

 

 

 

 

 

Millicom International Cellular S.A.

 

(a)162,803

 

$

19,201

Malaysia (0.5%)

 

 

 

 

Hap Seng Plantations Holdings Bhd

 

(a)549,000

 

528

IOI Corp. Bhd

 

7,825,150

 

18,179

 

 

 

 

18,707

Mexico (4.9%)

 

 

 

 

America Movil S.A.B. de C.V., Class L ADR

 

1,351,962

 

82,997

Corp. GEO S.A.B. de C.V.

 

(a)(c)2,675,314

 

7,697

Empresas ICA S.A.B. de C.V.

 

(a)(c)1,303,400

 

8,597

Grupo Financiero Banorte S.A.B. de C.V., Class O

 

5,628,800

 

23,259

Grupo Mexico S.A.B. de C.V., Class B

 

1,380,100

 

8,674

Urbi Desarrollos Urbanos S.A. de C.V

 

(a)2,727,600

 

9,422

Wal-Mart de Mexico S.A.B. de C.V. ADR

 

(c)303,243

 

10,572

Wal-Mart de Mexico S.A.B. de C.V., Series V

 

(c)6,117,538

 

21,327

 

 

 

 

172,545

Oman (0.9%)

 

 

 

 

Bank Muscat SAOG

 

4,136,032

 

20,627

Bank Muscat SAOG GDR (Registered)

 

453,854

 

10,098

 

 

 

 

30,725

Philippines (0.7%)

 

 

 

 

Ayala Corp.

 

562,332

 

7,605

Philippines Long Distance Telephone Co.

 

98,530

 

7,544

PNOC Energy Development Corp.

 

54,721,500

 

8,621

 

 

 

 

23,770

Poland (3.5%)

 

 

 

 

Bank Handlowy w Warszawie S.A.

 

245,743

 

9,908

Bank Millennium S.A.

 

4,172,252

 

19,535

Bank Pekao S.A.

 

328,220

 

30,001

Bank Zachodni WBK S.A.

 

162,215

 

16,414

Budimex S.A.

 

(a)139,357

 

5,187

Getin Holding S.A.

 

(a)517,640

 

3,053

PBG S.A.

 

(a)31,821

 

3,938

Polimex Mostostal S.A.

 

1,763

 

6,071

Polski Koncern Naftowy Orlen

 

(a)283,000

 

5,915

TVN S.A.

 

2,285,484

 

23,147

 

 

 

 

123,169

Qatar (0.5%)

 

 

 

 

Commercial Bank of Qatar

 

365,793

 

18,588

Russia (13.0%)

 

 

 

 

Alliance Cellulose Ltd.

 

(a)(d)(l)592,359

 

—

CTC Media, Inc.

 

(a)(c)953,078

 

28,783

Eurasia Drilling Co., Ltd. GDR

 

(a)(e)650,153

 

17,717

Evraz Group S.A. GDR

 

291,963

 

22,614

Mechel ADR

 

(c)259,761

 

25,233

Mobile Telesystems OJSC ADR

 

(c)326,732

 

33,258

OAO Gazprom ADR

 

1,015,000

 

57,156

OAO Gazprom ADR

 

(c)1,680,287

 

94,620

Sberbank

 

11,429,548

 

47,408

Sberbank GDR

 

(a)48,533

 

$

26,548

Severstal GDR

 

830,667

 

18,881

TMK OAO GDR

 

(c)(e)418,338

 

18,793

TMK OAO GDR (Registered)

 

(c)87,355

 

3,924

Vimpel-Communications ADR

 

(c)930,423

 

38,706

Wimm-Bill-Dann Foods OJSC ADR

 

(c)158,437

 

20,762

 

 

 

 

454,403

South Africa (5.3%)

 

 

 

 

Allied Electronics Corp., Ltd. (Preference)

 

(a)(c)1,419,524

 

8,931

Barloworld Ltd.

 

462,254

 

7,279

Freeworld Coatings Ltd.

 

(a)462,254

 

714

Group Five Ltd.

 

1,810,600

 

14,557

Kumba Resources Ltd.

 

1,315,900

 

19,842

Mittal Steel South Africa Ltd.

 

1,333,426

 

26,615

MTN Group Ltd.

 

3,719,752

 

69,669

Murray & Roberts Holdings Ltd.

 

1,541,736

 

22,973

Raubex Group Ltd.

 

1,999,000

 

13,893

Standard Bank Group Ltd.

 

74,100

 

1,084

 

 

 

 

185,557

South Korea (11.6%)

 

 

 

 

Amorepacific Corp.

 

(a)11,236

 

8,465

Cheil Communications, Inc.

 

(a)39,455

 

11,868

Cheil Industries, Inc.

 

(a)152,317

 

8,397

Doosan Infracore Co., Ltd.

 

(a)286,153

 

8,993

GS Engineering & Construction Corp.

 

(a)105,904

 

17,365

Hite Brewery Co., Ltd.

 

(a)74,318

 

11,280

Hyundai Heavy Industries

 

(a)65,269

 

30,374

Hyundai Mipo Dockyard

 

(a)64,972

 

19,647

Hyundai Motor Co.

 

(a)268,720

 

20,481

Korean Air Lines Co., Ltd.

 

(a)151,892

 

12,279

LG Chem Ltd.

 

(a)164,160

 

15,647

LG Electronics, Inc.

 

(a)201,669

 

21,239

LG Philips LCD Co. Ltd.

 

(a)550,545

 

29,124

NHN Corp.

 

(a)109,161

 

25,879

Orion Corp.

 

(a)23,314

 

6,185

POSCO

 

27,130

 

16,420

Samsung Electronics Co., Ltd.

 

43,141

 

25,357

Samsung Electronics Co., Ltd. (Preference)

 

38,506

 

17,462

Samsung Fire & Marine Insurance Co., Ltd.

 

72,400

 

19,519

Shinhan Financial Group Co., Ltd.

 

(a)409,004

 

23,467

SK Energy Co., Ltd.

 

(a)51,670

 

9,939

SSCP Co., Ltd.

 

(a)275,813

 

9,260

STX Pan Ocean Co., Ltd.

 

(a)(c)8,309,000

 

20,751

Woongjin Coway Co., Ltd.

 

(a)565,042

 

18,204

 

 

 

 

407,602

Taiwan (5.0%)

 

 

 

 

Asustek Computer, Inc.

 

4,980,494

 

14,850

AU Optronics Corp.

 

27,279,481

 

52,703

Epistar Corp.

 

3,075,000

 

13,094

Formosa Plastics Corp.

 

9,956,000

 

27,801

Foxconn Technology Co., Ltd.

 

1,728,400

 

13,945

 

The accompanying notes are an integral part of the financial statements.

27

 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Emerging Markets Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Taiwan (cont’d)

 

 

 

 

 

InnoLux Display Corp.

 

1,740,000

 

$

5,835

InnoLux Display Corp. GDR

 

(a)784,588

 

5,335

MediaTek, Inc.

 

150,905

 

1,942

Siliconware Precision Industries Co.

 

4,570,000

 

8,133

Taiwan Cement Corp.

 

11,200,000

 

15,385

Tripod Technology Corp.

 

508,315

 

1,824

TXC Corp.

 

1,033,757

 

1,807

Yang Ming Marine Transport Corp.

 

17,901,402

 

13,740

 

 

 

 

176,394

Turkey (3.6%)

 

 

 

 

Akcansa Cimento A/S

 

978,945

 

5,922

Aksigorta A/S

 

1,645,543

 

9,661

KOC Holding A/S

 

(a)1,496,678

 

8,080

Tekfen Holding A/S

 

(a)752,000

 

4,138

Turkcell Iletisim Hizmet A/S

 

2,394,175

 

26,229

Turkcell Iletisim Hizmet A/S ADR

 

42,500

 

1,172

Turkiye Garanti Bankasi A/S

 

3,308,186

 

29,513

Turkiye Halk Bankasi A/S

 

(a)1,307,560

 

13,560

Turkiye Is Bankasi, Class A

 

850,647

 

5,311

Yapi ve Kredi Bankasi A/S

 

(a)6,261,904

 

21,967

 

 

 

 

125,553

Total Common Stocks (Cost $2,373,561)

 

 

 

3,430,718

Investment Company (0.8%)

 

 

 

 

India (0.8%)

 

 

 

 

Morgan Stanley Growth Fund

 

 

 

 

(Cost $3,415)

 

(a)(o)17,282,900

 

28,374

 

 

Face
Amount
(000)

 

 

Short-Term Investments (8.5%)

 

 

 

 

Short-Term Debt Securities held as Collateral on Loaned Securities (7.5%)

 

 

 

 

Alliance & Leicester plc,

 

 

 

 

5.26%, 9/2/08

 

$

(h)7,895

 

7,895

Bancaja,

 

 

 

 

5.35%, 8/12/08

 

3,947

 

3,947

Bank of New York Co., Inc.,

 

 

 

 

5.24%, 8/8/08

 

(h)3,947

 

3,947

BASF AG,

 

 

 

 

5.18%, 8/19/08

 

(h)3,947

 

3,947

BNP Paribas plc,

 

 

 

 

4.90%, 5/19/08

 

(h)7,895

 

7,895

CAM US Finance S.A. Unipersonal,

 

 

 

 

5.24%, 7/25/08

 

(h)15,790

 

15,790

Canadian Imperial Bank of

 

 

 

 

Commerce, New York,

 

 

 

 

4.42%, 7/28/08

 

(h)7,895

 

7,895

CC USA, Inc.,

 

 

 

 

3.89%, 1/28/08

 

(h)3,946

 

3,946

CIT Group Holdings,

 

 

 

 

5.23%, 6/18/08

 

(h)14,211

 

14,211

Citigroup Global Markets Holdings, Inc.,

 

 

 

 

4.51%, 1/2/08

 

53,818

 

53,818

Credit Suisse First Boston, New York,

 

 

 

 

4.32%, 3/14/08

 

$

(h)7,895

 

$

7,895

First Tennessee Bank,

 

 

 

 

5.05%, 8/15/08

 

(h)3,947

 

3,947

5.06%, 8/15/08

 

(h)15,789

 

15,789

Goldman Sachs Group, Inc.,

 

 

 

 

4.62%, 2/13/09

 

(h)7,421

 

7,421

5.10%, 9/12/08

 

(h)3,947

 

3,947

HSBC Finance Corp.,

 

 

 

 

5.26%, 8/5/08

 

(h)3,947

 

3,947

IBM Corp.,

 

 

 

 

5.27%, 9/8/08

 

(h)15,790

 

15,790

Lehman Brothers, Inc.,

 

 

 

 

4.49%, 1/2/08

 

6,733

 

6,733

Macquarie Bank Ltd.,

 

 

 

 

4.95%, 8/20/08

 

(h)7,895

 

7,895

Metropolitan Life Global Funding,

 

 

 

 

4.89%, 8/21/08

 

(h)11,842

 

11,842

National Bank of Canada,

 

 

 

 

5.21%, 4/2/08

 

(h)15,788

 

15,788

National Rural Utilities Cooperative Finance Corp.,

 

 

 

 

5.24%, 9/2/08

 

(h)15,790

 

15,790

Nationwide Building Society,

 

 

 

 

4.92%, 7/28/08

 

(h)9,158

 

9,158

Unicredito Italiano Bank (Ireland) plc,

 

 

 

 

5.04%, 8/14/08

 

(h)8,684

 

8,684

5.26%, 8/8/08

 

(h)5,526

 

5,526

 

 

 

 

263,443

 

 

Shares

 

 

Investment Company (1.0%)

 

 

 

 

Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class

 

(o)35,567,570

 

35,567

Total Short-Term Investments (Cost $299,010)

 

 

 

299,010

Total Investments (107.3%) (Cost $2,675,986) — including $252,057 of Securities Loaned

 

 

 

(v) 3,758,102

Liabilities in Excess of Other Assets (-7.3%)

 

 

 

(255,138)

Net Assets (100%)

 

 

 

$

3,502,964

 

(a)

Non-income producing security.

(c)

All or a portion of security on loan at December 31, 2007.

(d)

Securities were valued at fair value — At December 31, 2007, the Portfolio held approximately $4,706,000 of fair valued securities, representing 0.1% of net assets.

(e)

144A Security — Certain conditions for public sale may exist. Unless otherwise noted, these securities are deemed to be liquid.

(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, 2007.

(l)

Security has been deemed illiquid at December 31, 2007.

(o)

See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Growth Fund and Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class.

 

28

The accompanying notes are an integral part of the financial statements.

 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Emerging Markets Portfolio

 

(v)

The approximate market value and percentage of the investments, $2,766,583,000 and 73.6%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note A within the Notes to Financial Statements.

@

Value is less than $500.

ADR

American Depositary Receipt

GDR

Global Depositary Receipt

 

 

Foreign Currency Exchange Contract Information:

 

The Portfolio had the following foreign currency exchange contract(s) open at period end:

 

Currency
to
Deliver
(000)

 

Value
(000)

 

Settlement
Date

 

In
Exchange
For
(000)

 

Value
(000)

 

Net
Unrealized
Appreciation
(Depreciation)
(000)

 

BRL

5,451

 

 

$  3,062

 

 

1/2/08

 

USD

3,049

 

 

$  3,049

 

 

$  (13

)

 

BRL

339

 

 

190

 

 

1/3/08

 

USD

191

 

 

191

 

 

1

 

 

HKD

723

 

 

93

 

 

1/2/08

 

USD

93

 

 

93

 

 

@—

 

 

HKD

687

 

 

88

 

 

1/3/08

 

USD

88

 

 

88

 

 

@—

 

 

MXN

3,127

 

 

286

 

 

1/2/08

 

USD

287

 

 

287

 

 

1

 

 

MXN

5,182

 

 

475

 

 

1/3/08

 

USD

475

 

 

475

 

 

@—

 

 

PLN

2,215

 

 

900

 

 

1/2/08

 

USD

896

 

 

896

 

 

(4

)

 

PLN

581

 

 

237

 

 

1/3/08

 

USD

238

 

 

238

 

 

1

 

 

TRY

810

 

 

691

 

 

1/2/08

 

USD

690

 

 

690

 

 

(1

)

 

USD

333

 

 

333

 

 

1/3/08

 

SGD

482

 

 

334

 

 

1

 

 

USD

361

 

 

361

 

 

1/3/08

 

TRY

422

 

 

360

 

 

(1

)

 

USD

281

 

 

281

 

 

1/3/08

 

ZAR

1,958

 

 

287

 

 

6

 

 

USD

251

 

 

251

 

 

1/8/08

 

ZAR

1,720

 

 

252

 

 

1

 

 

ZAR

20,729

 

 

3,033

 

 

1/2/08

 

USD

2,944

 

 

2,944

 

 

(89

)

 

ZAR

5,937

 

 

869

 

 

1/3/08

 

USD

850

 

 

850

 

 

(19

)

 

ZAR

9,721

 

 

1,422

 

 

1/4/08

 

USD

1,412

 

 

1,412

 

 

(10

)

 

ZAR

7,755

 

 

1,134

 

 

1/7/08

 

USD

1,134

 

 

1,134

 

 

@—

 

 

 

 

 

 

$13,706

 

 

 

 

 

 

 

 

$13,580

 

 

$(126

)

 

 

 

BRL

—

Brazilian Real

HKD

—

Hong Kong Dollar

MXN

—

Mexican Peso

PLN

—

Polish Zloty

SGD

—

Singapore Dollar

TRY

—

Turkish Lira

USD

—

United States Dollar

ZAR

—

South African Rand

 

The accompanying notes are an integral part of the financial statements.

29

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (unaudited)

 

Global Franchise Portfolio

 

 

 

*

Minimum Investment

**

Commenced operations on November 28, 2001

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the Morgan Stanley Capital International (MSCI) World Index(1) and the Lipper Global Multi-Cap Core Funds Index(2)

 

 

 

Total Returns(3)

 

 

 

 

 

 

Average Annual

 

 

 

One

 

Five

 

Since

 

 

 

Year

 

Years

 

Inception(5)

 

 

 

 

 

 

 

 

 

Portfolio – Class A (4)

 

9.58

%

16.76

%

15.92

%

MSCI World Index

 

9.04

 

16.96

 

9.97

 

Lipper Global Multi-Cap Core Funds Index

 

8.20

 

16.43

 

10.34

 

 

 

 

 

 

 

 

 

Portfolio – Class B (4)

 

9.26

 

16.46

 

15.59

 

MSCI World Index

 

9.04

 

16.96

 

9.97

 

Lipper Global Multi-Cap Core Funds Index

 

8.20

 

16.43

 

10.34

 

 

 

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 www.morganstanley.com/msim. 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.

 

(1)

 

The Morgan Stanley Capital International (MSCI) World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance. The term “free float” represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. 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. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)

 

The Lipper Global Multi-Cap Core Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Global Multi-Cap Core Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. As of the date of this report, the Portfolio is in the Lipper Global Multi-Cap Core Funds classification.

(3)

 

Total returns for the Portfolio reflect fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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)

 

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.

 

The Global Franchise Portfolio (the “Portfolio”) seeks longterm 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

 

30


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Investment Overview (cont’d)

 

Global Franchise Portfolio

 

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.

 

Performance

 

For the year ended December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of 9.58%, net of fees, for the Class A shares and 9.26%, net of fees, for the Class B shares. The Portfolio’s Class A and Class B shares outperformed against its benchmark the Morgan Stanley Capital International (MSCI) World Index (the “Index”) which returned 9.04%.

 

Factors Affecting Performance

 

·

 

The Index was driven by strong performance in the materials, energy and telecommunication services sectors. Over the same period, the three worst performing sectors in the Index were financials, consumer discretionary and health care. Of these, our investment philosophy prevents us from owning companies within the energy and telecommunication services sectors, and most of the companies within the materials and financials sector.

 

 

 

·

 

In all market environments, we pursue a strategy that is driven by finding companies of exceptional quality at compelling value. We manage a concentrated portfolio, as only a relatively small number of companies meet our stringent quality and valuation criteria. Because of this concentration, and the fact that we do not use benchmarks as a portfolio construction tool, our strategy has a low correlation to the Index. As a result, the Portfolio’s short-term performance does not follow that of the markets.

 

 

 

·

 

The three stocks that contributed the most to absolute performance were British American Tobacco, Imperial Tobacco and Cadbury Schweppes. The stocks that detracted most from absolute returns were C&C Group, Harley-Davidson and Experian Group.

 

Management Strategies

 

·

 

During the year we have initiated positions in six new stocks: C&C Group, Career Education, Experian, Moody’s, Numico and Weight Watchers; and sold out of Altadis, Danone, GCap Media, The New York Times, Numico, SMG and Torstar.

 

 

 

·

 

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 minimizing business and valuation risk. Our goal is for the Portfolio to outperform broadly-based benchmarks over the long term with less than average volatility.

 

The information contained in this overview regarding specific securities is for informational purposes only and should not be construed as a recommendation to purchase or sell the securities mentioned.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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%

 

31


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (cont’d)

 

Global Franchise Portfolio

 

hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning
Account Value

 

Ending Account
Value
December 31,

 

Expenses Paid
During Period*
July 1, 2007 —
December 31,

 

 

 

July 1, 2007

 

2007

 

2007

 

Class A

 

 

 

 

 

 

 

Actual

 

$1,000.00

 

$1,003.20

 

$5.15

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,020.06

 

5.19

 

 

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

 

Actual

 

1,000.00

 

1,001.10

 

6.46

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,018.75

 

6.51

 

 

*

Expenses are equal to Class A and Class B annualized net expense ratios of 1.02% and 1.28%, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

*

Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

32


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments

 

Global Franchise Portfolio

 

 

 

Shares

 

Value
(000)

Common Stocks (97.7%)

 

 

 

 

Finland (3.6%)

 

 

 

 

Kone Oyj, Class B

 

59,684

 

$     4,148

France (5.6%)

 

 

 

 

Pernod-Ricard S.A.

 

14,216

 

3,274

Sanofi-Aventis S.A.

 

35,499

 

3,245

 

 

 

 

6,519

Ireland (1.8%)

 

 

 

 

C&C Group plc

 

352,455

 

2,106

Japan (2.5%)

 

 

 

 

Kao Corp.

 

96,000

 

2,889

Netherlands (8.4%)

 

 

 

 

Reed Elsevier N.V.

 

242,204

 

4,805

Wolters Kluwer N.V.

 

153,002

 

4,999

 

 

 

 

9,804

Sweden (4.4%)

 

 

 

 

Swedish Match AB

 

217,667

 

5,179

Switzerland (5.0%)

 

 

 

 

Nestle S.A. (Registered)

 

7,136

 

3,270

Novartis AG (Registered)

 

46,100

 

2,511

 

 

 

 

5,781

United Kingdom (39.7%)

 

 

 

 

British American Tobacco plc

 

278,261

 

10,957

Cadbury Schweppes plc

 

453,542

 

5,654

Diageo plc

 

135,303

 

2,896

Experian Group Ltd.

 

358,029

 

2,845

GlaxoSmithKline plc

 

123,015

 

3,122

Imperial Tobacco Group plc

 

134,407

 

7,318

Reckitt Benckiser plc

 

97,614

 

5,639

Unilever plc

 

116,971

 

4,387

WPP Group plc

 

267,391

 

3,423

 

 

 

 

46,241

United States (26.7%)

 

 

 

 

Altria Group, Inc.

 

74,298

 

5,615

Brown-Forman Corp., Class B

 

36,474

 

2,703

Career Education Corp.

 

(a)82,155

 

2,065

Fortune Brands, Inc.

 

42,817

 

3,098

Harley-Davidson, Inc.

 

48,622

 

2,271

Kellogg Co.

 

58,125

 

3,047

Kimberly-Clark Corp.

 

36,988

 

2,565

Moody’s Corp.

 

46,571

 

1,663

Pfizer, Inc.

 

136,333

 

3,099

Scotts Miracle-Gro Co. (The), Class A

 

61,251

 

2,292

Weight Watchers International, Inc.

 

60,370

 

2,728

 

 

 

 

31,146

Total Common Stocks (Cost $86,750)

 

 

 

113,813

 

Short-Term Investment (2.0%)

 

 

 

 

Investment Company (2.0%)

 

 

 

 

Morgan Stanley Institutional Liquidity Government Portfolio
— Institutional Class (Cost $2,268)

 

(o)2,268,328

 

$    2,268 

Total Investments (99.7%) (Cost $89,018)

 

 

 

(v)  116,081

Other Assets in Excess of Liabilities (0.3%)

 

 

 

381

Net Assets (100%)

 

 

 

$116,462

 

(a)

 

Non-income producing security.

 

(o)

 

See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Government Portfolio — Institutional Class.

(v)

 

The approximate market value and percentage of the investments, $82,666,000 and 71.2%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note A within the Notes to Financial Statements.

 

Foreign Currency Exchange Contract Information:

 

The Portfolio had the following foreign currency exchange contract(s) open at period end:

 

Currency
to
Deliver
(000)

 

Value
(000)

 

Settlement
Date

 

In
Exchange
For
(000)

 

Value
(000)

 

Net
Unrealized
Gain (Loss)
(000)

 

GBP

10,650

 

 

$21,187

 

 

1/24/08

 

USD

21,571

 

 

$21,571

 

 

 

$  384

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GBP — British Pound

USD — United States Dollar

 

The accompanying notes are an integral part of the financial statements.

 

33

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (unaudited)

 

Global Real Estate Portfolio

 

 

 

*

Minimum Investment

**

Commenced operations on August 30, 2006

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the FTSE EPRA/NAREIT Global Real Estate Net Index(1), the Morgan Stanley Capital International (MSCI) World Index(2) and the Lipper Real Estate Funds Index(3)

 

 

 

Total Returns(4)

 

 

 

 

Average Annual

 

 

 

 

One

 

Since

 

 

 

Year

 

Inception

(6)

 

 

 

 

 

 

Portfolio – Class A (5)

 

(7.87

)%

 

5.91

%

FTSE EPRA/NAREIT Global Real Estate Net Index

 

(7.06

)

 

6.48

 

MSCI World Index

 

9.04

 

 

14.31

 

Lipper Real Estate Funds Index

 

(13.50

)

 

(2.64

)

 

 

 

 

 

 

 

Portfolio – Class B (5)

 

(8.15

)

 

5.60

 

FTSE EPRA/NAREIT Global Real Estate Net Index

 

(7.06

)

 

6.48

 

MSCI World Index

 

9.04

 

 

14.31

 

Lipper Real Estate Funds Index

 

(13.50

)

 

(2.64

)

 

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 www.morganstanley.com/msim. 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.

 

(1)

 

The FTSE EPRA/NAREIT Global Real Estate Net Index is a market capitalization weighted index designed to reflect the stock performance of companies engaged in the North American, European and Asian real estate markets. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends. “Net dividends” reflects a reduction in dividends after taking into account withholding of taxes by certain foreign countries represented in the Index. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)

 

The Morgan Stanley Capital International (MSCI) World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance. The term “free float” represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. 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. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(3)

 

The Lipper 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.

(4)

 

Total returns for the Portfolio reflect fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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 August 30, 2006

 

34


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Investment Overview (cont’d)

 

Global Real Estate Portfolio

 

(6)

 

For comparative purposes, cumulative 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.

 

The Global Real Estate Portfolio (the “Portfolio”) seeks to provide current income and capital appreciation by investing primarily in equity securities of companies in the real estate industry located throughout the world, including real estate operating companies, real estate investment trusts and similar entities established outside the U.S. (foreign real estate 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. The risks of investing in emerging-market countries are greater than the risks generally associated with foreign investments. In addition to the general risks associated with real-estate investment, REIT investing entails other risks, such as credit and interest-rate risk.

 

Performance

 

For the year ended December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of -7.87% for the Class A shares, net of fees, and -8.15% for the Class B shares. The Portfolio’s Class A and Class B shares underperformed against its benchmarks, the FTSE EPRA/NAREIT Global Real Estate Net Index (the “Index”) which returned -7.06% and the MSCI World Index which returned 9.04%.

 

Factors Affecting Performance

 

·

 

At the end of the period, the Portfolio was overweight the Asian listed property sector and underweight both the European and U.S. listed property sectors. Global allocation among the three regions contributed to performance.

 

 

 

·

 

The Portfolio’s underperformance relative to the Index was driven by positioning within its European and U.S. portfolios, although we generated outperformance within the Asian portfolio.

 

 

 

·

 

In Europe, we believed there were prospects for declines in asset values for stocks on the Continent, which were trading at a discount to current NAVs. In contrast, we believed there was significant potential upside in the U.K., where the stocks were trading at discounted valuations that appeared too wide, even after adjusting for the prospective declines in asset values. In addition, a number of the major property companies in the U.K. continued to repurchase shares as a result of the wide disparity between share prices and the private market value of their portfolios. As a result, within Europe, the Portfolio was overweight the U.K. and underweight the Continent.

 

 

 

·

 

The Portfolio’s stock selection within and overweight to the U.K. hampered returns during the period. Stock selection in Sweden and an underweighted position in Germany contributed to returns.

 

 

 

·

 

The Portfolio was underweight the U.S., as we believe the market faces prospects for declines in underlying asset values as a result of continued tightening of credit in the debt markets and prospects for a weaker economy. Within the U.S. portfolio, performance was hurt by stock selection within and an underweight to the health care sector, as well as an underweight to the industrial sector. Stock selection in the office sector and an overweight to the hotel sector also hampered returns. On a more positive note, stock selection within and an overweight to the mall sector contributed to returns, as well as stock selection in the shopping center sector.

 

 

 

·

 

We believe the Asian listed property sector will continue to benefit from improving underlying asset values and property fundamentals, and as a result overweighted Asia in the Portfolio. The overweight position was dominated by Japanese and Hong Kong real estate operating companies (REOCs). In Japan, the REOCs ended the year trading at significant discounts to NAV, as the share prices do not appear to appropriately reflect the prospect for several years of continued strong NAV growth. In Hong Kong, the REOCs experienced very strong share price improvements during the year and ended the year trading at modest premiums, reflecting market expectations for continued strong NAV growth. We continue to prefer the Asian REOCs, as we believe these companies continue to offer better value relative to the REITs and possess the ability to engage in value- added opportunities such as the development of new assets and redevelopment of existing assets, as opposed to the Asian REITs, which are externally managed vehicles and limited to property ownership.

 

 

 

·

 

The Portfolio’s returns benefited from stock selection within and an underweight to the Australian Listed Property Trust (LPT) sector, which experienced significant share price declines in late 2007 and ended the year trading in-line with unadjusted NAVs, which do not appear to reflect prospects for declines in asset values, particularly for those companies with offshore exposure. The Portfolio also benefited from an overweight to Hong Kong, while stock selection in Japan detracted from returns.

 

35


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (cont’d)

 

Global Real Estate Portfolio

 

·

 

While we continue to expect several years of strong NAV growth in Asia, there has been a noticeable change in sentiment toward REITs in the U.S. and Europe, where current share prices appear to reflect expectations for prospective declines in private real estate values, which may be due to (i) a slowdown in the weight and pace of capital being deployed to real estate, (ii) a weaker outlook for further cash flow growth or (iii) higher required return expectations and risk premiums for real estate. It is important to note that real estate securities were vulnerable to some profit-taking and portfolio rebalancing after years of very strong performance, even without any material declines in underlying real asset values. Thus, selling pressure from non-dedicated equity investors and mutual fund redemptions in dedicated REIT portfolios should not be surprising given recent concerns over possible declines in asset values and several years of significant outperformance versus the broader equity market.

 

 

 

·

 

However, we believe that longer term investors will remain committed to maintaining a strategic allocation to the sector due to its expected returns and the diversification benefits from its lack of meaningful correlation to other asset classes.

 

Management Strategies

 

·

 

The global Portfolio is comprised of three regional portfolios with a global allocation which weights each of the three major regions (U.S., Europe and Asia) based on our view of the relative attractiveness of each region in terms of underlying real estate fundamentals and public market valuations.

 

 

 

·

 

Moreover, each of the regional portfolios reflects our core investment philosophy as a real estate value investor, which results in the ownership of stocks that we believe provide the best valuation relative to their underlying real estate values, while maintaining portfolio diversification.

 

·

 

Our company specific research leads us to specific preferences for sub-segments within each of the property sectors and countries.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

36


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Investment Overview (cont’d)

 

Global Real Estate Portfolio

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning
Account Value

 

Ending Account
Value
December 31,

 

Expenses Paid
During Period*
July 1, 2007—
December 31,

 

 

 

July 1, 2007

 

2007

 

2007

 

Class A

 

 

 

 

 

 

 

Actual

 

$1,000.00

 

$910.30

 

$4.86

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,020.11

 

5.14

 

Class B

 

 

 

 

 

 

 

Actual

 

1,000.00

 

909.00

 

6.11

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,018.80

 

6.46

 

*               Expenses are equal to Class A and Class B annualized net expense ratios of 1.01% and 1.27%, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

*               Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

37


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments

 

Global Real Estate Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Common Stocks (95.8%)

 

 

 

 

 

Australia (9.6%)

 

 

 

 

 

Centro Properties Group REIT

 

737,418

 

$     649

 

CFS Retail Property Trust REIT

 

1,331,108

 

2,727

 

DB RREEF Trust REIT

 

2,174,900

 

3,805

 

Goodman Group REIT

 

1,185,386

 

5,101

 

GPT Group REIT

 

1,559,423

 

5,505

 

ING Industrial Fund REIT

 

375,300

 

834

 

Macquarie CountryWide Trust REIT

 

614,000

 

886

 

Mirvac Group REIT

 

599,071

 

3,150

 

Stockland REIT

 

1,236,800

 

9,104

 

Westfield Group REIT

 

1,649,315

 

30,220

 

 

 

 

 

61,981

 

Austria (0.6%)

 

 

 

 

 

CA Immobilien Anlagen AG

 

(a)10,383

 

231

 

Conwert Immobilien Invest AG

 

(a)54,593

 

962

 

IMMOFINANZ AG

 

240,900

 

2,428

 

 

 

 

 

3,621

 

Canada (0.1%)

 

 

 

 

 

RioCan REIT

 

37,700

 

834

 

Finland (0.4%)

 

 

 

 

 

Sponda Oyj

 

215,990

 

2,567

 

France (3.5%)

 

 

 

 

 

Fonciere Des Regions REIT

 

11,548

 

1,454

 

Gecina S.A. REIT

 

10,411

 

1,632

 

Klepierre REIT

 

60,599

 

3,077

 

Silic REIT

 

12,757

 

1,863

 

Unibail-Rodamco REIT

 

67,526

 

14,698

 

 

 

 

 

22,724

 

Germany (0.5%)

 

 

 

 

 

Alstria Office AG REIT

 

(a)161,587

 

2,422

 

IVG Immobilien AG

 

33,218

 

1,124

 

 

 

 

 

3,546

 

Hong Kong (16.9%)

 

 

 

 

 

China Overseas Land & Investment Ltd.

 

3,299,000

 

6,765

 

China Resources Land Ltd.

 

754,000

 

1,644

 

Guangzhou R&F Properties Co., Ltd., Class H

 

2,308,100

 

8,125

 

Hang Lung Properties Ltd.

 

547,000

 

2,446

 

Henderson Land Development Co., Ltd.

 

1,070,000

 

9,918

 

Hongkong Land Holdings Ltd.

 

2,638,000

 

12,950

 

Hysan Development Co., Ltd.

 

1,745,430

 

4,945

 

Kerry Properties Ltd.

 

1,163,627

 

9,280

 

KWG Property Holding Ltd.

 

(a)1,252,000

 

1,830

 

New World China Land Ltd.

 

3,842,000

 

3,429

 

New World Development Ltd.

 

3,193,629

 

11,210

 

Sino Land Co.

 

244,000

 

856

 

Sun Hung Kai Properties Ltd.

 

1,694,000

 

35,637

 

 

 

 

 

109,035

 

Italy (0.5%)

 

 

 

 

 

Aedes S.p.A.

 

24,224

 

123

 

Beni Stabili S.p.A.

 

1,533,467

 

1,660

 

Risanamento S.p.A.

 

(a)259,951

 

1,397

 

 

 

 

 

3,180

 

Japan (14.2%)

 

 

 

 

 

Daibiru Corp.

 

43,300

 

$      464

 

Goldcrest Co., Ltd.

 

59,450

 

1,770

 

Japan Real Estate Investment Corp. REIT

 

322

 

3,980

 

KK DaVinci Advisors

 

(a)2,040

 

1,794

 

Mitsubishi Estate Co., Ltd.

 

1,182,000

 

28,334

 

Mitsui Fudosan Co., Ltd.

 

992,000

 

21,439

 

Mori Trust Sogo, Inc. REIT

 

72

 

765

 

Nippon Building Fund, Inc. REIT

 

407

 

5,698

 

Nomura Real Estate Office Fund, Inc. REIT

 

151

 

1,420

 

NTT Urban Development Corp.

 

1,884

 

3,001

 

Sumitomo Realty & Development Co., Ltd.

 

757,000

 

18,619

 

TOC Co., Ltd.

 

70,500

 

535

 

Tokyo Tatemono Co., Ltd.

 

210,000

 

1,977

 

Tokyu Land Corp.

 

248,000

 

2,122

 

 

 

 

 

91,918

 

Netherlands (1.2%)

 

 

 

 

 

Corio N.V. REIT

 

19,111

 

1,538

 

Eurocommercial Properties N.V. CVA REIT

 

38,458

 

1,974

 

ProLogis European Properties

 

188,930

 

2,741

 

Vastned Retail N.V. REIT

 

1,273

 

122

 

Wereldhave N.V. REIT

 

11,078

 

1,205

 

 

 

 

 

7,580

 

Singapore (3.5%)

 

 

 

 

 

CapitaLand Ltd.

 

1,137,000

 

4,889

 

CapitaMall Trust REIT

 

1,079,000

 

2,566

 

CapitaRetail China Trust REIT

 

(a)708,100

 

1,051

 

Macquarie MEAG Prime REIT

 

3,545,000

 

2,702

 

Suntec REIT

 

855,500

 

1,016

 

United Industrial Corp., Ltd.

 

4,920,000

 

9,370

 

Wheelock Properties S Ltd.

 

872,000

 

1,289

 

 

 

 

 

22,883

 

Sweden (0.7%)

 

 

 

 

 

Castellum AB

 

138,084

 

1,418

 

Hufvudstaden AB, Class A

 

296,196

 

2,815

 

 

 

 

 

4,233

 

Switzerland (0.2%)

 

 

 

 

 

PSP Swiss Property AG (Registered)

 

(a)28,545

 

1,436

 

United Kingdom (9.9%)

 

 

 

 

 

Big Yellow Group plc REIT

 

181,556

 

1,570

 

British Land Co. plc REIT

 

603,513

 

11,249

 

Brixton plc REIT

 

557,327

 

3,242

 

Capital & Regional plc

 

303,876

 

2,391

 

Derwent London plc REIT

 

128,709

 

3,592

 

Grainger plc

 

289,685

 

2,003

 

Great Portland Estates plc REIT

 

299,035

 

2,834

 

Hammerson plc REIT

 

321,470

 

6,539

 

Invista Foundation Property Trust Ltd.

 

158,279

 

255

 

Land Securities Group plc REIT

 

384,361

 

11,430

 

Liberty International plc REIT

 

192,149

 

4,089

 

Mapeley Ltd.

 

8,299

 

249

 

Millennium & Copthorne Hotels plc

 

145,360

 

1,173

 

Minerva plc

 

(a)820,179

 

2,173

 

Quintain Estates & Development plc

 

214,106

 

2,175

 

 

38

 

The accompanying notes are an integral part of the financial statements.

 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Global Real Estate Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

United Kingdom (cont’d)

 

 

 

 

 

Safestore Holdings Ltd.

 

184,389

 

$      636

 

Segro plc REIT

 

575,114

 

5,340

 

Shaftesbury plc REIT

 

177,770

 

1,764

 

Unite Group plc

 

173,709

 

1,216

 

 

 

 

 

63,920

 

United States (34.0%)

 

 

 

 

 

Acadia Realty Trust REIT

 

73,537

 

1,883

 

AMB Property Corp. REIT

 

75,558

 

4,349

 

Assisted Living Concepts, Inc., Class A

 

(a)288,690

 

2,165

 

AvalonBay Communities, Inc. REIT

 

117,773

 

11,087

 

Boston Properties, Inc. REIT

 

(c)140,255

 

12,877

 

Brandywine Realty Trust REIT

 

137,724

 

2,469

 

BRE Properties, Inc. REIT

 

55,190

 

2,237

 

Brookfield Properties Corp.

 

625,913

 

12,049

 

Camden Property Trust REIT

 

62,603

 

3,014

 

Cedar Shopping Centers, Inc. REIT

 

32,656

 

334

 

Cogdell Spencer, Inc. REIT

 

4,720

 

75

 

DCT Industrial Trust, Inc. REIT

 

94,175

 

877

 

Developers Diversified Realty Corp. REIT

 

25,710

 

985

 

DiamondRock Hospitality Co. REIT

 

45,070

 

675

 

Duke Realty Corp. REIT

 

202,935

 

5,293

 

Equity Lifestyle Properties, Inc. REIT

 

(a)(c)66,636

 

3,044

 

Equity One, Inc. REIT

 

7,465

 

172

 

Equity Residential Property Trust REIT

 

453,431

 

16,537

 

Essex Property Trust, Inc. REIT

 

32,086

 

3,128

 

Exeter Industrial Value Fund LP

 

(d)200,000

 

200

 

Federal Realty Investment Trust REIT

 

51,752

 

4,251

 

Forest City Enterprises, Inc., Class A

 

(c)125,256

 

5,566

 

General Growth Properties, Inc. REIT

 

87,746

 

3,613

 

GMH Communities Trust REIT

 

79,930

 

441

 

Healthcare Realty Trust, Inc. REIT

 

208,220

 

5,287

 

Hersha Hospitality Trust REIT

 

(c)85,136

 

809

 

Host Hotels & Resorts, Inc. REIT

 

755,954

 

12,882

 

Kilroy Realty Corp. REIT

 

(c)18,365

 

1,009

 

LaSalle Hotel Properties REIT

 

15,330

 

489

 

Liberty Property Trust REIT

 

(c)198,554

 

5,720

 

Macerich Co. (The) REIT

 

96,531

 

6,860

 

Mack-Cali Realty Corp. REIT

 

210,025

 

7,141

 

Morgans Hotel Group Co.

 

(a)(c)116,881

 

2,254

 

Parkway Properties, Inc. REIT

 

1,162

 

43

 

Post Properties, Inc. REIT

 

(c)151,261

 

5,312

 

ProLogis REIT

 

67,197

 

4,259

 

PS Business Parks, Inc. REIT

 

22,983

 

1,208

 

Public Storage REIT

 

80,658

 

5,921

 

Ramco-Gershenson Properties Trust REIT

 

33,055

 

706

 

Regency Centers Corp. REIT

 

(c)101,415

 

6,540

 

Senior Housing Properties Trust REIT

 

157,191

 

3,565

 

Simon Property Group, Inc. REIT

 

247,343

 

21,484

 

SL Green Realty Corp. REIT

 

(c)40,458

 

3,781

 

Sovran Self Storage, Inc. REIT

 

(c)49,659

 

1,991

 

Starwood Hotels & Resorts Worldwide, Inc.

 

281,422

 

12,391

 

Strategic Hotels & Resorts, Inc. REIT

 

193,338

 

3,235

 

Sunstone Hotel Investors, Inc. REIT

 

20

 

@—

 

Taubman Centers, Inc. REIT

 

23,986

 

1,180

 

U-Store-It Trust REIT

 

15,090

 

$     138

 

Universal Health Reality Income Trust REIT

 

4,887

 

173

 

Ventas, Inc. REIT

 

6,410

 

290

 

Vornado Realty Trust REIT

 

85,190

 

7,493

 

Weingarten Realty Investors REIT

 

2,220

 

70

 

 

 

 

 

219,552

 

Total Common Stocks (Cost $689,694)

 

 

 

619,010

 

 

 

Face

 

 

 

 

 

Amount

 

 

 

 

 

(000)

 

 

 

 

 

 

 

 

 

Short-Term Investments (0.4%)

 

 

 

 

 

Short-Term Debt Securities held as Collateral on Loaned Securities (0.4%)

 

 

 

 

 

Alliance & Leicester plc,

 

 

 

 

 

5.26%, 9/2/08

 

$   (h)79

 

79

 

Bancaja,

 

 

 

 

 

5.35%, 8/12/08

 

39

 

39

 

Bank of New York Co., Inc.,

 

 

 

 

 

5.24%, 8/8/08

 

(h)39

 

39

 

BASF AG,

 

 

 

 

 

5.18%, 8/19/08

 

(h)39

 

39

 

BNP Paribas plc,

 

 

 

 

 

4.90%, 5/19/08

 

(h)79

 

79

 

CAM US Finance S.A. Unipersonal,

 

 

 

 

 

5.24%, 7/25/08

 

(h)158

 

158

 

Canadian Imperial Bank of Commerce, New York,

 

 

 

 

 

4.42%, 7/28/08

 

(h)79

 

79

 

CC USA, Inc.,

 

 

 

 

 

3.89%, 1/28/08

 

(h)39

 

39

 

CIT Group Holdings,

 

 

 

 

 

5.23%, 6/18/08

 

(h)142

 

142

 

Citigroup Global Markets Holdings, Inc.,

 

 

 

 

 

4.51%, 1/2/08

 

538

 

538

 

Credit Suisse First Boston, New York,

 

 

 

 

 

4.32%, 3/14/08

 

(h)79

 

79

 

First Tennessee Bank,

 

 

 

 

 

5.05%, 8/15/08

 

(h)39

 

39

 

5.06%, 8/15/08

 

(h)158

 

158

 

Goldman Sachs Group, Inc.,

 

 

 

 

 

4.62%, 2/13/09

 

(h)74

 

74

 

5.10%, 9/12/08

 

(h)39

 

39

 

HSBC Finance Corp.,

 

 

 

 

 

5.26%, 8/5/08

 

(h)39

 

39

 

IBM Corp.,

 

 

 

 

 

5.27%, 9/8/08

 

(h)158

 

158

 

Lehman Brothers, Inc.,

 

 

 

 

 

4.49%, 1/2/08

 

67

 

67

 

Macquarie Bank Ltd.,

 

 

 

 

 

4.95%, 8/20/08

 

(h)79

 

79

 

Metropolitan Life Global Funding,

 

 

 

 

 

4.89%, 8/21/08

 

(h)118

 

118

 

National Bank of Canada,

 

 

 

 

 

5.21%, 4/2/08

 

(h)158

 

158

 

National Rural Utilities Cooperative Finance Corp.,

 

 

 

 

 

5.24%, 9/2/08

 

(h)158

 

158

 

 

The accompanying notes are an integral part of the financial statements.

 

39

 


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Global Real Estate Portfolio

 

 

 

Face

 

 

 

 

 

Amount

 

Value

 

 

 

(000)

 

(000)

 

Short-Term Debt Securities held as Collateral on Loaned Securities (cont’d)

 

 

 

 

 

Nationwide Building Society,

 

 

 

 

 

4.92%, 7/28/08

 

$      (h)92

 

$

92

 

Unicredito Italiano Bank (Ireland) plc,

 

 

 

 

 

5.04%, 8/14/08

 

(h)87

 

87

 

5.26%, 8/8/08

 

(h)55

 

55

 

Total Short-Term Investments (Cost $2,631)

 

 

 

2,631

 

Total Investments (96.2%) (Cost $692,325) — including $2,594 of Securities Loaned

 

 

 

(v)  621,641

 

Other Assets in Excess of Liabilities (3.8%)

 

 

 

24,283

 

Net Assets (100%)

 

 

 

$

645,924

 

 

(a)

Non-income producing security.

(c)

All or a portion of security on loan at December 31, 2007.

(d)

Security was valued at fair value — At December 31, 2007, the Portfolio held a fair valued security valued at approximately $200,000, representing less than 0.05% of net assets.

(h)

Variable/Floating Rate Security — Interest rate changes on these instruments are based on changes in a designated base rates. The rates shown are those in effect on December 31, 2007.

(v)

The approximate market value and percentage of the investments, $398,624,000 and 64.1%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note A within the Notes to Financial Statements.

CVA

Certificaten Van Aandelen

REIT

Real Estate Investment Trust

 

Foreign Currency Exchange Contract Information:

 

The Portfolio had the following foreign currency exchange contract(s) open at period end:

 

Currency
to
Deliver
(000)

 

Value
(000)

 

Settlement
Date

 

In
Exchange
For
(000)

 

Value
(000)

 

Net
Unrealized
Appreciation
(Depreciation)
(000)

 

AUD

 

362

 

 

$    318

 

 

1/2/08

 

USD

 

317

 

 

$   317

 

 

 

$    (1)

 

 

AUD

 

1,190

 

 

1,045

 

 

1/3/08

 

USD

 

1,046

 

 

1,046

 

 

 

1

 

 

GBP

 

88

 

 

175

 

 

1/3/08

 

EUR

 

119

 

 

175

 

 

 

@—

 

 

GBP

 

339

 

 

675

 

 

1/4/08

 

EUR

 

461

 

 

675

 

 

 

@—

 

 

HKD

 

3,886

 

 

498

 

 

1/2/08

 

USD

 

498

 

 

498

 

 

 

@—

 

 

HKD

 

12,552

 

 

1,610

 

 

1/3/08

 

USD

 

1,609

 

 

1,609

 

 

 

(1)

 

 

JPY

 

53,630

 

 

480

 

 

1/7/08

 

USD

 

471

 

 

471

 

 

 

(9)

 

 

JPY

 

174,604

 

 

1,563

 

 

1/8/08

 

USD

 

1,558

 

 

1,558

 

 

 

(5)

 

 

SGD

 

172

 

 

119

 

 

1/2/08

 

USD

 

118

 

 

118

 

 

 

(1)

 

 

SGD

 

375

 

 

260

 

 

1/3/08

 

USD

 

259

 

 

259

 

 

 

(1)

 

 

USD

 

210

 

 

210

 

 

1/2/08

 

EUR

 

142

 

 

208

 

 

 

(2)

 

 

 

 

 

 

 

$  6,953

 

 

 

 

 

 

 

 

 

$  6,934

 

 

 

$  (19)

 

 

 

AUD

— Australian Dollar

EUR

— Euro

GBP

— British Pound

HKD

— Hong Kong Dollar

JPY

— Japanese Yen

SGD

— Singapore Dollar

USD

— United States Dollar

@

Value is less than $500.

 

40

The accompanying notes are an integral part of the financial statements.

 


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (unaudited)

 

Global Value Equity Portfolio

 

 

 

 

*   Minimum Investment

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares based upon its different inception date and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the Morgan Stanley Capital International (MSCI) World Index(1) and the Lipper Global Large-Cap Value Funds Median(2)

 

 

 

Total Returns(3)

 

 

 

 

 

Average Annual

 

 

One

 

Five

 

Ten

 

Since

 

 

Year

 

Years

 

Years

 

Inception(6)

 

 

 

 

 

 

 

 

 

 

Portfolio – Class A (4)

 

6.65

%

15.10

%

7.38

%

11.69

%

MSCI World Index

 

9.04

 

16.96

 

7.00

 

9.32

 

Lipper Global Large-Cap Value Funds Median

 

4.34

 

15.66

 

8.97

 

—

 

 

 

 

 

 

 

 

 

 

 

Portfolio – Class B (5)

 

6.37

 

14.81

 

7.09

 

9.55

 

MSCI World Index

 

9.04

 

16.96

 

7.00

 

8.20

 

Lipper Global Large-Cap Value Funds Median

 

4.34

 

15.66

 

8.97

 

10.53

 

 

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 www.morganstanley.com/msim. 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.

 

(1)     The Morgan Stanley Capital International (MSCI) World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance. The term “free float” represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. 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. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)     The Lipper Global Large-Cap Value Funds Median tracks the performance of all funds in the Lipper Global Large-Cap Value Funds classification. The Median, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment.

(3)     Total returns for the Portfolio reflect fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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 operations 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.

 

The Global Value Equity Portfolio (the “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

 

41


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

Global Value Equity Portfolio

 

liquidity and the potential for market volatility and political instability.

 

Performance

 

For the year ended December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of 6.65%, net of fees, for Class A shares and 6.37%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares underperformed against its benchmark, the Morgan Stanley Capital International (MSCI) World Index (the “Index”) which returned 9.04%.

 

Factors Affecting Performance

 

·      The past year has been a difficult one for equity markets. Global economies were hit by significant credit losses, which led to increasingly tight liquidity, problems in the subprime mortgage sector and a declining U.S. housing market. Global equity markets have recently become dominated by sharp rises in a narrowing group of stocks displaying both earnings and price momentum. Outperformance has been largely concentrated in stocks connected to strength in commodity markets and China, as investors have sought refuge from a deteriorating outlook for the U.S. financial and consumer segments.

 

·      The Portfolio underperformed its Index for the period primarily due to weakness in the financials, materials and health care sectors. Stocks within the financials sector sold off strongly in the second half of the year as investor concerns regarding the credit markets increased and holdings within the banks and diversified financials segments steeply declined as part of the broader sell-off in the financials sector. While stocks in the materials sector continued to be supported by high demand in emerging markets and the Portfolio’s holdings within this sector performed well, the Portfolio was underweight in the sector and, on valuation grounds, did not hold some of the stronger performing Index stocks. The Portfolio’s overweight allocation to the health care sector also hindered relative returns through the lackluster performance of pharmaceuticals stocks. In response, adjustments were made within the pharmaceutical segment of the Portfolio to overweight those stocks which are believed to have attractive earnings potential and are less likely to be impacted by the expiration of key patents.

 

·      Despite these detractors, there were several areas that benefited relative performance. The Portfolio achieved strong gains within the consumer staples sector. Here, an overweight allocation and holdings within the food, beverage and tobacco group delivered positive returns. In the consumer discretionary sector, investment in the media segment greatly added to overall performance. Moreover, the Portfolio’s investments within the automobiles and components group helped relative returns. Select diversified holdings within the telecommunication services sector also produced strong returns, with both European and U.S. names delivering positive performance.

 

Management Strategies

 

·      As of the close of the period, the Portfolio remained defensively positioned. We continued to hold key overweight positions in the cash generative consumer staples sector – which is dominated by food, beverage and tobacco stocks. While adjustments were made to the stock positioning within the pharmaceutical sector, the overweight position was maintained, and the positions held in this sector are well diversified geographically. Conversely, the Portfolio held an underweight allocation in the more cyclical sectors, including a significant underweight in industrials, particularly in European capital goods stocks. We were also underweighted in the materials sector as well as in the information technology sector, with holdings concentrated in the hardware and equipment group.

 

·      We have carefully reviewed the Portfolio’s positioning within the financials sector, and are underweight relative to the Index. At the end of the period, the Portfolio was overweight the insurance group, underweight in diversified financials, and approximately market-weight in banks. Within the banks group, we have an overweight allocation in European banks as we believe they offer better value than the U.S. banks, where we remain underweight.

 

·      In these volatile market conditions, we believe that adhering to our highly disciplined and established investment process is very important. We continue to focus on identifying investment opportunities which meet our valuation criteria as we believe that this is the key to achieving outperformance over the longer term.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 and held for the entire six-month period.

 

42


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

Global Value Equity Portfolio

 

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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning
Account Value
July  1,2007

 

Ending
Account Value
December 31,
2007

 

Expenses Paid
During Period*
July 1, 2007 —
December 31,
2007

 

Class A

 

 

 

 

 

 

 

Actual

 

$ 1,000.00

 

$    969.70

 

$ 4.27

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,020.87

 

4.38

 

 

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

 

Actual

 

1,000.00

 

968.50

 

5.51

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,019.61

 

5.65

 

*

Expenses are equal to Class A and Class B annualized net expense ratios of 0.86% and 1.11%, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

*

Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

 

43


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments

 

Global Value Equity Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Common Stocks (98.7%)

 

 

 

 

 

Australia (2.4%)

 

 

 

 

 

Boral Ltd.

 

68,861

 

$

369

 

Foster’s Group Ltd.

 

91,018

 

522

 

Goodman Fielder Ltd.

 

(c)792,118

 

1,314

 

 

 

 

 

2,205

 

France (7.6%)

 

21,773

 

2,341

 

BNP Paribas S.A.

 

(c)10,614

 

1,921

 

Lafarge S.A.

 

11,830

 

1,081

 

Sanofi-Aventis S.A.

 

(c)18,223

 

1,512

 

Total S.A.

 

 

 

6,855

 

Germany (3.0%)

 

 

 

 

 

Bayerische Motoren Werke AG

 

15,869

 

980

 

Daimler AG

 

17,852

 

1,729

 

 

 

 

 

2,709

 

Ireland (2.1%)

 

 

 

 

 

Bank of Ireland

 

40,503

 

601

 

Kerry Group plc, Class A

 

40,764

 

1,288

 

 

 

 

 

1,889

 

Italy (1.1%)

 

 

 

 

 

ENI S.p.A.

 

28,134

 

1,025

 

Japan (10.2%)

 

 

 

 

 

Astellas Pharma, Inc.

 

15,100

 

659

 

Canon, Inc.

 

20,700

 

946

 

Kao Corp.

 

44,000

 

1,324

 

Keihin Corp.

 

73,400

 

1,312

 

Kuraray Co., Ltd.

 

36,000

 

435

 

Mitsui Sumitomo Insurance Co., Ltd.

 

61,000

 

595

 

Nissan Motor Co., Ltd.

 

(c)94,000

 

1,018

 

Sankyo Co.

 

24,400

 

1,131

 

Sumitomo Electric Industries Ltd.

 

(c)65,100

 

1,037

 

Takeda Pharmaceutical Co., Ltd.

 

12,800

 

748

 

 

 

 

 

9,205

 

Netherlands (4.7%)

 

 

 

 

 

Aegon N.V.

 

72,044

 

1,264

 

Koninklijke Philips Electronics N.V.

 

10,774

 

467

 

Unilever N.V. CVA

 

46,846

 

1,715

 

Wolters Kluwer N.V.

 

23,941

 

782

 

 

 

 

 

4,228

 

Norway (1.4%)

 

 

 

 

 

StatoilHydro ASA

 

41,321

 

1,278

 

Singapore (0.8%)

 

 

 

 

 

ComfortDelgro Corp., Ltd.

 

567,000

 

713

 

South Korea (0.9%)

 

 

 

 

 

SK Telecom Co., Ltd. ADR

 

(c)27,035

 

807

 

Spain (4.0%)

 

 

 

 

 

Banco Bilbao Vizcaya Argentaria S.A.

 

58,370

 

1,434

 

Telefonica S.A.

 

67,302

 

2,175

 

 

 

 

 

3,609

 

Sweden (1.0%)

 

 

 

 

 

Telefonaktiebolaget LM Ericsson, Class B

 

403,318

 

943

 

Switzerland (3.1%)

 

 

 

 

 

Novartis AG (Registered)

 

32,213

 

$

1,755

 

Syngenta AG (Registered)

 

1,855

 

471

 

UBS AG (Registered)

 

12,713

 

590

 

 

 

 

 

2,816

 

Taiwan (0.7%)

 

 

 

 

 

Chunghwa Telecom Co., Ltd. ADR

 

(c)29,537

 

624

 

United Kingdom (20.3%)

 

 

 

 

 

Barclays plc

 

186,034

 

1,884

 

Cadbury Schweppes plc

 

186,721

 

2,328

 

GlaxoSmithKline plc

 

34,683

 

880

 

Imperial Tobacco Group plc

 

43,882

 

2,389

 

Old Mutual plc

 

314,834

 

1,044

 

Reed Elsevier plc

 

88,128

 

1,186

 

Rolls-Royce Group plc

 

(a)92,707

 

1,002

 

Rolls-Royce Group plc, B Shares

 

5,391,986

 

12

 

Royal Bank of Scotland Group plc

 

137,649

 

1,238

 

Royal Dutch Shell plc ADR

 

21,817

 

1,837

 

Vodafone Group plc

 

296,286

 

1,104

 

WM Morrison Supermarkets plc

 

272,576

 

1,758

 

WPP Group plc

 

126,100

 

1,614

 

 

 

 

 

18,276

 

United States (35.4%)

 

 

 

 

 

Alcoa, Inc.

 

18,925

 

692

 

Altria Group, Inc.

 

43,299

 

3,273

 

American Electric Power Co., Inc.

 

10,665

 

497

 

American International Group, Inc.

 

16,774

 

978

 

Arrow Electronics, Inc.

 

(a)25,487

 

1,001

 

AT&T, Inc.

 

14,301

 

594

 

Bank of New York/Mellon Corp. (The)

 

29,562

 

1,441

 

Chevron Corp.

 

20,308

 

1,895

 

Citigroup, Inc.

 

32,216

 

948

 

Covidien Ltd.

 

(c)22,021

 

975

 

Dominion Resources, Inc.

 

16,784

 

796

 

EMC Corp.

 

(a)62,146

 

1,152

 

Freddie Mac

 

28,686

 

977

 

Hewlett-Packard Co.

 

21,487

 

1,085

 

Illinois Tool Works, Inc.

 

(c)16,963

 

908

 

Ingersoll Rand Co., Ltd. Class A

 

(c)19,530

 

908

 

International Business Machines Corp.

 

20,217

 

2,185

 

Marsh & McClennan Cos., Inc.

 

43,610

 

1,154

 

Merrill Lynch & Co., Inc.

 

20,548

 

1,103

 

Peabody Energy Corp.

 

21,559

 

1,329

 

Pfizer, Inc.

 

29,596

 

673

 

Schering-Plough Corp.

 

33,767

 

900

 

Tyco International Ltd.

 

(c)21,884

 

868

 

UnitedHealth Group, Inc.

 

(c)35,924

 

2,091

 

Verizon Communications, Inc.

 

20,858

 

911

 

Viacom, Inc., Class B

 

(a)(c)9,551

 

419

 

Weyerhauser Co.

 

6,233

 

460

 

Wyeth

 

38,210

 

1,689

 

 

 

 

 

31,902

 

Total Common Stocks (Cost $68,874)

 

 

 

89,084

 

 

44

The accompanying notes are an integral part of the financial statements.

 


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Global Value Equity Portfolio

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Investment Company (0.3%)

 

 

 

 

 

iShares MSCI World Index Fund (Cost $273)

 

8,061

 

$

271

 

 

 

 

 

 

 

 

 

Face
Amount
(000)

 

 

 

Short-Term Investments (6.0%)

 

 

 

 

 

Short-Term Debt Securities held as Collateral on Loaned Securities (5.1%)

 

 

 

 

 

Alliance & Leicester plc,

 

 

 

 

 

5.26%, 9/2/08

 

$

(h)138

 

138

 

Bancaja,

 

 

 

 

 

5.35%, 8/12/08

 

69

 

69

 

Bank of New York Co., Inc.,

 

 

 

 

 

5.24%, 8/8/08

 

(h)69

 

69

 

BASF AG,

 

 

 

 

 

5.18%, 8/19/08

 

(h)69

 

69

 

BNP Paribas plc,

 

 

 

 

 

4.90%, 5/19/08

 

(h)138

 

138

 

CAM US Finance S.A. Unipersonal,

 

 

 

 

 

5.24%, 7/25/08

 

(h)276

 

276

 

Canadian Imperial Bank of Commerce, New York,
4.42%, 7/28/08

 

(h)138

 

138

 

CC USA, Inc.,

 

 

 

 

 

3.89%, 1/28/08

 

(h)69

 

69

 

CIT Group Holdings,

 

 

 

 

 

5.23%, 6/18/08

 

(h)248

 

248

 

Citigroup Global Markets Holdings, Inc.,

 

 

 

 

 

4.51%, 1/2/08

 

940

 

940

 

Credit Suisse First Boston, New York,

 

 

 

 

 

4.32%, 3/14/08

 

(h)138

 

138

 

First Tennessee Bank,

 

 

 

 

 

5.05%, 8/15/08

 

(h)69

 

69

 

5.06%, 8/15/08

 

(h)276

 

276

 

Goldman Sachs Group, Inc.,

 

 

 

 

 

4.62%, 2/13/09

 

(h)130

 

130

 

5.10%, 9/12/08

 

(h)69

 

69

 

HSBC Finance Corp.,

 

 

 

 

 

5.26%, 8/5/08

 

(h)69

 

69

 

IBM Corp.,

 

 

 

 

 

5.27%, 9/8/08

 

(h)276

 

276

 

Lehman Brothers, Inc.,

 

 

 

 

 

4.49%, 1/2/08

 

117

 

117

 

Macquarie Bank Ltd.,

 

 

 

 

 

4.95%, 8/20/08

 

(h)138

 

138

 

Metropolitan Life Global Funding,

 

 

 

 

 

4.89%, 8/21/08

 

(h)207

 

207

 

National Bank of Canada,

 

 

 

 

 

5.21%, 4/2/08

 

(h)276

 

276

 

National Rural Utilities Cooperative Finance Corp.,

 

 

 

 

 

5.24%, 9/2/08

 

(h)276

 

276

 

Nationwide Building Society,

 

 

 

 

 

4.92%, 7/28/08

 

(h)160

 

160

 

Unicredito Italiano Bank (Ireland) plc,

 

 

 

 

 

5.04%, 8/14/08

 

(h)152

 

152

 

5.26%, 8/8/08

 

(h)97

 

97

 

 

 

 

 

4,604

 

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Investment Company (0.9%)

 

 

 

 

 

Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class

 

(o)783,195

 

$

783

 

Total Short-Term Investments (Cost $5,387)

 

 

 

5,387

 

Total Investments (105.0%) (Cost $74,534) — including $4,408 of Securities Loaned

 

 

 

(v) 94,742

 

Liabilities in Excess of Other Assets (-5.0%)

 

 

 

(4,508)

 

Net Assets (100%)

 

 

 

$

90,234

 

 

(a)           Non-income producing security.

(c)           All or a portion of security on loan at December 31, 2007.

(h)           Variable/Floating Rate Security — Interest rate changes on these instruments are based on changes in a designated rate. The rates shown are those in effect on December 31, 2007.

(o)           See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class.

(v)           The approximate market value and percentage of the investments, $54,186,000 and 57.2%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note A within the Notes to Financial Statements.

ADR       American Depositary Receipt

CVA       Certificaten Van Aandelen

 

Foreign Currency Exchange Contract Information:

 

The Portfolio had the following foreign currency exchange contract(s) open at period end:

 

Currency
to
Deliver
(000)

 

Value
(000)

 

Settlement
Date

 

In
Exchange
For
(000)

 

Value
(000)

 

Net
Unrealized
Appreciation
(Depreciation)
(000)

 

GBP

2,050

 

 

 

$4,073

 

 

3/12/08

 

USD

4,172

 

 

$4,172

 

 

 

$99

 

 

 

GBP

—

British Pound

USD

—

United States Dollar

 

The accompanying notes are an integral part of the financial statements.

45

 


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (unaudited)

 

International Equity Portfolio

 

 

 

* Minimum Investment

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares based upon its different inception date and will be negatively impacted by additional fees assessed to this class.

 

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)

 

9.84

%

17.93

%

11.57

%

11.86

%

MSCI EAFE Index

 

11.17

 

21.59

 

8.66

 

6.43

 

Lipper International Large-Cap Core Funds Index

 

12.51

 

20.03

 

9.17

 

9.26

 

 

 

 

 

 

 

 

 

 

 

Portfolio – Class B (5)

 

9.52

 

17.63

 

11.32

 

12.09

 

MSCI EAFE Index

 

11.17

 

21.59

 

8.66

 

7.85

 

Lipper International Large-Cap Core Funds Index

 

12.51

 

20.03

 

9.17

 

9.60

 

 

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 www.morganstanley.com/msim. 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.

 

(1)              The Morgan Stanley Capital International (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 term “free float” represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. 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. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)              The Lipper 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 30 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 fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and/or reimbursements, total returns would have been lower. Fee waivers and/or expense 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 operations 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.

 

The International Equity Portfolio (the “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,

 

46


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (cont’d)

 

International Equity Portfolio

 

restrictions on foreign investments, less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability. The risks of investing in emerging-market countries are greater than the risks generally associated with foreign investments.

 

Performance

 

For the year ended December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of 9.84% net of fees, for Class A shares and 9.52%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares underperformed against its benchmark, the Morgan Stanley Capital International (MSCI) EAFE Index (the “Index”) which returned 11.17%.

 

Factors Affecting Performance

 

·                  The Index fell by 2.3% in December, bringing the quarterly return to -1.8%, and reducing the Index return to 11.2% for 2007. The depreciation of the U.S. dollar was responsible for most of these gains as the Index rose just 3.5% in local currency terms for the year, in what became an increasingly schizophrenic and volatile trading environment. U.S. dollar depreciation was concentrated in the final four months of the year as credit concerns emerged and left the U.S. dollar down 10.9% against the Euro and 6.7% against the Yen for the year as a whole. Within the EAFE countries, there was considerable variation in market returns, from despondency in Japan (-4.2% USD), to elation in Hong Kong (+42%). Among European markets there was also considerable variation (Germany +35.2%, France + 13.2%, Italy +6.1% and Ireland -20%). Those markets with large exposures to financials, such as Italy or Ireland, did poorly, whereas markets with significant exposures to capital goods and material stocks, such as Germany, did well. The performance of Hong Kong’s market was a barometer for the continued strong demand and economic growth among the emerging markets, and also reflected its proximity to the group’s most dynamic constituent, China.

 

·                  Conversely, Japan’s performance was due to homegrown weakness, but anomalous in so far as there is no contagion from Western credit markets in either its financial system or its economy.

 

·                  The polarity in performance is even clearer when surveying by sector. The materials sector rose 32% in U.S. dollar terms for the year. Capital goods rose 22%, energy was up 22%, and utilities (which are to some degree an oil proxy) rose 24%. Conversely, banks fell 3.4% and retail declined 0.4% over the year.

 

Telecommunications (+28%) and consumer staples (+24%) also rose due to their defensive characteristics.

 

Management Strategies

 

·                  The Portfolio enjoyed bursts of strong relative performance during the few periods of market stress, and outperformed modestly in the schizophrenic final quarter. The Portfolio finished the year behind the Index for 2007 despite our prognosis relating to western credit markets and consequent major underweight allocation to western financial stocks. While this position did boost relative performance, several factors weighed against us. The first and most important was the continued momentum in cyclicals and our underweight to this sector. We have been concerned about valuations here for some time but the market has not shared our concerns, and these stocks performed best in 2007. The second factor was the exceptionally poor performance of Japan as a whole, and of Japanese financials in particular, where we are overweight versus the Index. Third was stock selection in the technology sector. We believe our valuation disagreements with the market could be a source of outperformance.

 

·                  We believe that equity markets have shrugged off credit market concerns in a most extraordinary and unsustainable way. Western economies – not just subprime borrowers in the U.S. – have lived off lending practices driven by the insatiable appetites of the structured debt markets for years. These markets are now shut and we are seeing considerable funding shortfalls emerge in the real economy; for companies (especially many banks and those in real estate) and individuals (a substantial margin of consumers in the U.S., U.K., Spain and Ireland) whose past activity has resulted in massive indebtedness. We believe that this will result in a major slowdown, yet the valuation of most cyclical stocks in the West are saying just the opposite. The pricing of profits as if they were at the bottom rather than the peak of the cycle is a phenomenon we find widespread – outside of Japan. In isolated areas where bear markets are well established, such as U.K. property, U.K. retail, U.K. housebuilding and in Spanish property, we are investigating high quality companies that have been sold off as potential new investment opportunities. We haven’t seen bear markets like these for many years and are excited as they often provide the best new ideas. These ideas add to an already large position in a “forgotten” bear market – Japan. Today we believe Japan equity is attractively valued: 45% of TOPIX stocks sell below book value, and the dividend yield of the TOPIX index exceeds the

 

47


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Investment Overview (cont’d)

 

International Equity Portfolio

 

bond yield. Critically, the Japanese have generally not engaged in western credit practices either domestically or abroad and therefore as a financial sector and as an economy are not directly exposed to its unwinding. Elsewhere in Japan we find cyclicals de-rated, defensives attractively valued and, new management practices that are moving Japan, albeit slowly, to a much more shareholder-oriented stance. Consequently the Portfolio has a 24% allocation to Japan, its highest ever in both absolute and relative terms.

 

·                  Our largest positions in the Portfolio remain those with highly predictable free cash flow streams in dependable market positions with what we believe to be excellent management and valuations that still look attractive relative to bonds. We have held some of these for a long period but believe they will remain rewarding compounders over the long term, an attribute lacking elsewhere in an expensive, fragile market.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning Account Value

July 1, 2007

Ending
Account Value

December 31,

2007

Expenses Paid

During Period*

July 1, 2007 —
December 31,
 2007

 

Class A

 

 

 

 

 

 

 

Actual

 

$1,000.00

 

$    995.80

 

$4.63

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,020.57

 

4.69

 

 

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

 

Actual

 

1,000.00

 

994.30

 

5.88

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,019.31

 

5.96

 

 

*

Expenses are equal to Class A and Class B annualized net expense ratios of 0.92% and 1.17%, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

48


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Investment Overview (cont’d)

 

International Equity Portfolio

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

*       Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

49


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments

 

International Equity Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Common Stocks (99.1%)

 

 

 

 

Australia (1.7%)

 

 

 

 

Foster's Group Ltd.

 

8,153,757

 

$

46,792

Orica Ltd.

 

(c)658,945

 

18,298

Santos Ltd.

 

2,976,309

 

36,940

 

 

 

 

102,030

Austria (0.8%)

 

 

 

 

Telekom Austria AG

 

1,808,117

 

50,108

Belgium (2.5%)

 

 

 

 

Fortis

 

3,185,452

 

83,122

Fortis Strip VVPR

 

(a)694,410

 

10

KBC Groep N.V.

 

521,576

 

72,846

 

 

 

 

155,978

Canada (0.7%)

 

 

 

 

EnCana Corp.

 

661,087

 

45,213

France (5.8%)

 

 

 

 

ArcelorMittal

 

(c)448,765

 

34,506

BNP Paribas

 

436,090

 

46,877

France Telecom S.A.

 

(c)946,163

 

33,955

Lafarge S.A.

 

206,484

 

37,377

Legrand S.A.

 

(c)2,346,378

 

79,698

Total S.A.

 

(c)1,512,232

 

125,500

 

 

 

 

357,913

Germany (8.8%)

 

 

 

 

Bayer AG

 

(c)1,343,965

 

122,535

Bayerische Motoren Werke AG

 

1,077,974

 

66,566

Daimler AG

 

721,995

 

69,934

E.ON AG

 

335,034

 

71,136

Porsche Automobil Holding SE (Non-Voting Shares)

 

39,330

 

79,258

RWE AG

 

(c)946,045

 

132,569

 

 

 

 

541,998

Greece (1.1%)

 

 

 

 

OPAP S.A.

 

1,721,820

 

68,744

Ireland (1.0%)

 

 

 

 

CRH plc

 

1,764,254

 

61,256

Italy (2.6%)

 

 

 

 

ENI S.p.A.

 

2,562,401

 

93,366

UniCredito Italiano S.p.A.

 

7,993,709

 

66,527

 

 

 

 

159,893

Japan (24.5%)

 

 

 

 

Asatsu-DK, Inc.

 

(c)741,485

 

20,639

Astellas Pharma, Inc.

 

1,696,800

 

74,027

Canon, Inc.

 

(c)1,167,500

 

53,344

Central Japan Railway Co.

 

2,986

 

25,401

Chiba Bank Ltd. (The)

 

4,160,000

 

33,704

Fukuoka Financial Group, Inc.

 

6,003,000

 

35,804

Hoya Corp.

 

(c)1,321,600

 

42,179

JSR Corp.

 

(c)1,294,200

 

33,479

Kao Corp.

 

4,205,000

 

126,530

Keyence Corp.

 

(c)450,400

 

110,339

Kyocera Corp.

 

364,300

 

31,876

Mitsubishi Electric Corp.

 

5,125,000

 

52,930

Mitsubishi Estate Co., Ltd.

 

1,359,000

 

$

32,576

Mitsui Sumitomo Insurance Co., Ltd.

 

10,102,000

 

98,600

NGK Spark Plug Co., Ltd.

 

(c)1,880,000

 

32,820

Nitto Denko Corp.

 

(c)1,242,400

 

65,595

NTT DoCoMo, Inc.

 

56,095

 

92,942

Omron Corp.

 

2,045,000

 

48,404

Oriental Land Co., Ltd.

 

(c)1,028,700

 

62,093

Rohm Co., Ltd.

 

381,900

 

33,240

Sega Sammy Holdings, Inc.

 

(c)1,496,300

 

18,680

Shinsei Bank Ltd.

 

(c)10,570,000

 

38,860

Sumitomo Mitsui Financial Group, Inc.

 

(c)17,650

 

131,336

T&D Holdings, Inc.

 

(c)2,125,450

 

110,014

Taiyo Nippon Sanso Corp.

 

(c)5,375,000

 

50,222

Teijin Ltd.

 

9,909,000

 

42,355

 

 

 

 

1,497,989

Netherlands (5.8%)

 

 

 

 

Akzo Nobel N.V.

 

943,679

 

75,149

CSM N.V.

 

(c)1,538,660

 

51,817

ING Groep N.V. CVA

 

1,910,264

 

74,562

Unilever N.V. CVA

 

4,194,501

 

153,572

 

 

 

 

355,100

Norway (0.4%)

 

 

 

 

StatoilHydro ASA

 

715,103

 

22,110

Spain (2.1%)

 

 

 

 

Telefonica S.A.

 

(c)3,925,960

 

126,876

Sweden (1.4%)

 

 

 

 

Telefonaktiebolaget LM Ericsson, Class B

 

36,615,687

 

85,606

Switzerland (9.5%)

 

 

 

 

Givaudan S.A. (Registered)

 

36,021

 

34,609

Holcim Ltd. (Registered)

 

1,221,923

 

129,834

Nestle S.A. (Registered)

 

468,057

 

214,470

Novartis AG (Registered)

 

1,873,039

 

102,040

Roche Holding AG (Genusschein)

 

483,317

 

83,252

UBS AG (Registered)

 

351,654

 

16,331

 

 

 

 

580,536

United Kingdom (30.4%)

 

 

 

 

AstraZeneca plc

 

655,979

 

28,186

BHP Billiton plc

 

1,747,957

 

53,841

BP plc

 

8,115,190

 

99,245

British American Tobacco plc

 

6,016,751

 

236,922

British Land Co. plc REIT

 

1,573,050

 

29,321

Cadbury Schweppes plc

 

16,409,745

 

204,555

Drax Group plc

 

4,984,243

 

59,611

GlaxoSmithKline plc

 

1,839,751

 

46,687

Hays plc

 

38,062,709

 

87,008

Imperial Tobacco Group plc

 

4,207,351

 

229,066

Intercontinental Hotels Group plc

 

3,297,802

 

57,561

Johnston Press plc

 

1,985,334

 

10,767

Ladbrokes plc

 

12,722,738

 

81,255

Lonmin plc

 

284,079

 

17,527

National Grid plc

 

3,666,874

 

60,625

Reckitt Benckiser plc

 

2,057,630

 

118,867

Reed Elsevier plc

 

7,630,622

 

102,669

Royal Dutch Shell plc, Class A

 

1,856,273

 

78,026

 

50

The accompanying notes are an integral part of the financial statements.

 


 

 

2007 Annual Report

 

 

 

December, 31 2007

 

Portfolio of Investments (cont’d)

 

International Equity Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Scottish & Southern Energy plc

 

1,666,771

 

$

54,141

Smiths Group plc

 

3,707,206

 

74,315

Vodafone Group plc

 

34,690,518

 

129,292

 

 

 

 

1,859,487

Total Common Stocks (Cost $4,821,389)

 

 

 

6,070,837

 

 

 

Face

 

 

 

 

Amount

 

 

 

 

(000)

 

 

Short-Term Investments (9.4%)

 

 

 

 

Short-Term Debt Securities held as Collateral on Loaned Securities (7.6%)

 

 

 

 

Alliance & Leicester plc,

 

 

 

 

5.26%, 9/2/08

 

$

(h)14,035

 

14,035

Bancaja,

 

 

 

 

5.35%, 8/12/08

 

7,017

 

7,017

Bank of New York Co., Inc.,

 

 

 

 

5.24%, 8/8/08

 

(h)7,017

 

7,017

BASF AG,

 

 

 

 

5.18%, 8/19/08

 

(h)7,017

 

7,017

BNP Paribas plc,

 

 

 

 

4.90%, 5/19/08

 

(h)14,035

 

14,035

CAM US Finance S.A. Unipersonal,

 

 

 

 

5.24%, 7/25/08

 

(h)28,070

 

28,070

Canadian Imperial Bank of Commerce, New York,

 

 

 

 

4.42%, 7/28/08

 

(h)14,035

 

14,035

CC USA, Inc.,

 

 

 

 

3.89%, 1/28/08

 

(h)7,014

 

7,014

CIT Group Holdings,

 

 

 

 

5.23%, 6/18/08

 

(h)25,263

 

25,263

Citigroup Global Markets Holdings, Inc.,

 

 

 

 

4.51%, 1/2/08

 

95,674

 

95,674

Credit Suisse First Boston, New York,

 

 

 

 

4.32%, 3/14/08

 

(h)14,035

 

14,035

First Tennessee Bank,

 

 

 

 

5.05%, 8/15/08

 

(h)7,017

 

7,017

5.06%, 8/15/08

 

(h)28,068

 

28,068

Goldman Sachs Group, Inc.,

 

 

 

 

4.62%, 2/13/09

 

(h)13,193

 

13,193

5.10%, 9/12/08

 

(h)7,017

 

7,017

HSBC Finance Corp.,

 

 

 

 

5.26%, 8/5/08

 

(h)7,017

 

7,017

IBM Corp.,

 

 

 

 

5.27%, 9/8/08

 

(h)28,069

 

28,069

Lehman Brothers, Inc.,

 

 

 

 

4.49%, 1/2/08

 

11,969

 

11,969

Macquarie Bank Ltd.,

 

 

 

 

4.95%, 8/20/08

 

(h)14,035

 

14,035

Metropolitan Life Global Funding,

 

 

 

 

4.89%, 8/21/08

 

(h)21,052

 

21,052

National Bank of Canada,

 

 

 

 

5.21%, 4/2/08

 

(h)28,067

 

28,067

National Rural Utilities Cooperative Finance Corp.,

 

 

 

 

5.24%, 9/2/08

 

(h)28,069

 

28,069

 

 

 

Face

 

 

 

 

Amount

 

Value

 

 

(000)

 

(000)

Nationwide Building Society,

 

 

 

 

4.92%, 7/28/08

 

$

(h)16,280

 

$

16,280

Unicredito Italiano Bank (Ireland) plc,

 

 

 

 

5.04%, 8/14/08

 

(h)15,439

 

15,439

5.26%, 8/8/08

 

(h)9,824

 

9,824

 

 

 

 

468,328

 

 

 

Shares

 

 

Investment Company (1.8%)

 

 

 

 

Morgan Stanley Institutional Liquidity

 

 

 

 

Money Market Portfolio

 

 

 

 

— Institutional Class

 

(o)108,256,406

 

108,256

Total Short-Term Investments (Cost $576,584)

 

 

 

576,584

Total Investments (108.5%) (Cost $5,397,973) — including $448,800 of Securities Loaned

 

 

 

(v) 6,647,421

Liabilities in Excess of Other Assets (-8.5%)

 

 

 

(522,019)

Net Assets (100%)

 

 

 

$ 6,125,402

 

(a)

 

Non-income producing security.

(c)

 

All or portion of security on loan at December 31, 2007.

(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, 2007.

(o)

 

See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Money Market Portfolio -— Institutional Class.

(v)

 

The approximate market value and percentage of the investments, $6,025,623,000 and 90.6%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note A within the Notes to Financial Statements.

CVA

 

Certificaten Van Aandelen

REIT

 

Real Estate Investment Trust

 

 

 

Foreign Currency Exchange Contract Information:

 

The Portfolio had the following foreign currency exchange contract(s) open at period end:

 

Currency
to
Deliver
(000)

 

Value
(000)

 

Settlement
Date

 

In
Exchange
For
(000)

 

Value
(000)

 

Net
Unrealized
Appreciation
(Depreciation)
(000)

 

EUR

49

 

 

$     72

 

 

1/2/08

 

USD

72

 

 

$    72

 

 

 

$ @

—

 

EUR

1,131

 

 

1,654

 

 

1/2/08

 

USD

1,664

 

 

1,664

 

 

 

10

 

 

NOK

1,322

 

 

243

 

 

1/2/08

 

USD

237

 

 

237

 

 

 

(6

)

 

SEK

1,139

 

 

176

 

 

1/2/08

 

USD

173

 

 

173

 

 

 

(3

)

 

 

 

 

 

$2,145

 

 

 

 

 

 

 

 

$2,146

 

 

 

$   1

 

 

 

EUR

— Euro

NOK

— Norwegian Krone

SEK

— Swedish Krona

USD

— United States Dollar

@

Value is less than $500.

 

The accompanying notes are an integral part of the financial statements.

51

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (unaudited)

 

International Growth Active Extension Portfolio

 

 

 

*   Minimum Investment

** Commenced operations on July 31, 2007

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the Morgan Stanley Capital International (MSCI) EAFE Index(1) and the Lipper International Large-Cap Growth Funds Index(2)

 

 

 

Total Returns

(3)

 

 

 

Cumulative

 

 

 

Since

 

 

 

Inception

(5)

 

 

 

 

Portfolio – Class A (4)

 

6.60

%

MSCI EAFE Index

 

1.89

 

Lipper International Large-Cap Growth Funds Index

 

5.35

 

 

 

 

 

Portfolio – Class B (4)

 

6.50

 

MSCI EAFE Index

 

1.89

 

Lipper International Large-Cap Growth Funds Index

 

5.35

 

 

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 www.morganstanley.com/msim. 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.

 

(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 term “free float” represents the portion of shares outstanding that are deemed to be available for purhcase in the public equity markets by investors. 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. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)

 

The Lipper International Large-Cap Growth Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper International 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 10 funds represented in this Index. As of the date of this report, the Portfolio is in the Lipper International Large-Cap Growth Funds classification.

(3)

 

Total returns for the Portfolio reflect fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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 31, 2007

(5)

 

For comparative purposes, cumulative 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.

 

The International Growth Active Extension Portfolio (the “Portfolio”) seeks long-term capital appreciation with a secondary objective of income. The Adviser seeks to construct a diversified portfolio primarily consisting of equity securities of issuers located in countries other than the United States using a quantitative security selection model and fundamental

 

52


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Investment Overview (cont’d)

 

International Growth Active Extension Portfolio

 

analysis. In addition to purchasing equity securities (i.e., taking long positions), the Adviser attempts to identify stocks that it believes will underperform relative to the average stock in the MSCI EAFE Index and will sell these securities short on behalf of the Portfolio.

 

Investments in foreign markets entail special risks such as currency, political, economic, and market risks. The risks of investing in emerging-market countries are greater than the risks generally associated with foreign investments. Short sales expose the Portfolio to the risk that it will be required to cover its short positions at a time when securities have appreciated in value, thus resulting in a loss to the portfolio. Leverage may cause the Portfolio’s net asset value to be more volatile than if it had not been leveraged because leverage tends to magnify the effect of any increases or decreases in the value of Portfolio’s securities. The Portfolio cannot assure you that the use of leverage will result in a higher return on your investment.

 

Performance

 

For the period from July 31, 2007 (commencement of operations) to December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of 6.60%, net of fees, for Class A shares and 6.50%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares outperformed against its benchmark, the MSCI EAFE Index (the “Index”) which returned 1.89% for the same period.

 

Factors Affecting Performance

 

· 

Performance in the international equity markets in 2007 was quite volatile, fueled by tightening credit markets globally, slowing corporate earnings growth and a fragile U.S. economy. Despite the uncertain market conditions, most major international equity market indices (excluding Japan) outpaced U.S. returns in U.S. dollar terms - the MSCI EAFE Index posted a total return of 11.2% vs. 5.5% for the S&P 500® Index in 2007.

 

 

·

After the sharp sell-off in July and August, driven primarily by global credit market concerns, international equity markets recovered during September and appeared to stabilize as investors moved away from the increasingly risky financial sector and into more defensive sectors such as consumer staples and utilities. Additionally, investors in foreign shares benefited from the decision by the Federal Reserve to lower the target federal funds rate in September, October, and December after two years of rate tightening, which caused continued weakness in the U.S. dollar. The U.S. dollar lost 9.6% versus the Euro, declined 6.4% versus the Japanese Yen and weakened 1.4% versus the British Pound for the year.

 

 

·

Since its inception on July 31, 2007, the Portfolio outperformed the Index. The Portfolio’s strong relative performance was due to security selections in the Asia/ Pacific ex-Japan region and the emerging markets. In Asia/Pacific ex-Japan region, returns were driven by investment in a mining company and an oil rig manufacturer. Both holdings greatly benefitted from robust global economic growth and surging demand for oil and other commodities, and reported record earnings in 2007.

 

 

·

Within emerging markets, one of the Portfolio’s top performers was a Beijing-based department store chain that witnessed an exponential rise in profits during the year from increased Chinese consumer spending. In the European region, a short position in a global telecommunications equipment firm significantly added to the Portfolio’s performance.

 

 

·

On a sector basis, for the period, the Portfolio outperformed the Index in eight out of ten sectors, led by the outsized gains in the utilities and industrials sector. Rising power prices amongst utility providers in Germany and the U.K. benefitted relative returns, and a short position in a Spanish building company also helped.

 

 

·

Conversely, a company-specific event in the information technology sector diminished relative returns, and an underweight allocation to the materials sectors along with a limited exposure to steel companies also hindered performance.

 

Management Strategies

 

·

 

While the initial impact of the subprime crisis was directly on the U.S. economy, the surprise of 2007 was the subsequent global scale of the credit shock. Given the continued weakness in the U.S. housing market, declining consumer spending, and diminishing corporate earnings, economic growth in the Euro-zone and Japan may slow as Europe’s financial services sector and Japanese banks face further potential write-downs on their debt holdings tied to the U.S. subprime mortgage market.

 

 

 

·

 

We believe the Asia Pacific ex-Japan region and the emerging markets are in potentially better shape to weather current financial difficulties. Many governments of these regions have been paying off public debt, are running budget and/or current account surpluses and have strong foreign exchange reserves. According to the Financial Times, emerging markets as a group are a net creditor to the U.S. Based on International Monetary Fund (IMF) estimates, emerging markets already accounted for 47% of the global GDP growth in 2007. As certain parts of the world decouple from the U.S. economy, we will continue to emphasize building diversified portfolios across regions.

 

53


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (cont’d)

 

International Growth Active Extension Portfolio

 

·

 

Additionally, 2007 was the first year in the past eight years that the MSCI EAFE Growth Index outperformed the broad-based MSCI EAFE Index. As continued higher borrowing costs translate into higher costs of capital which could slow spending, we believe corporate earnings growth will slow globally. With earnings growth becoming more scarce, we think investors may continue to focus on higher quality growth companies,with lower leverage and strong balance sheets which already comprise our portfolio. We believe that the Portfolio is well positioned for the potential global economic slowdown

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 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.

 

Please note that both classes within the Portfolio commenced operations on July 31, 2007, however, expenses did not begin accruing until August 1, 2007; therefore, ‘‘Actual Expenses Paid During Period” reflect activity from August 1, 2007 through December 31, 2007.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that while the Portfolio commenced operations on July 31, 2007, the “Hypothetical Expenses Paid During the Period” reflect projected activity for the full six month period for the purposes of comparability. This projection assumes that the annualized expense ratio for the period was in effect during the period from July 1, 2007 through December 31, 2007.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning
Account Value*

 

Ending
Account Value
December 31,
2007

 

Expenses Paid
During Period*
August 1, 2007
— December
31, 2007

 

Class A

 

 

 

 

 

 

 

Actual

 

$1,000.00

 

$1,066.00

 

$

9.48

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,014.17

 

 

11.12

 

 

 

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

 

 

Actual

 

1,000.00

 

1,065.00

 

 

10.56

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,012.91

 

 

12.38

 

* Expenses are equal to Class A and Class B annualized net expense ratios of 2.19% and 2.44%, respectively, multiplied by the average account value over the period, multiplied by 153/365 (to reflect the actual days in the period for the actual example) and multiplied by 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

* Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

54


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments

 

International Growth Active Extension Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Long Positions (125.4%)

 

 

 

 

Common Stocks (125.4%)

 

 

 

 

Australia (1.9%)

 

 

 

 

BHP Billiton Ltd.

 

(q)5,872

 

$       206

Austria (5.5%)

 

 

 

 

Andritz AG

 

(q)3,153

 

189

Erste Bank der Oesterreichischen Sparkassen AG

 

(q)3,152

 

224

Wiener Staedtische Allgemeine Versicherung AG

 

2,193

 

177

 

 

 

 

590

Canada (3.1%)

 

 

 

 

EnCana Corp.

 

(q)2,500

 

171

Research In Motion Ltd.

 

(a)1,400

 

159

 

 

 

 

330

Egypt (1.7%)

 

 

 

 

Orascom Construction Industries GDR

 

886

 

184

Finland 5.9%)

 

 

 

 

Fortum Oyj

 

(q)6,157

 

276

Kone Oyj, Class B

 

(q)3,069

 

213

Neste Oil Oyj

 

(q)3,978

 

139

 

 

 

 

628

France (12.9%)

 

 

 

 

AXA S.A.

 

(q)5,570

 

222

BNP Paribas

 

(q)1,618

 

174

Cie Generale d'Optique Essilor International S.A.

 

(q)3,423

 

218

LVMH Moet Hennessy Louis Vuitton S.A.

 

(q)1,184

 

142

Schneider Electric S.A.

 

(q)1,331

 

178

Total S.A.

 

(q)3,677

 

305

Vallourec

 

517

 

139

 

 

 

 

1,378

Germany (11.6%)

 

 

 

 

Bayer AG

 

2,081

 

190

Celesio AG

 

2,672

 

165

Continental AG

 

1,649

 

214

E.ON AG

 

1,650

 

350

SAP AG

 

2,704

 

140

SGL Carbon AG

 

(a)3,301

 

177

 

 

 

 

1,236

Greece (5.4%)

 

 

 

 

Coca-Cola Hellenic Bottling Co. S.A.

 

6,760

 

292

National Bank of Greece S.A.

 

4,055

 

279

 

 

 

 

571

Hong Kong (9.5%)

 

 

 

 

Bank of East Asia Ltd.

 

30,400

 

206

China Resources Power Holdings Co.

 

52,000

 

176

CNOOC Ltd.

 

103,000

 

173

Esprit Holdings Ltd.

 

13,600

 

200

Lee & Man Paper Manufacturing Ltd.

 

13,200

 

58

Parkson Retail Group Ltd.

 

16,500

 

197

 

 

 

 

1,010

India (2.0%)

 

 

 

 

ICICI Bank Ltd. ADR

 

(q)3,500

 

215

Ireland (2.8%)

 

 

 

 

Allied Irish Banks plc

 

(q)7,728

 

177

CRH plc

 

(q)3,539

 

$       123

 

 

 

 

300

Israel (1.7%)

 

 

 

 

Teva Pharmaceutical Industries Ltd. ADR

 

(q)3,800

 

177

Japan (17.0%)

 

 

 

 

Canon, Inc.

 

(q)3,300

 

151

Daikin Industries Ltd.

 

4,000

 

223

Daiwa Securities Group, Inc.

 

(q)12,000

 

110

Kobe Steel Ltd.

 

(q)44,000

 

143

Komatsu Ltd.

 

6,300

 

170

Sharp Corp.

 

(q)8,000

 

143

Shin-Etsu Chemical Co., Ltd.

 

(q)2,000

 

125

Sony Corp.

 

(q)3,000

 

163

Sumitomo Realty & Development Co, Ltd.

 

(q)6,000

 

148

Terumo Corp.

 

(q)3,300

 

174

Toray Industries, Inc.

 

(q)18,000

 

140

Toyota Motor Corp.

 

(q)2,300

 

124

 

 

 

 

1,814

Luxembourg (1.8%)

 

 

 

 

Millicom International Cellular S.A.

 

(a)(q)1,600

 

189

Mexico (3.2%)

 

 

 

 

America Movil S.A.B. de C.V., Class L ADR

 

(q)2,800

 

172

Wal-Mart de Mexico S.A.B. de C.V. ADR

 

(q)4,700

 

164

 

 

 

 

336

Netherlands (1.6%)

 

 

 

 

Reed Elsevier N.V.

 

8,351

 

166

Norway (2.8%)

 

 

 

 

Telenor ASA

 

(a)(q)8,581

 

203

TGS Nopec Geophysical Co. ASA

 

(a)(q)7,122

 

96

 

 

 

 

299

Portugal (2.5%)

 

 

 

 

Banco Espirito Santo S.A. (Registered)

 

12,105

 

264

Singapore (3.7%)

 

 

 

 

DBS Group Holdings Ltd.

 

13,000

 

184

Keppel Corp. Ltd.

 

24,000

 

215

 

 

 

 

399

Spain (1.6%)

 

 

 

 

Banco Santander S.A.

 

8,039

 

174

Sweden (2.7%)

 

 

 

 

Getinge AB, Class B

 

(q)10,788

 

288

Switzerland (10.7%)

 

 

 

 

ABB Ltd. (Registered)

 

(q)9,689

 

279

EFG International (Registered)

 

(q)4,380

 

177

Nestle S.A. (Registered)

 

(q)609

 

279

Novartis AG (Registered)

 

(q)2,212

 

120

Roche Holding AG (Genusschein)

 

(q)767

 

132

SGS S.A. (Registered)

 

(q)129

 

152

 

 

 

 

1,139

Taiwan (1.4%)

 

 

 

 

Delta Electronics, Inc.

 

44,000

 

149

United Kingdom (12.4%)

 

 

 

 

Barclays plc

 

(q)12,525

 

127

Capita Group plc

 

11,145

 

156

 

The accompanying notes are an integral part of the financial statements.

55

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Portfolio of Investments (cont’d)

 

International Growth Active Extension Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

United Kingdom (cont’d)

 

 

 

 

Prudential plc

 

(q)14,166

 

$       199

Reckitt Benckiser Group plc

 

3,333

 

193

SABMiller plc

 

(q)6,022

 

169

Standard Chartered plc

 

5,112

 

186

Tesco plc

 

(q)31,286

 

295

 

 

 

 

1,325

Total Common Stocks (Cost $12,807)

 

 

 

13,367

 

 

No of

 

 

 

 

Warrants

 

 

Warrant (1.8%)

 

 

 

 

India (1.8%)

 

 

 

 

Bharti Airtel Ltd., expiring 3/31/11 (Cost $181)

 

(a)7,900

 

196

 

 

Shares

 

 

Short-Term Investment (0.4%)

 

 

 

 

Investment Company (0.4%)

 

 

 

 

Morgan Stanley Institutional Liquidity

 

 

 

 

Money Market Portfolio
— Institutional Class (Cost $43)

 

(o)42,936

 

43

Total Investments (127.6%) (Cost $13,031)

 

 

 

(v)  13,606

Liabilities in Excess of Other Assets (-27.6%)

 

 

 

(2,947)

Net Assets (100%)

 

 

 

$  10,659

Short Positions (29.3%)*

 

 

 

 

Common Stocks (22.8%)

 

 

 

 

Australia (1.7%)

 

 

 

 

BlueScope Steel Ltd.

 

11,054

 

93

Tatts Group Ltd.

 

24,358

 

85

 

 

 

 

178

Belgium (0.9%)

 

 

 

 

UCB S.A.

 

2,133

 

96

Canada (0.9%)

 

 

 

 

Loblaw Cos. Ltd

 

2,778

 

96

France (1.6%)

 

 

 

 

Alcatel-Lucent

 

9,292

 

68

Credit Agricole S.A.

 

3,102

 

104

 

 

 

 

172

Germany (1.1%)

 

 

 

 

Fraport AG Frankfurt Airport Services Worldwide

 

1,444

 

113

Ireland (0.7%)

 

 

 

 

Bank of Ireland

 

5,104

 

75

Italy (1.1%)

 

 

 

 

Mediaset S.p.A.

 

11,816

 

119

Japan (4.9%)

 

 

 

 

Dai Nippon Printing Co., Ltd.

 

7,000

 

102

Fast Retailing Co., Ltd.

 

1,600

 

114

NTT DoCoMo, Inc.

 

79

 

131

Ono Pharmaceutical Co., Ltd.

 

2,100

 

98

Sompo Japan Insurance, Inc.

 

9,000

 

81

 

 

 

 

526

Mexico (2.0%)

 

 

 

 

Grupo Carso S.A.B. de C.V., Class A1

 

28,400

 

$       107

Grupo Modelo S.A.B. de C.V., Class C

 

23,300

 

111

 

 

 

 

218

Spain (2.8%)

 

 

 

 

Grupo Ferrovial S.A.

 

1,117

 

78

Repsol YPF S.A.

 

3,480

 

124

Zardoya Otis S.A.

 

3,250

 

92

 

 

 

 

294

Sweden (1.2%)

 

 

 

 

Svenska Handelsbanken AB, Class A

 

4,194

 

133

United Kingdom (3.9%)

 

 

 

 

Cadbury Schweppes plc

 

8,705

 

108

GlaxoSmithKline plc

 

4,047

 

103

HSBC Holdings plc

 

6,897

 

116

ITV plc

 

49,020

 

83

 

 

 

 

410

Total Common Stocks (Cost $2,616)

 

 

 

2,430

Investment Companies (6.5%)

 

 

 

 

iShares MSCI EAFE Growth Index Fund

 

4,100

 

319

iShares MSCI EAFE Index Fund

 

4,797

 

376

Total Investment Companies (Cost $695)

 

 

 

695

Total Short Positions (29.3%) (Cost $3,311)

 

 

 

3,125

 

*

 

Percentages are based on Net Assets.

(a)

 

Non-income producing security.

(o)

 

See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class.

(q)

 

Securities are pledged with a broker as collateral for short sales.

(v)

 

The approximate market value and percentage of the investments, $12,133,000 and 89.2%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note A within the Notes to Financial Statements.

ADR

 

American Depositary Receipt

GDR

 

Global Depositary Receipt

 

56

The accompanying notes are an integral part of the financial statements.

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

International Growth Active Extension 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

76

 

$111

 

 

1/2/08

 

USD

109

 

$109

 

$(2

)

EUR

12

 

17

 

 

1/2/08

 

USD

17

 

17

 

@—

 

EUR

3

 

4

 

 

1/2/08

 

USD

4

 

4

 

@—

 

EUR

27

 

40

 

 

1/3/08

 

USD

40

 

40

 

@—

 

USD

36

 

36

 

 

1/3/08

 

GBP

18

 

36

 

@—

 

USD

1

 

1

 

 

1/7/08

 

GBP

1

 

1

 

@—

 

USD

1

 

1

 

 

1/10/08 

 

GBP

1

 

1

 

@—

 

USD

12

 

12

 

 

1/2/08

 

HKD

91

 

12

 

@—

 

USD

6

 

 

6

 

 

1/3/08

 

HKD

44

 

 

6

 

 

@—

 

 

 

 

$228

 

 

 

 

 

 

 

$226

 

 

$(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

EUR

—

Euro

GBP

—

British Pound

HKD

—

Hong Kong Dollar

USD

—

United States Dollar

@

Value is less than $500.

 

The accompanying notes are an integral part of the financial statements.

57

 


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (unaudited)

 

International Growth Equity Portfolio

 

 

 

*   Minimum Investment

** Commenced operations on December 27, 2005

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the Morgan Stanley Capital International (MSCI) EAFE Index(1) and the Lipper International Large-Cap Growth Funds Index(2)

 

 

 

Total Returns(3)

 

 

 

 

Average

 

 

 

 

Annual

 

 

One

 

Since

 

 

 

Year

 

Inception

(5)

 

 

 

 

 

 

Portfolio – Class A (4)

 

15.22

%

20.85

%

MSCI EAFE Index

 

11.17

 

18.16

 

Lipper International Large-Cap Growth Funds Index

 

14.15

 

19.32

 

 

 

 

 

 

 

Portfolio – Class B (4)

 

15.03

 

20.55

 

MSCI EAFE Index

 

11.17

 

18.16

 

Lipper International Large-Cap Growth Funds Index

 

14.15

 

19.32

 

 

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 www.morganstanley.com/msim. 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.

 

(1)              The Morgan Stanley Capital International (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 term “free float” represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. 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. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)              The Lipper International Large-Cap Growth Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper International Large-Cap Growth Funds classification. The Index, which is adjusted for capital gains distributions and income distributions, 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 Growth Funds classification.

(3)              Total returns for the Portfolio reflect fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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 27, 2005

(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 Indexes.

 

The International Growth Equity Portfolio (the “Portfolio”) seeks long-term capital appreciation, with a secondary objective of income by investing primarily in a diversified portfolio of equity securities of issuers located in countries other than the U.S. Foreign investing involves certain risks,

 

58


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

International Growth Equity Portfolio

 

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 risks of investing in emerging- market countries are greater than the risks generally associated with foreign investments.

 

Performance

 

For the year ended December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of 15.22%, net of fees, for Class A shares and 15.03%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares outperformed against its benchmark, the Morgan Stanley Capital International (MSCI) EAFE Index (the “Index”) which returned 11.17%.

 

Factors Affecting Performance

 

·                  Performance in the international equity markets in 2007 was quite volatile, fueled by tightening credit markets globally, slowing corporate earnings growth and a fragile U.S. economy. Despite the uncertain market conditions, most major international equity market indices (excluding Japan) outpaced U.S. returns in U.S. dollar terms – the MSCI EAFE Index posted a total return of 11.2% vs. 5.5% for the S&P 500® Index in 2007.

 

·                  After the sharp sell-off in July and August, driven primarily by global credit market concerns, international equity markets recovered during September and appeared to stabilize as investors moved away from the increasingly risky financial sector into more defensive sectors such as consumer staples and utilities. Additionally, investors in foreign shares benefited from the decision by the Federal Reserve to lower the target federal funds rate in September, October, and December after two years of rate tightening, which caused continued weakness in the U.S. dollar. The U.S. dollar lost 9.6% versus the Euro, declined 6.4% versus the Japanese Yen and weakened 1.4% versus the British Pound for the year.

 

·                  For the 12-month period, the Portfolio outperformed the Index due to security selections in the Asia/Pacific ex- Japan region and in emerging markets. The Portfolio’s strong relative performance in the Asia/Pacific ex-Japan region was driven by investment in a mining company and an oil rig manufacturer. Both holdings greatly benefitted from robust global economic growth and surging demand for oil and other commodities, and reported record earnings in 2007.

 

·                  Within the emerging markets, the Portfolio’s top two performers were an electricity generator, which benefited from soaring demand for electricity accompanying China’s economic growth, and a retail group that witnessed an exponential rise in profits during the year from increased Chinese consumer spending.

 

·                  The Portfolio underperformed in Europe due to an overweight in Ireland. After seeing its economy expand by three times the Euro-area average in the past decade, Ireland’s economy quickly cooled as its real estate market weakened during the second half of the year. The Portfolio’s holdings in the Irish banks suffered as increased borrowing costs slowed property demand and subsequent loan growth.

 

·                  On a sector basis, for the year, the Portfolio outperformed the Index in eight out of ten sectors, led by the outsized gains in the utilities and industrials sector. Conversely, stock selection in the information technology sector diminished relative returns, and an underweight allocation to the materials sectors together with a limited exposure to steel companies also hindered performance.

 

Management Strategies

 

·                  While the initial impact of the subprime crisis was directly on the U.S. economy, the surprise of 2007 was the subsequent global scale of the credit shock. Given the continued weakness in the U.S. housing market, declining consumer spending and uncertain corporate earnings, economic growth in the Euro-zone and Japan may slow as Europe’s financial services sector and Japanese banks face further potential write-downs on their debt holdings tied to the U.S. subprime mortgage market.

 

·                  We believe the Asia Pacific ex-Japan region and the emerging markets are in potentially better shape to weather current financial difficulties. Many governments of these regions have been paying off public debt, are running budget and/or current account surpluses and have strong foreign exchange reserves. According to the Financial Times, emerging markets as a group are a net creditor to the U.S. Based on International Monetary Fund (IMF) estimates, emerging markets already accounted for 47% of the global Gross Domestic Product growth in 2007. As certain parts of the world decouple from the U.S. economy, we will continue to emphasize building diversified portfolios across regions.

 

·                  Additionally, 2007 was the first year in the past eight years that the MSCI EAFE Growth Index outperformed the broad-based MSCI EAFE Index. As continued higher borrowing costs translate into higher costs of capital which could slow spending, we believe corporate earnings growth will slow globally. With earnings growth becoming more scarce, we think investors may continue

 

59


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

International Growth Equity Portfolio

 

to focus on higher quality growth companies, with lower leverage and strong balance sheets which already comprise our portfolio. We believe that the Portfolio is well positioned for the potential global economic slowdown.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning Account Value

 

Ending Account
Value
December 31,

 

Expenses Paid During Period*
July 1, 2007 — December 31,

 

 

 

July 1, 2007

 

2007

 

2007

 

Class A

 

 

 

 

 

 

 

Actual

 

$1,000.00

 

$1,036.60

 

$5.13

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,020.16

 

5.09

 

 

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

 

Actual

 

1,000.00

 

1,035.70

 

6.41

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,018.90

 

6.36

 

* 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 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

*   Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

60


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments

 

International Growth Equity Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Common Stocks (97.8%)

 

 

 

 

 

Australia (1.5%)

 

 

 

 

 

BHP Billiton Ltd.

 

(c)9,793

 

$

343

 

Austria (4.3%)

 

 

 

 

 

Andritz AG

 

5,346

 

320

 

Erste Bank der Oesterreichischen Sparkassen AG

 

5,344

 

380

 

Wiener Staedtische Allgemeine Versicherung AG

 

3,678

 

296

 

 

 

 

 

996

 

Canada (2.3%)

 

 

 

 

 

EnCana Corp.

 

4,075

 

278

 

Research In Motion Ltd.

 

(a)2,300

 

261

 

 

 

 

 

539

 

Egypt (1.4%)

 

 

 

 

 

Orascom Construction Industries GDR

 

1,496

 

310

 

Finland (4.4%)

 

 

 

 

 

Fortum Oyj

 

9,531

 

427

 

Kone Oyj, Class B

 

5,203

 

362

 

Neste Oil Oyj

 

6,741

 

236

 

 

 

 

 

1,025

 

France (10.1%)

 

 

 

 

 

AXA S.A.

 

9,443

 

376

 

BNP Paribas

 

2,745

 

295

 

Cie Generale d’Optique Essilor International S.A.

 

5,804

 

369

 

LVMH Moet Hennessy Louis Vuitton S.A.

 

2,011

 

242

 

Schneider Electric S.A.

 

2,258

 

302

 

Total S.A.

 

6,202

 

515

 

Vallourec

 

878

 

236

 

 

 

 

 

2,335

 

Germany (9.0%)

 

 

 

 

 

Bayer AG

 

(c)3,486

 

318

 

Celesio AG

 

(c)4,533

 

280

 

Continental AG

 

2,737

 

355

 

E.ON AG

 

2,772

 

588

 

SAP AG

 

4,592

 

237

 

SGL Carbon AG

 

(a)5,638

 

303

 

 

 

 

 

2,081

 

Greece (4.1%)

 

 

 

 

 

Coca-Cola Hellenic Bottling Co. S.A.

 

10,647

 

459

 

National Bank of Greece S.A.

 

6,873

 

474

 

 

 

 

 

933

 

Hong Kong (7.1%)

 

 

 

 

 

Bank of East Asia Ltd.

 

51,600

 

350

 

China Resources Power Holdings Co.

 

86,000

 

292

 

CNOOC Ltd.

 

174,700

 

293

 

Esprit Holdings Ltd.

 

22,700

 

334

 

Lee & Man Paper Manufacturing Ltd.

 

12,300

 

54

 

Parkson Retail Group Ltd.

 

27,000

 

322

 

 

 

 

 

1,645

 

India (3.0%)

 

 

 

 

 

Bharti Airtel Ltd.

 

(a)13,029

 

327

 

ICICI Bank Ltd. ADR

 

5,900

 

$

 363

 

 

 

 

 

690

 

Ireland (2.2%)

 

 

 

 

 

Allied Irish Banks plc

 

12,890

 

296

 

CRH plc

 

6,008

 

209

 

 

 

 

 

505

 

Israel (1.3%)

 

 

 

 

 

Teva Pharmaceutical Industries Ltd. ADR

 

6,300

 

293

 

Japan (13.0%)

 

 

 

 

 

Canon, Inc.

 

5,500

 

251

 

Daikin Industries Ltd.

 

(c)6,100

 

340

 

Daiwa Securities Group, Inc.

 

20,000

 

184

 

Kobe Steel Ltd.

 

63,000

 

204

 

Komatsu Ltd.

 

10,500

 

284

 

Sharp Corp.

 

14,000

 

251

 

Shin-Etsu Chemical Co., Ltd.

 

3,400

 

213

 

Sony Corp.

 

4,900

 

266

 

Sumitomo Realty & Development Co., Ltd.

 

10,000

 

246

 

Terumo Corp.

 

5,600

 

295

 

Toray Industries, Inc.

 

31,000

 

241

 

Toyota Motor Corp.

 

3,900

 

210

 

 

 

 

 

2,985

 

Luxembourg (1.4%)

 

 

 

 

 

Millicom International Cellular S.A.

 

(a)2,700

 

318

 

Mexico (2.4%)

 

 

 

 

 

America Movil S.A.B. de C.V., Class L ADR

 

4,600

 

283

 

Wal-Mart de Mexico S.A.B. de C.V. ADR

 

7,979

 

278

 

 

 

 

 

561

 

Netherlands (1.2%)

 

 

 

 

 

Reed Elsevier N.V.

 

(c)13,929

 

276

 

Norway (2.2%)

 

 

 

 

 

Telenor ASA

 

(a)14,237

 

337

 

TGS Nopec Geophysical Co. ASA

 

(a)12,091

 

164

 

 

 

 

 

501

 

Portugal (1.9%)

 

 

 

 

 

Banco Espirito Santo S.A. (Registered)

 

20,278

 

443

 

Singapore (2.9%)

 

 

 

 

 

DBS Group Holdings Ltd.

 

21,000

 

298

 

Keppel Corp., Ltd.

 

41,000

 

367

 

 

 

 

 

665

 

Spain (1.3%)

 

 

 

 

 

Banco Santander S.A.

 

13,408

 

290

 

Sweden (2.1%)

 

 

 

 

 

Getinge AB, Class B

 

(c)18,071

 

483

 

Switzerland (8.1%)

 

 

 

 

 

ABB Ltd. (Registered)

 

16,071

 

463

 

EFG International (Registered)

 

(c)7,311

 

295

 

Nestle S.A. (Registered)

 

932

 

427

 

Novartis AG (Registered)

 

3,759

 

205

 

Roche Holding AG (Genusschein)

 

1,303

 

224

 

SGS S.A. (Registered)

 

219

 

258

 

 

 

 

 

1,872

 

 

The accompanying notes are an integral part of the financial statements.

61

 


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

International Growth Equity Portfolio

 

 

 

Shares

 

Value

(000)

Taiwan (1.1%)

 

 

 

 

Delta Electronics, Inc. GDR

 

77,000

 

$

262

United Kingdom (9.5%)

 

 

 

 

Barclays plc

 

21,255

 

215

Capita Group plc

 

18,913

 

264

Prudential plc

 

23,679

 

333

Reckitt Benckiser plc

 

5,656

 

327

SABMiller plc

 

10,222

 

288

Standard Chartered plc

 

8,558

 

311

Tesco plc

 

48,553

 

458

 

 

 

 

2,196

Total Common Stocks (Cost $20,698)

 

 

 

22,547

 

 

Face

 

 

 

 

Amount

 

 

 

 

(000)

 

 

Short-Term Investments (60.4%)

 

 

 

 

Short-Term Debt Securities held as Collateral on Loaned Securities (2.7%)

 

 

 

 

Alliance & Leicester plc,

 

 

 

 

5.26%, 9/2/08

 

$

(h)18

 

18

Bancaja,

 

 

 

 

5.35%, 8/12/08

 

9

 

9

Bank of New York Co., Inc.,

 

 

 

 

5.24%, 8/8/08

 

(h)9

 

9

BASF AG,

 

 

 

 

5.18%, 8/19/08

 

(h)9

 

9

BNP Paribas plc,

 

 

 

 

4.90%, 5/19/08

 

(h)18

 

18

CAM US Finance S.A. Unipersonal,

 

 

 

 

5.24%, 7/25/08

 

(h)37

 

37

Canadian Imperial Bank of Commerce, New York,

 

 

 

 

4.42%, 7/28/08

 

(h)18

 

18

CC USA, Inc.,

 

 

 

 

3.89%, 1/28/08

 

(h)9

 

9

CIT Group Holdings,

 

 

 

 

5.23%, 6/18/08

 

(h)33

 

33

Citigroup Global Markets Holdings, Inc.,

 

 

 

 

4.51%, 1/2/08

 

125

 

125

Credit Suisse First Boston, New York,

 

 

 

 

4.32%, 3/14/08

 

(h)18

 

18

First Tennessee Bank,

 

 

 

 

5.05%, 8/15/08

 

(h)9

 

9

5.06%, 8/15/08

 

(h)37

 

37

Goldman Sachs Group, Inc.,

 

 

 

 

4.62%, 2/13/09

 

(h)17

 

17

5.10%, 9/12/08

 

(h)9

 

9

HSBC Finance Corp.,

 

 

 

 

5.26%, 8/5/08

 

(h)9

 

9

IBM Corp.,

 

 

 

 

5.27%, 9/8/08

 

(h)37

 

37

Lehman Brothers, Inc.,

 

 

 

 

4.49%, 1/2/08

 

16

 

16

Macquarie Bank Ltd.,

 

 

 

 

4.95%, 8/20/08

 

(h)18

 

18

Metropolitan Life Global Funding,

 

 

 

 

4.89%, 8/21/08

 

$

(h)27

 

$

27

National Bank of Canada,

 

 

 

 

5.21%, 4/2/08

 

(h)37

 

37

National Rural Utilities Cooperative Finance Corp.,

 

 

 

 

5.24%, 9/2/08

 

(h)37

 

37

Nationwide Building Society,

 

 

 

 

4.92%, 7/28/08

 

(h)21

 

21

Unicredito Italiano Bank (Ireland) plc,

 

 

 

 

5.04%, 8/14/08

 

(h)20

 

20

5.26%, 8/8/08

 

(h)13

 

13

 

 

 

 

610

 

 

Shares

 

 

Investment Company (57.7%)

 

 

 

 

Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class

 

(o)13,310,632

 

13,311

Total Short-Term Investments (Cost $13,921)

 

 

 

13,921

Total Investments (158.2%) (Cost $34,619) — including $580 of Securities Loaned

 

 

 

(v)

36,468

Liabilities in Excess of Other Assets (-58.2%)

 

 

 

(13,414)

Net Assets (100%)

 

 

 

$

23,054

 

(a)

 

Non-income producing security.

(c)

 

All or portion of security on loan at December 31, 2007.

(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, 2007.

(o)

 

See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class.

(v)

 

The approximate market value and percentage of the investments, $20,163,000 and 55.3%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note A within the Notes to Financial Statements.

ADR

 

American Depositary Receipt

CVA

 

Certificaten Van Aandelen

GDR

 

Global Depositary Receipt

 

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)

USD

187

 

$   187

 

1/2/08

CAD

183

 

$   186

 

 

$    (1)

 

 

 

 

 

 

 

 

 

 

 

CAD

—

Canadian Dollar

USD

—

United States Dollar

 

62

The accompanying notes are an integral part of the financial statements.

 


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (unaudited)

 

International Magnum Portfolio

 

 

 

 

*  Minimum Investment

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares and will be negatively impacted by additional fees assessed to this class.

 

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

(5)

 

 

 

 

 

 

 

 

 

 

Portfolio – Class A (4)

 

14.77

%

19.63

%

7.54

%

7.66

%

MSCI EAFE Index

 

11.17

 

21.59

 

8.66

 

8.02

 

Lipper International Multi-Cap Core Funds Index

 

12.61

 

21.23

 

9.71

 

10.03

 

 

 

 

 

 

 

 

 

 

 

Portfolio – Class B (4)

 

14.47

 

19.27

 

7.27

 

7.37

 

MSCI EAFE Index

 

11.17

 

21.59

 

8.66

 

8.02

 

Lipper International Multi-Cap Core Funds Index

 

12.61

 

21.23

 

9.71

 

10.03

 

 

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 www.morganstanley.com/msim. 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.

 

(1)     The Morgan Stanley Capital International (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 term “free float” represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. 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. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)     The Lipper 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 30 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 fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and/or reimbursements, total returns would have been lower. Fee waivers and/or expense 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)     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.

 

The International Magnum Portfolio (the “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,

 

 

63

 


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

International Magnum Portfolio

 

less governmental supervision and regulation, less liquidity and the potential for market volatility and political instability.

 

Performance

 

For the year ended December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of 14.77%, net of fees, for the Class A shares and 14.47%, net of fees, for the Class B shares. The Portfolio’s Class A and Class B shares outperformed against its benchmark, the Morgan Stanley Capital International (MSCI) EAFE Index (the “Index”) which returned 11.17%.

 

Factors Affecting Performance

 

·             In general, financial markets worldwide advanced during the 12 months ended December 31, 2007. However, with the widely anticipated economic slowdown in the U.S., it is still not fully clear how this will ultimately impact the global picture.

 

·             In the second half of 2007, evidence of a mid-cycle slowdown in the U.S. began to surface. Although a pickup in third quarter Gross Domestic Product growth was better than expected, investor optimism quickly dissipated following news that the ISM Index: Manufacturing (the Institute of Supply Management’s survey of purchasing executives at roughly 300 industrial companies), which peaked at 56 in June 2007, fell to 47.7 in December (below 50 signals contraction). In contrast, the ISM Services Non Manufacturing Index did not drop as much as the ISM Index: Manufacturing. The ISM Services Non Manufacturing Index returned 53.9 in December, down somewhat from its peak of 60.7 in June 2007.

 

·             Moreover, the worsening U.S. housing market and the subsequent crisis in the subprime mortgage market caused credit to significantly tighten as liquidity decreased. Corporate profits, which were generally robust in the first half of the year, decreased sharply later in the year, and the domestic unemployed rate surged to 5% in December.

 

·             However, a prevailing trend over much of the period was the apparent decoupling of the U.S. markets with the rest of the world. Asia and emerging markets were resilient and showed impressive growth rates. The U.S. dollar declined, whereas the Euro and the emerging market currencies rallied. The MSCI World Index returned 5.2% in local currency and 9.0% in dollar terms. The MSCI U.S. Index returned 5.4% and the MSCI EAFE markets returned 3.5% in local currency and 11.2% in dollar terms. MSCI Japan Index was the clear outlier, declining -10.1% in local terms and -4.2% in dollar terms.

 

·             The Portfolio’s outperformance is primarily attributed to the overweight allocation favoring the Asia Pacific ex-Japan and the emerging markets regions.

 

·             Currency management also added to results. Furthermore, security selection within Asia Pacific ex-Japan, Europe and Japan significantly contributed to performance. In contrast, notable detractors included the Portfolio’s underweight allocation to Europe.

 

Management Strategies

 

·             At the beginning of 2007, we believed we would see an end to the trend of “value” outperformance and a rotation into more growth-oriented industries. Therefore, during the first quarter of 2007, we implemented a strategic shift in the Portfolio by adding an explicit allocation to international growth securities.

 

·             As a result, the Portfolio is slightly overweight growth securities. The style allocation shift turned profitable during the second half of the year, as investors began to focus on higher-quality, less-leveraged companies with strong balance sheets. Given our emphasis on building diversified portfolios across regions and investing in higher-quality growth companies, we believe the Portfolio is well positioned for the ensuing market rotation and potential global economic slowdown.

 

·             Regionally, the Portfolio is underweight Europe, Japan and Asia, and is overweight in emerging markets. We believe that valuations remain expensive for European companies given that we expect reduced growth in the region in the face of headwinds from stresses in the liquidity and credit markets, as well as the ongoing deterioration of the U.S. housing market. The Japanese economy also appears sluggish with stagnating wages and slower consumer spending. On the other hand, emerging markets continue to show impressive growth rates; however, we believe valuations are stretched in some of these countries.

 

·             On a sector basis, we are maintaining the Portfolio’s overweight to the health care and industrials sectors, and an underweight allocation to the financials, energy, materials and utilities sectors. We also maintain an overweight to cash to help buffer the market volatility.

 

64


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Investment Overview (cont’d)

 

International Magnum Portfolio

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning
Account Value

 

Ending Account
Value 
December 31,

 

Expenses Paid
During Period*
July 1, 2007 —
December 31,

 

 

 

July 1, 2007

 

2007

 

2007

 

Class A

 

 

 

 

 

 

 

Actual

 

$1,000.00

 

$1,023.90

 

$5.05

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,020.21

 

5.04

 

 

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

 

Actual

 

1,000.00

 

1,022.80

 

6.32

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,018.95

 

6.31

 

* Expenses are equal to Class A and Class B annualized net expense ratios of 0.99% and 1.24%, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

* Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

65


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments

 

International Magnum Portfolio

 

 

 

Shares

 

Value
(000)

 

Common Stocks (94.0%)

 

 

 

 

 

Australia (3.9%)

 

 

 

 

 

Australia & New Zealand Banking Group Ltd.

 

(c)16,008

 

$

384

 

BHP Billiton Ltd.

 

(c)58,490

 

2,051

 

QBE Insurance Group Ltd.

 

15,350

 

447

 

Rio Tinto Ltd.

 

(c)10,500

 

1,226

 

Tatts Group

 

97,200

 

340

 

Wesfarmers Ltd.

 

12,950

 

459

 

Westpac Banking Corp.

 

17,900

 

436

 

 

 

 

 

5,343

 

Austria (2.6%)

 

 

 

 

 

Andritz AG

 

16,359

 

981

 

Erste Bank der Oesterreichischen Sparkassen AG

 

16,351

 

1,162

 

Telekom Austria AG

 

16,426

 

455

 

Wiener Staedtische Versicherung AG

 

11,237

 

905

 

 

 

 

 

3,503

 

Belgium (0.4%)

 

 

 

 

 

Umicore

 

2,120

 

523

 

Canada (1.2%)

 

 

 

 

 

EnCana Corp.

 

12,600

 

862

 

Research In Motion Ltd.

 

(a)7,100

 

805

 

 

 

 

 

1,667

 

Egypt (0.7%)

 

 

 

 

 

Orascom Construction Industries GDR

 

4,652

 

965

 

Finland (2.3%)

 

 

 

 

 

Fortum Oyj

 

29,162

 

1,305

 

Kone Oyj, Class B

 

(c)15,922

 

1,106

 

Neste Oil Oyj

 

(c)20,632

 

724

 

 

 

 

 

3,135

 

France (9.1%)

 

 

 

 

 

AXA S.A.

 

28,895

 

1,150

 

BNP Paribas

 

(c)15,868

 

1,706

 

Cie Generale d’Optique Essilor International S.A.

 

17,760

 

1,130

 

Electricite De France

 

6,777

 

803

 

Lafarge S.A.

 

4,366

 

790

 

LVMH Moet Hennessy Louis Vuitton S.A.

 

6,154

 

740

 

Renault S.A.

 

3,796

 

533

 

Sanofi-Aventis S.A.

 

8,130

 

743

 

Schneider Electric S.A.

 

(c)11,951

 

1,598

 

Suez S.A.

 

12,726

 

863

 

Total S.A.

 

18,979

 

1,575

 

Vallourec

 

(c)2,687

 

723

 

 

 

 

 

12,354

 

Germany (8.6%)

 

 

 

 

 

Allianz AG (Registered)

 

3,828

 

819

 

Bayer AG

 

18,252

 

1,664

 

Bayerische Motoren Werke AG

 

8,667

 

535

 

Celesio AG

 

(c)13,871

 

855

 

Commerzbank AG

 

14,647

 

554

 

Continental AG

 

8,467

 

1,098

 

E.ON AG

 

8,482

 

$

1,801

 

MAN AG

 

4,638

 

763

 

Muenchener Rueckversicherungs AG (Registered)

 

4,206

 

813

 

SAP AG

 

14,051

 

726

 

SGL Carbon AG

 

(a)(c)17,253

 

928

 

Siemens AG (Registered)

 

7,613

 

1,195

 

 

 

 

 

11,751

 

Greece (3.1%)

 

 

 

 

 

Coca-Cola Hellenic Bottling Co. S.A.

 

32,578

 

1,405

 

EFG Eurobank Ergasias S.A.

 

16,193

 

572

 

National Bank of Greece S.A.

 

32,444

 

2,235

 

 

 

 

 

4,212

 

Hong Kong (5.4%)

 

 

 

 

 

Bank of East Asia Ltd.

 

158,200

 

1,072

 

Cheung Kong Holdings Ltd.

 

26,000

 

474

 

China Resources Power Holdings Co.

 

266,000

 

903

 

CNOOC Ltd.

 

533,000

 

895

 

Esprit Holdings Ltd.

 

97,800

 

1,437

 

Great Eagle Holdings Ltd.

 

94,000

 

347

 

Lee & Man Paper Manufacturing Ltd.

 

67,700

 

296

 

MTR Corp., Ltd.

 

123,500

 

450

 

New World Development Ltd.

 

132,000

 

463

 

Parkson Retail Group Ltd.

 

84,200

 

1,005

 

 

 

 

 

7,342

 

India (1.6%)

 

 

 

 

 

Bharti Airtel Ltd.

 

(a)39,868

 

1,002

 

ICICI Bank Ltd. ADR

 

18,000

 

1,107

 

 

 

 

 

2,109

 

Ireland (1.1%)

 

 

 

 

 

Allied Irish Banks plc

 

39,752

 

914

 

CRH plc

 

18,385

 

638

 

 

 

 

 

1,552

 

Israel (0.7%)

 

 

 

 

 

Teva Pharmaceutical Industries Ltd. ADR

 

19,400

 

902

 

Italy (1.2%)

 

 

 

 

 

ENI S.p.A.

 

22,508

 

820

 

UniCredito Italiano S.p.A.

 

92,849

 

773

 

 

 

 

 

1,593

 

Japan (17.0%)

 

 

 

 

 

Amada Co., Ltd.

 

19,000

 

168

 

Astellas Pharma, Inc.

 

7,100

 

310

 

Canon, Inc.

 

26,200

 

1,197

 

Casio Computer Co., Ltd.

 

14,000

 

163

 

Dai Nippon Printing Co., Ltd.

 

13,000

 

189

 

Daicel Chemical Industries Ltd.

 

(c)28,000

 

167

 

Daifuku Co., Ltd.

 

(c)14,000

 

199

 

Daiichi Sankyo Co., Ltd.

 

11,100

 

341

 

Daikin Industries Ltd.

 

(c)27,000

 

1,507

 

Daiwa Securities Group, Inc.

 

62,000

 

571

 

Denki Kagaku Kogyo KK

 

45,000

 

194

 

East Japan Railway Co.

 

(c)28

 

230

 

FamilyMart Co., Ltd.

 

6,600

 

206

 

Fuji Machine Manufacturing Co., Ltd.

 

3,200

 

69

 

 

66

The accompanying notes are an integral part of the financial statements.

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

International Magnum Portfolio

 

 

 

Shares

 

Value
(000)

 

Japan (cont’d)

 

 

 

 

 

FUJIFILM Holdings Corp.

 

7,100

 

$

301

 

Fujitec Co., Ltd.

 

(c)11,000

 

64

 

Fujitsu Ltd.

 

45,000

 

301

 

Furukawa Electric Co., Ltd.

 

41,000

 

159

 

Hitachi Capital Corp.

 

(c)9,000

 

115

 

Hitachi High-Technologies Corp.

 

(c)3,900

 

85

 

Hitachi Ltd.

 

40,000

 

293

 

House Foods Corp.

 

4,600

 

77

 

Kaneka Corp.

 

21,000

 

174

 

Kobe Steel Ltd.

 

193,000

 

626

 

Komatsu Ltd.

 

32,100

 

868

 

Kurita Water Industries Ltd.

 

(c)7,300

 

222

 

Kyocera Corp.

 

3,000

 

263

 

Kyudenko Corp.

 

7,000

 

36

 

Lintec Corp.

 

(c)5,500

 

94

 

Maeda Road Construction Co., Ltd.

 

(c)5,000

 

40

 

Marubeni Corp.

 

16,000

 

112

 

Matsushita Electric Industrial Co., Ltd.

 

19,000

 

389

 

Minebea Co., Ltd.

 

(c)24,000

 

153

 

Mitsubishi Chemical Holdings Corp.

 

29,000

 

222

 

Mitsubishi Corp.

 

16,800

 

458

 

Mitsubishi Heavy Industries Ltd.

 

61,000

 

261

 

Mitsui Mining & Smelting Co., Ltd.

 

(c)37,000

 

148

 

Mitsumi Electric Co., Ltd.

 

8,900

 

297

 

Nagase & Co., Ltd.

 

(c)7,000

 

73

 

NEC Corp.

 

(c)49,000

 

226

 

Nifco, Inc.

 

(c)6,400

 

149

 

Nintendo Co., Ltd.

 

1,200

 

729

 

Nippon Meat Packers, Inc.

 

10,000

 

101

 

Nippon Sheet Glass Co., Ltd.

 

(c)20,000

 

101

 

Nippon Steel Corp.

 

(c)21,000

 

129

 

Nippon Telegraph & Telephone Corp.

 

30

 

148

 

Nissan Motor Co., Ltd.

 

34,300

 

371

 

Nissha Printing Co., Ltd.

 

(c)2,000

 

79

 

Nisshinbo Industries, Inc.

 

(c)10,000

 

122

 

Obayashi Corp.

 

27,000

 

136

 

Ono Pharmaceutical Co., Ltd.

 

4,200

 

196

 

Ricoh Co., Ltd.

 

17,000

 

313

 

Rinnai Corp.

 

1,400

 

46

 

Rohm Co., Ltd.

 

2,500

 

218

 

Ryosan Co., Ltd.

 

4,400

 

108

 

Sanki Engineering Co., Ltd.

 

(c)5,000

 

30

 

Sanwa Holdings Corp.

 

(c)17,000

 

84

 

Sekisui Chemical Co., Ltd.

 

26,000

 

175

 

Sekisui House Ltd.

 

(c)13,000

 

141

 

Sharp Corp.

 

(c)41,000

 

735

 

Shin-Etsu Chemical Co., Ltd.

 

10,300

 

644

 

Shin-Etsu Polymer Co., Ltd.

 

(c)10,800

 

77

 

Sony Corp.

 

20,600

 

1,118

 

Sumitomo Realty & Development Co., Ltd.

 

(c)29,000

 

713

 

Suzuki Motor Corp.

 

10,600

 

319

 

TDK Corp.

 

3,600

 

267

 

Teijin Ltd.

 

36,000

 

154

 

Terumo Corp.

 

17,000

 

896

 

Toho Co., Ltd.

 

(c)4,100

 

92

 

Tokyo Electric Power Co., Inc.

 

3,500

 

$

91

 

Toray Industries, Inc.

 

(c)94,000

 

730

 

Toshiba Corp.

 

(c)57,000

 

425

 

Toyo Ink Manufacturing Co., Ltd.

 

(c)17,000

 

58

 

Toyoda Gosei Co., Ltd.

 

(c)2,700

 

95

 

Toyota Motor Corp.

 

19,700

 

1,060

 

Tsubakimoto Chain Co.

 

23,000

 

129

 

Yamaha Corp.

 

10,900

 

249

 

Yamaha Motor Co., Ltd.

 

(c)8,900

 

216

 

 

 

 

 

23,012

 

Luxembourg (0.7%)

 

 

 

 

 

Millicom International Cellular S.A.

 

(a)8,200

 

967

 

Mexico (1.3%)

 

 

 

 

 

America Movil S.A.B. de C.V., Class L ADR

 

14,035

 

862

 

Wal-Mart de Mexico S.A.B. de C.V. ADR

 

24,300

 

847

 

 

 

 

 

1,709

 

Netherlands (0.8%)

 

 

 

 

 

TNT N.V.

 

11,975

 

498

 

Wolters Kluwer N.V.

 

16,356

 

535

 

 

 

 

 

1,033

 

Norway (1.6%)

 

 

 

 

 

Telenor ASA

 

(a)68,763

 

1,626

 

TGS Nopec Geophysical Co. ASA

 

(a)(c)36,996

 

502

 

 

 

 

 

2,128

 

Portugal (1.0%)

 

 

 

 

 

Banco Espirito Santo S.A. (Registered)

 

62,047

 

1,355

 

Singapore (2.3%)

 

 

 

 

 

CapitaCommercial Trust REIT

 

42,040

 

71

 

CapitaLand Ltd.

 

(c)97,000

 

417

 

City Developments Ltd.

 

35,000

 

341

 

DBS Group Holdings Ltd.

 

65,000

 

921

 

Keppel Corp. Ltd.

 

125,000

 

1,119

 

Oversea-Chinese Banking Corp.

 

35,000

 

202

 

 

 

 

 

3,071

 

Spain (2.1%)

 

 

 

 

 

Banco Bilbao Vizcaya Argentaria S.A.

 

33,094

 

813

 

Banco Santander S.A.

 

41,350

 

893

 

Telefonica S.A.

 

34,140

 

1,103

 

 

 

 

 

2,809

 

Sweden (1.5%)

 

 

 

 

 

Getinge AB, Class B

 

(c)55,294

 

1,477

 

Sandvik AB

 

33,968

 

577

 

 

 

 

 

2,054

 

Switzerland (8.5%)

 

 

 

 

 

ABB Ltd. (Registered)

 

49,734

 

1,434

 

Compagnie Financiere Richemont S.A.,Class A

 

10,606

 

723

 

EFG International (Registered)

 

22,369

 

902

 

Nestle S.A. (Registered)

 

6,059

 

2,776

 

Nobel Biocare Holding AG

 

1,481

 

392

 

Novartis AG (Registered)

 

29,791

 

1,623

 

Roche Holding AG (Genusschein)

 

9,154

 

1,577

 

SGS S.A. (Registered)

 

669

 

788

 

 

The accompanying notes are an integral part of the financial statements.

67

 


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

International Magnum Portfolio

 

 

 

Shares

 

Value
(000)

 

Switzerland (cont’d)

 

 

 

 

 

UBS AG (Registered)

 

15,067

 

$

700

 

Zurich Financial Services AG (Registered)

 

2,083

 

613

 

 

 

 

 

11,528

 

Taiwan (0.6%)

 

 

 

 

 

Delta Electronics, Inc.

 

235,000

 

798

 

United Kingdom (14.7%)

 

 

 

 

 

Anglo American plc

 

12,190

 

739

 

BAE Systems plc

 

70,641

 

692

 

Barclays plc

 

115,847

 

1,173

 

BG Group plc

 

32,627

 

751

 

British American Tobacco plc

 

20,845

 

821

 

Capita Group plc

 

57,871

 

809

 

GlaxoSmithKline plc

 

34,696

 

880

 

HSBC Holdings plc

 

64,087

 

1,075

 

Imperial Tobacco Group plc

 

12,336

 

671

 

Man Group plc

 

36,326

 

418

 

Prudential plc

 

112,024

 

1,575

 

Reckitt Benckiser Group plc

 

17,305

 

1,000

 

Reed Elsevier plc

 

98,696

 

1,328

 

Rolls-Royce Group plc

 

(a)51,354

 

555

 

Rolls-Royce Group, Class B

 

2,126,413

 

5

 

Royal Dutch Shell plc, Class A

 

40,778

 

1,718

 

SABMiller plc

 

31,279

 

880

 

Standard Chartered plc

 

26,187

 

951

 

Tesco plc

 

238,156

 

2,249

 

Vodafone Group plc

 

309,561

 

1,154

 

WM Morrison Supermarkets plc

 

77,320

 

499

 

 

 

 

 

19,943

 

Total Common Stocks (Cost $99,177)

 

 

 

127,358

 

Preferred Stock (0.3%)

 

 

 

 

 

Germany (0.3%)

 

 

 

 

 

Fresenius SE (Cost $373)

 

4,607

 

383

 

 

 

Face

 

 

 

 

 

Amount

 

 

 

 

 

(000)

 

 

 

Short-Term Investments (16.8%)

 

 

 

 

 

Short-Term Debt Securities held as Collateral on Loaned Securities (11.8%)

 

 

 

 

 

Alliance & Leicester plc,

 

 

 

 

 

5.26%, 9/2/08

 

$

(h)479

 

479

 

Bancaja,

 

 

 

 

 

5.35%, 8/12/08

 

239

 

239

 

Bank of New York Co., Inc.,

 

 

 

 

 

5.24%, 8/8/08

 

(h)239

 

239

 

BASF AG,

 

 

 

 

 

5.18%, 8/19/08

 

(h)239

 

239

 

BNP Paribas plc,

 

 

 

 

 

4.90%, 5/19/08

 

(h)479

 

479

 

CAM US Finance S.A. Unipersonal,

 

 

 

 

 

5.24%, 7/25/08

 

(h)958

 

958

 

Canadian Imperial Bank of Commerce, New York,

 

 

 

 

 

4.42%, 7/28/08

 

(h)479

 

479

 

CC USA, Inc.,

 

 

 

 

 

3.89%, 1/28/08

 

$

(h)239

 

 

$

239

 

CIT Group Holdings,

 

 

 

 

 

5.23%, 6/18/08

 

(h)862

 

862

 

Citigroup Global Markets Holdings, Inc.,

 

 

 

 

 

4.51%, 1/2/08

 

3,265

 

3,265

 

Credit Suisse First Boston, New York,

 

 

 

 

 

4.32%, 3/14/08

 

(h)479

 

479

 

First Tennessee Bank,

 

 

 

 

 

5.05%, 8/15/08

 

(h)239

 

239

 

5.06%, 8/15/08

 

(h)958

 

958

 

Goldman Sachs Group, Inc.,

 

 

 

 

 

4.62%, 2/13/09

 

(h)450

 

450

 

5.10%, 9/12/08

 

(h)240

 

240

 

HSBC Finance Corp.,

 

 

 

 

 

5.26%, 8/5/08

 

(h)239

 

239

 

IBM Corp.,

 

 

 

 

 

5.27%, 9/8/08

 

(h)958

 

958

 

Lehman Brothers, Inc.,

 

 

 

 

 

4.49%, 1/2/08

 

408

 

408

 

Macquarie Bank Ltd.,

 

 

 

 

 

4.95%, 8/20/08

 

(h)479

 

479

 

Metropolitan Life Global Funding,

 

 

 

 

 

4.89%, 8/21/08

 

(h)718

 

718

 

National Bank of Canada,

 

 

 

 

 

5.21%, 4/2/08

 

(h)958

 

958

 

National Rural Utilities Cooperative Finance Corp.,

 

 

 

 

 

5.24%, 9/2/08

 

(h)958

 

958

 

Nationwide Building Society,

 

 

 

 

 

4.92%, 7/28/08

 

(h)556

 

556

 

Unicredito Italiano Bank (Ireland) plc,

 

 

 

 

 

5.04%, 8/14/08

 

(h)527

 

527

 

5.26%, 8/8/08

 

(h)335

 

335

 

 

 

 

 

15,980

 

 

 

Shares

 

 

 

Investment Company (5.0%)

 

 

 

 

 

Morgan Stanley Institutional Liquidity Money Market Portfolio

— Institutional Class

 

(o)6,786,232

 

6,786

 

Total Short-Term Investments (Cost $22,766)

 

 

 

22,766

 

Total Investments (111.1%) (Cost $122,316) — including $15,270 of Securities Loaned

 

 

 

(v)        150,507

 

Liabilities in Excess of Other Assets (-11.1%)

 

 

 

(15,026)

 

Net Assets (100%)

 

 

 

$        135,481

 

 

(a)

Non-income producing security.

(c)

All or portion of security on loan at December 31, 2007.

(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, 2007.

(o)

See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class.

 

68

The accompanying notes are an integral part of the financial statements.

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

International Magnum Portfolio

 

(v)

The approximate market value and percentage of the investments, $120,424,000 and 80.0%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note A within the Notes to Financial Statements.

ADR

American Depositary Receipt

GDR

Global Depositary Receipt

REIT

Real Estate Investment Trust

 

Foreign Currency Exchange Contract Information:

 

 

 

The Portfolio had the following foreign currency exchange contract(s) open at period end:

 

Currency
to
Deliver
(000)

 

Value
(000)

 

Settlement
Date

 

In
Exchange
For
(000)

 

Value
(000)

 

Net
Unrealized
Appreciation
(Depreciation)
(000)

 

AUD

 

1,562

 

$  1,366

 

3/13/08

 

USD

 

1,365

 

$  1,365

 

$(1

)

EUR

 

61

 

89

 

1/2/08

 

USD

 

89

 

89

 

@—

 

EUR

 

372

 

544

 

1/2/08

 

USD

 

536

 

536

 

(8

)

EUR

 

141

 

206

 

1/3/08

 

USD

 

208

 

208

 

2

 

EUR

 

6

 

10

 

3/13/08

 

USD

 

10

 

10

 

@—

 

EUR

 

1,687

 

2,468

 

3/13/08

 

USD

 

2,482

 

2,482

 

14

 

GBP

 

278

 

553

 

3/13/08

 

USD

 

566

 

566

 

13

 

GBP

 

458

 

911

 

3/13/08

 

USD

 

932

 

932

 

21

 

GBP

 

478

 

949

 

3/13/08

 

USD

 

971

 

971

 

22

 

GBP

 

1,199

 

2,382

 

3/13/08

 

USD

 

2,436

 

2,436

 

54

 

JPY

 

23,700

 

214

 

3/13/08

 

USD

 

214

 

214

 

@—

 

JPY

 

192,458

 

1,736

 

3/13/08

 

USD

 

1,752

 

1,752

 

16

 

USD

 

188

 

188

 

3/13/08

 

AUD

 

213

 

186

 

(2

)

USD

 

253

 

253

 

3/13/08

 

AUD

 

287

 

251

 

(2

)

USD

 

426

 

426

 

3/13/08

 

AUD

 

483

 

422

 

(4

)

USD

 

3,381

 

3,381

 

3/13/08

 

AUD

 

3,829

 

3,348

 

(33

)

USD

 

32

 

32

 

1/3/08

 

EUR

 

22

 

32

 

@—

 

USD

 

188

 

188

 

3/13/08

 

EUR

 

128

 

187

 

(1

)

USD

 

338

 

338

 

3/13/08

 

EUR

 

230

 

336

 

(2

)

USD

 

1,084

 

1,084

 

3/13/08

 

EUR

 

737

 

1,079

 

(5

)

USD

 

876

 

876

 

3/13/08

 

EUR

 

596

 

871

 

(5

)

USD

 

4,516

 

4,516

 

3/13/08

 

EUR

 

3,071

 

4,492

 

(24

)

USD

 

176

 

176

 

1/3/08

 

GBP

 

88

 

175

 

(1

)

USD

 

6,877

 

6,877

 

3/13/08

 

GBP

 

3,384

 

6,723

 

(154

)

USD

 

10,495

 

10,495

 

3/13/08

 

GBP

 

5,167

 

10,266

 

(229

)

USD

 

67

 

67

 

1/2/08

 

HKD

 

526

 

67

 

@—

 

USD

 

29

 

29

 

1/3/08

 

HKD

 

223

 

29

 

@—

 

USD

 

544

 

544

 

3/13/08

 

JPY

 

60,217

 

543

 

(1

)

USD

 

587

 

587

 

3/13/08

 

JPY

 

64,987

 

586

 

(1

)

USD

 

1,617

 

1,617

 

3/13/08

 

JPY

 

178,858

 

1,613

 

(4

)

USD

 

3,528

 

 

3,528

 

3/13/08

 

JPY

 

390,064

 

 

3,519

 

 

(9

)

 

 

 

 

 

$46,630

 

 

 

 

 

 

 

 

$46,286

 

 

$(344

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUD — Australian Dollar

 

EUR — Euro

 

GBP — British Pound

 

HKD — Hong Kong Dollar

 

JPY — Japanese Yen

 

USD — United States Dollar

 

@

Value is less than $500.

 

 

The accompanying notes are an integral part of the financial statements.

69

 

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (unaudited)

 

International Real Estate Portfolio

 

 

 

* Minimum Investment

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the FTSE EPRA/NAREIT Global Real Estate Index: Europe Series(1), the FTSE EPRA/NAREIT Global Real Estate Index: Asia Series(2), FTSE EPRA/NAREIT Global ex-North America Real Estate Index (80% Europe/20% Asia)(3), Morgan Stanley Capital International (MSCI) EAFE Index(4) and the Lipper Real Estate Funds Index(5)

 

 

Total Returns(6)

 

 

 

 

 

Average Annual

 

 

 

One

 

Five

 

Ten

 

Since

 

 

 

Year

 

Years

 

Years

 

Inception(8)

 

Portfolio – Class A (7)

 

(1 7.59

)%

25.56

%

15.46

%

14.51

%

FTSE EPRA/NAREIT Global Real Estate Index: Europe Series

 

(24.70

)

24.78

 

14.41

 

13.81

 

FTSE EPRA/NAREIT Global Real Estate Index: Asia Series

 

14.78

 

30.86

 

14.52

 

9.41

 

FTSE EPRA/NAREIT Global ex-North America Real Estate Index (80% Europe/20% Asia)

 

(17.88

)

26.15

 

14.84

 

13.41

 

MSCI EAFE Index

 

11.17

 

21.59

 

8.66

 

7.55

 

Lipper Real Estate Funds Index

 

(13.50

)

18.27

 

10.24

 

9.90

 

Portfolio – Class B (7)

 

(17.76

)

25.26

 

15.17

 

14.23

 

 

 

 

 

 

 

 

 

 

 

FTSE EPRA/NAREIT Global Real Estate Index: Europe Series

 

(24.70

)

24.78

 

14.41

 

13.81

 

FTSE EPRA/NAREIT Global Real Estate Index: Asia Series

 

14.78

 

30.86

 

14.52

 

9.41

 

FTSE EPRA/NAREIT Global ex-North America Real Estate Index (80% Europe/20% Asia)

 

(17.88

)

26.15

 

14.84

 

13.41

 

MSCI EAFE Index

 

11.17

 

21.59

 

8.66

 

7.55

 

Lipper Real Estate Funds Index

 

(13.50

)

18.27

 

10.24

 

9.90

 

 

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 www.morganstanley.com/msim. 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.

 

(1)

The FTSE EPRA/NAREIT Global Real Estate Index: Europe Series is the European component of the FTSE EPRA/NAREIT Global Real Estate Index, which is a market capitalization weighted index designed to reflect the stock performance of companies engaged in the North American, European and Asian real estate markets. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends for periods after 1/31/2005 (gross returns used prior to 1/31/2005). “Net Dividends” reflects a reduction in dividends after taking into account withholding of taxes by certain foreign countries represented in the Index. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)

The FTSE EPRA/NAREIT Global Real Estate Index: Asia Series is the Asian component of the FTSE EPRA/NAREIT Global Real Estate Index, which is a market capitalization weighted index designed to reflect the stock performance of companies engaged in the North American, European and Asian real estate

 

70


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Investment Overview (cont’d)

 

International Real Estate Portfolio

 

 

markets. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends for periods after 1/31/2005 (gross returns used prior to 1/31/2005). “Net Dividends” reflects a reduction in dividends after taking into account withholding of taxes by certain foreign countries represented in the Index. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(3)

The FTSE EPRA/NAREIT Global ex-North America Real Estate Index (80% Europe/20% Asia) is a customized benchmark, 80% of which consists of the performance of the FTSE EPRA/NAREIT Europe Series and 20% of which consists of the performance of the FTSE EPRA/NAREIT Asia Series. These series are components of the FTSE EPRA/NAREIT Global Real Estate Index which is a market capitalization weighted index designed to reflect the stock performance of companies engaged in the North American, European and Asian real estate markets. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends for periods after 1/31/2005 (gross returns used prior to 1/31/2005). “Net Dividends” reflects a reduction in dividends after taking into account withholding of taxes by certain foreign countries represented in the Index. The Index is rebalanced on a monthly basis. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(4)

The Morgan Stanley Capital International (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 term “free float” represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. 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. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(5)

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.

(6)

Total returns for the Portfolio reflect fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense reimbursements are voluntary and the Adviser reserves the right to commence or terminate any waiver and/or reimbursement at any time.

(7)

Commenced operations on October 1, 1997

(8)

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.

 

The International Real Estate Portfolio (the “Portfolio”) seeks to provide current income and long-term capital appreciation by investing primarily in equity securities of companies in the real estate industry located throughout the world (excluding the United States and Canada). 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 risks of investing in emerging-market countries are greater than the risks generally associated with foreign investments. In addition to the general risks associated with real-estate investment, REIT investing entails other risks, such as credit and interest-rate risk.

 

Performance

 

For the year ended December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of -17.59%, net of fees, for Class A shares and -17.76%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares outperformed against the FTSE EPRA /NAREIT Global Real Estate Index: Europe Series which returned -24.70%, underperformed against the FTSE EPRA/NAREIT Global Real Estate Index: Asia Series which returned 14.78%, outperformed against the FTSE EPRA/NAREIT Global ex-North America Real Estate Index (80% Europe/20% Asia) which returned -17.88% and underperformed against the MSCI EAFE Index which returned 11.17%.

 

Factors Affecting Performance

 

·              The Portfolio’s overweight in Asia, particularly in Japan and Hong Kong, had a positive impact on relative performance versus the Index. Within Asia, an underweight in Australia was also positive as was stock selection in that market. These gains were more than offset, however, by a negative contribution from stock selection in Japan.

 

·                  In Europe, country underweights in Austria and Germany had a positive impact on relative performance, but this was offset by a detraction from an overweight in the United Kingdom and underweights in Poland and the Netherlands. Stock selection was positive in Sweden, the Netherlands and Germany, but negatively affected performance in the United Kingdom.

 

·                  In 2007, returns from property stocks in Asia were strong, and real estate securities outperformed the general equity markets in this region. The strong performance in Asia can be attributed to improving real estate values and continued investor attraction to Asian real estate.

 

·                  Property stocks in Europe showed significant declines during 2007, as investors became increasingly cautious about the impact of the credit crisis on real estate fundamentals. Tenant demand in Europe’s major office markets was strong in the first nine months of 2007, with most markets showing signs that leasing activity should exceed the record levels of 2006. Vacancy rates fell in all major cities, which resulted in positive rental growth across Europe. Occupier demand is expected to slow as economic growth decelerates, but low vacancies and modest development activity should dampen this effect, keeping rental growth positive.

 

71


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (cont’d)

 

International Real Estate Portfolio

 

·              The most significant impact of the credit crunch on European real estate has been in the real estate investment market, rather than in the occupational market. Following the credit crisis, buyers have significantly slowed their activity due to limited availability of credit and uncertainty regarding the future direction of real estate values, resulting in a standstill in transactional activity. We expect that the combination of higher borrowing costs, tighter lending standards, and higher return requirements due to higher risk premiums are likely to translate into higher property yields and a downward re-pricing of assets in Europe, and the key question should center on the magnitude of the yield shift.

 

·                  Fundamentals in the office markets in Japan, Hong Kong and Singapore remained very attractive, despite the recent financial turmoil. All three countries experienced healthy rental growth in 2007 and given the limited new supply (especially in Japan and Singapore), appear poised to deliver continued rental growth into 2008. The Asian investment markets also remained healthy and appear unaffected by the credit crisis, with liquidity still strong and no investor expectations for higher property yields or a prospective decline in asset values.

 

·                  In the public markets the European real estate securities sector traded at a 17% discount to NAV at the end of the period, the biggest discount since January 2004. While Asia on the whole performed more strongly than Europe, improving real estate fundamentals are still not being fully priced into the Asian market, which was trading close to NAV at the end of the period.

 

Management Strategies

 

·              We maintained our core investment philosophy as a real estate value investor. This results in our ownership of stocks in regions which we believe provide the best valuation relative to their underlying real estate values and growth prospects.

 

·              As of the close of the period, the Portfolio remained overweight in Asia, which we believe combines improving real estate fundamentals with more attractive securities valuations compared to the European market. Within Asia, we prefer the Japanese and Hong Kong markets.

 

·                  In Europe, we added to positions in the United Kingdom during the year, thereby increasing the Portfolio’s overweight. We partly closed our underweight in Germany following that market’s underperformance during the year. We also took profits in Switzerland during the second half of the period, and as a result, moved from an overweighted position to an underweighted position. The Portfolio also included underweights in Austria and Belgium, and an overweight in Italy.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any

 

72


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Investment Overview (cont’d)

 

International Real Estate Portfolio

 

transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning
Account Value

 

Ending Account
Value
December 31,

 

Expenses Paid
During Period*
July 1, 2007 —
December 31,

 

 

 

July 1, 2007

 

2007

 

2007

 

Class A

 

 

 

 

 

 

 

Actual

 

$1,000.00

 

$

854.00

 

 

$

4.44

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,020.42

 

4.84

 

 

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

 

Actual

 

1,000.00

 

853.20

 

5.61

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,019.16

 

6.11

 

* Expenses are equal to Class A and Class B annualized net expense ratios of 0.95% and 1.20%, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

* Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

73


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Portfolio of Investments

 

International Real Estate Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Common Stocks (101.5%)

 

 

 

 

 

Australia (5.8%)

 

 

 

 

 

Centro Properties Group REIT

 

782,158

 

$

688

 

CFS Retail Property Trust REIT

 

1,421,423

 

2,912

 

DB RREEF Trust REIT

 

2,509,987

 

4,391

 

Goodman Group REIT

 

1,230,858

 

5,297

 

GPT Group REIT

 

1,665,213

 

5,879

 

ING Industrial Fund REIT

 

389,700

 

866

 

Macquarie CountryWide Trust REIT

 

637,300

 

920

 

Mirvac Group REIT

 

621,959

 

3,270

 

Stockland REIT

 

1,321,454

 

9,727

 

Westfield Group REIT

 

1,759,108

 

32,232

 

 

 

 

 

66,182

 

Austria (2.5%)

 

 

 

 

 

CA Immobilien Anlagen AG

 

(a)52,627

 

1,170

 

Conwert Immobilien Invest AG

 

(a)465,953

 

8,214

 

IMMOFINANZ AG

 

1,921,187

 

19,359

 

 

 

 

 

28,743

 

Finland (1.7%)

 

 

 

 

 

Sponda Oyj

 

1,672,189

 

19,870

 

France (15.2%)

 

 

 

 

 

Fonciere Des Regions REIT

 

89,569

 

11,276

 

Gecina S.A. REIT

 

69,970

 

10,970

 

Klepierre REIT

 

509,841

 

25,886

 

Silic REIT

 

91,459

 

13,354

 

Unibail-Rodamco REIT

 

523,398

 

113,930

 

 

 

 

 

175,416

 

Germany (2.4%)

 

 

 

 

 

Alstria Office AG REIT

 

(a)1,254,325

 

18,802

 

IVG Immobilien AG

 

276,748

 

9,366

 

 

 

 

 

28,168

 

Hong Kong (10.0%)

 

 

 

 

 

China Overseas Land & Investment Ltd.

 

3,468,000

 

7,111

 

China Resources Land Ltd.

 

950,000

 

2,072

 

Guangzhou R&F Properties Co., Ltd., Class H

 

2,386,200

 

8,400

 

Hang Lung Properties Ltd.

 

556,000

 

2,486

 

Henderson Land Development Co., Ltd.

 

1,192,000

 

11,049

 

Hongkong Land Holdings Ltd.

 

2,824,000

 

13,863

 

Hysan Development Co., Ltd.

 

1,946,580

 

5,515

 

Kerry Properties Ltd.

 

1,146,653

 

9,145

 

KWG Property Holding Ltd.

 

(a)1,075,000

 

1,571

 

New World China Land Ltd.

 

4,190,400

 

3,740

 

New World Development Ltd.

 

3,347,256

 

11,749

 

Sino Land Co.

 

212,000

 

744

 

Sun Hung Kai Properties Ltd.

 

1,798,000

 

37,825

 

 

 

 

 

115,270

 

Italy (2.1%)

 

 

 

 

 

Aedes S.p.A.

 

265,964

 

1,346

 

Beni Stabili S.p.A.

 

10,095,082

 

10,932

 

Risanamento S.p.A.

 

(a)2,131,871

 

11,459

 

 

 

 

 

23,737

 

Japan (8.7%)

 

 

 

 

 

Daibiru Corp.

 

55,800

 

$

598

 

Goldcrest Co., Ltd.

 

61,560

 

1,833

 

Japan Real Estate Investment Corp. REIT

 

338

 

4,178

 

KK DaVinci Advisors

 

(a)2,866

 

2,521

 

Mitsubishi Estate Co., Ltd.

 

1,234,000

 

29,580

 

Mitsui Fudosan Co., Ltd.

 

1,079,000

 

23,319

 

Mori Trust Sogo Reit, Inc. REIT

 

48

 

510

 

Nippon Building Fund, Inc. REIT

 

490

 

6,860

 

Nomura Real Estate Office Fund, Inc. REIT

 

199

 

1,872

 

NTT Urban Development Corp.

 

2,467

 

3,929

 

Sumitomo Realty & Development Co., Ltd.

 

770,000

 

18,939

 

TOC Co., Ltd.

 

86,000

 

653

 

Tokyo Tatemono Co., Ltd.

 

231,000

 

2,174

 

Tokyu Land Corp.

 

340,000

 

2,910

 

 

 

 

 

99,876

 

Netherlands (5.6%)

 

 

 

 

 

Corio N.V. REIT

 

182,022

 

14,651

 

Eurocommercial Properties N.V. CVA REIT

 

372,422

 

19,120

 

ProLogis European Properties

 

1,574,080

 

22,834

 

Wereldhave N.V. REIT

 

69,195

 

7,528

 

 

 

 

 

64,133

 

Singapore (2.3%)

 

 

 

 

 

CapitaLand Ltd.

 

1,191,000

 

5,121

 

CapitaMall Trust REIT

 

1,264,000

 

3,006

 

CapitaRetail China Trust

 

(a)884,500

 

1,312

 

Macquarie MEAG Prime REIT

 

4,428,000

 

3,375

 

Suntec REIT

 

1,230,000

 

1,460

 

United Industrial Corp., Ltd.

 

5,167,000

 

9,841

 

Wheelock Properties S Ltd.

 

1,364,000

 

2,016

 

 

 

 

 

26,131

 

Sweden (2.9%)

 

 

 

 

 

Castellum AB

 

1,102,156

 

11,315

 

Hufvudstaden AB, Class A

 

2,307,413

 

21,929

 

 

 

 

 

33,244

 

Switzerland (0.9%)

 

 

 

 

 

PSP Swiss Property AG (Registered)

 

(a)214,267

 

10,781

 

United Kingdom (41.4%)

 

 

 

 

 

Big Yellow Group plc REIT

 

1,073,314

 

9,282

 

British Land Co. plc REIT

 

4,625,210

 

86,213

 

Brixton plc REIT

 

4,052,173

 

23,568

 

Capital & Regional plc

 

2,145,768

 

16,885

 

Derwent London plc REIT

 

1,036,266

 

28,921

 

Grainger plc

 

2,208,105

 

15,266

 

Great Portland Estates plc REIT

 

2,658,706

 

25,196

 

Hammerson plc REIT

 

2,492,805

 

50,706

 

Invista Foundation Property Trust Ltd.

 

1,162,464

 

1,876

 

Land Securities Group plc REIT

 

2,992,679

 

88,993

 

Liberty International plc REIT

 

1,468,202

 

31,246

 

Mapeley Ltd.

 

81,690

 

2,447

 

Minerva plc

 

(a)3,518,870

 

9,322

 

Quintain Estates & Development plc

 

1,582,926

 

16,083

 

Safestore Holdings Ltd.

 

784,510

 

2,707

 

Segro plc REIT

 

4,489,306

 

41,686

 

 

74

The accompanying notes are an integral part of the financial statements.

 

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

International Real Estate Portfolio

 

 

 

Shares

 

Value
(000)

 

United Kingdom (cont’d)

 

 

 

 

 

Shaftsbury plc REIT

 

1,550,933

 

 

$

 15,387

 

Unite Group plc

 

1,438,673

 

10,070

 

Warner Estate Holdings plc REIT

 

30,359

 

217

 

 

 

 

 

476,071

 

Total Common Stocks (Cost $1,328,193)

 

 

 

1,167,622

 

Total Investments (101.5%) (Cost $1,328,193)

 

 

 

(v)

1,167,622

 

Liabilities in Excess of Other Assets (-1.5%)

 

 

 

(16,804)

 

Net Assets (100%)

 

 

 

$1,150,818

 

 

(a)         Non-income producing security.

(v)        The approximate market value and percentage of the investments,$1,168,000 and 100.0%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note A within the Notes to Financial Statements.

CVA     Certificaten Van Aandelen

REIT    Real Estate Investment Trust

 

Foreign Currency Exchange Contract Information:

 

The Portfolio had the following foreign currency exchange contract(s) open at period end:

 

Currency
to
Deliver
(000)

 

Value
(000)

 

Settlement
Date

 

In
Exchange
For
(000)

 

Value
(000)

 

Net
Unrealized
Gain (Loss)
(000)

 

AUD

554

 

 

$

487

 

 

1/2/08

 

USD

484

 

 

$

484

 

 

$ (3)

 

 

HKD

5,781

 

 

741

 

 

1/2/08

 

USD

741

 

 

741

 

 

@—

 

 

JPY

8,865

 

 

79

 

 

1/4/08

 

USD

78

 

 

78

 

 

(1)

 

 

JPY

83,391

 

 

746

 

 

1/7/08

 

USD

732

 

 

732

 

 

(14)

 

 

SGD

298

 

 

208

 

 

1/2/08

 

USD

207

 

 

207

 

 

(1)

 

 

SGD

71

 

 

50

 

 

1/3/08

 

USD

49

 

 

49

 

 

 

(1)

 

 

 

 

 

 

 

$2,311

 

 

 

 

 

 

 

 

$2,291

 

 

 

$(20)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUD — Australian Dollar

HKD — Hong Kong Dollar

JPY — Japanese Yen

SGD — Singapore Dollar

USD — United States Dollar

@         Value is less than $500.

 

 

The accompanying notes are an integral part of the financial statements.

75

 


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (unaudited)

 

International Small Cap Portfolio

 

 

*

Minimum Investment

 

 

+

The Lipper International Small/Mid-Cap Core Funds Index commenced operations on March 31, 2002. Performance data prior to December 31, 2002 is from the Lipper International Small/Mid-Cap Core Funds Average.

 

 

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 
Year

 

Five 
Years

 

Ten 
Years

 

Since 
Inception(5)

 

Portfolio – Class A (4)

 

(3.22

)%

 

20.99

%

 

12.79

%

 

12.82

%

 

MSCI EAFE Small Cap Total Return Index

 

1.45

 

 

26.37

 

 

11.11

 

 

7.89

 

 

Lipper International Small/Mid-Cap Core Funds Index

 

3.90

 

 

24.52

 

 

14.47

 

 

—

 

 

 

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 www.morganstanley.com/msim. 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.

 

(1)

The Morgan Stanley Capital International (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. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)

The Lipper 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 fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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.

 

The International Small Cap Portfolio (the “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. The risks of investing in emerging- market countries are greater than the risks generally associated with foreign investments.

 

Performance

 

For the year ended December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of -3.22%, net of fees, The Portfolio underperformed against its benchmark, the Morgan Stanley Capital International (MSCI) EAFE Small Cap Total Return Index (the “Index”) which returned 1.45%.

 

Factors Affecting Performance

 

·

The Index ended the year up 1.5%, but it was a tale of two halves with increased volatility creating a dramatic shift in conditions. In the first half, the Index posted a return of 11.6% on globally robust merger and acquisition (M&A) activity, strong corporate earnings, and an abundance of liquidity, coupled with generally positive economic news. In the second half of the year, the Index retracted much of the gain, as data confirmed that real estate in the U.S. and some parts of Europe had deteriorated, retail sales softened, credit standards tightened and inflation increased on the back of higher commodity prices.

 

 

·

The underlying currencies of the Index also saw some marked movement in 2007, with the U.S. dollar hitting record lows against the Euro and a 26-year low against the U.K. pound. The Yen was weak most of the year but strengthened mid-year as the carry trade unwound. The Australian and Canadian dollars strengthened in the last

 

76


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

International Small Cap Portfolio

 

 

quarter of the year. In U.S. dollar terms, the Index gained a modest 1.5% for the year versus a decline of 5.6% in local currency terms.

 

 

·

On a sector basis, the first half of the year saw the utilities sector as the best performing sector, as investors favored opportunities in alternative energy and fuel (wind/solar). The industrials and materials sectors led the market as companies there benefited from global demand. However, financials lagged, rising a modest 5.7% in the first half of the year, as prospects for the real estate industry became more subdued and the news on subprime default was emerging. In the second half of the year, all sectors declined, but the defensive sectors – including consumer staples, health care and utilities – proved slightly more resilient. The financials, industrials and materials sectors underperformed the Index, declining 13%, 10.9% and 10.6%, respectively. Telecommunications was the worst performer, down 16%.

 

Management Strategies

 

·

The Portfolio underperformed the Index for the year, in part because the Portfolio’s more defensive structure failed to fully keep up with the rising market in the first six months and also lagged in the fourth quarter of the year, despite generating outperformance in the third quarter.

 

 

·

For the full year, the Portfolio’s sector allocations – specifically, an overweight to consumer staples and under-weights to materials and financials – were a positive contributor. However, stock selection in information technology, consumer discretionary and financials detracted from performance.

 

 

·

The information technology sector was weak throughout 2007 as the industry faced consolidation, cost restructuring and a delay in new products. The Portfolio’s stock selection was the most significant contributor to underperformance, primarily due to its holdings in hardware and semiconductor companies. Nonetheless, the strength of the franchises in the Portfolio is unquestionable, in our view; the stocks we hold each have strong balance sheets and we believe their valuations are strikingly cheap.

 

 

·

Stock selection in the consumer discretionary sector across a broad group of companies in retail, media and autos added value in the first half. However, in the second half, stock selection was weak both from positions not held in the Portfolio and current holdings. In particular, a position in a U.K. nightclub operator sold off sharply due to its exposure to the U.K. consumer. The Portfolio’s holding in a Norwegian media company declined on concerns about higher capital expenditures and a disappointing recent earnings announcement. Finally, the Portfolio’s holding in an Australian retail company was weaker, despite a generally positive outlook for the company by management. All are stocks we believe continue to offer attractive value.

 

 

·

Within the financial sector, stock selection and underweight positions in the real estate and the banking sectors added value, but gains were offset by stock selection in diversified financials, which included both European and Japanese holdings. Over the year, we continually evaluated the positions (consumer finance, leasing and real estate service companies) and believe they continue to offer compelling value.

 

 

·

Conversely, stock selection in a broad range of health care companies, including equipment, services and drugs, benefited the Portfolio. In general, these companies benefited from higher sales and expansion in their core businesses.

 

 

·

The overweight to consumer staples added value, but stock selection was a detractor. A broad group of companies, primarily in the U.K., rose as the value characteristics, high margins and lower book values appealed to both corporate and private investors. In addition, many companies completed restructuring and added to their product mix, which commanded higher end prices. However, one U.K. branded consumer staples company came under pressure as investors worried about its ability to pass on higher costs.

 

 

·

Industrials were a detractor for the full year, as the Portfolio’s holdings did not participate in the rally in the first half of the year. However, as the market weakened in the second half, the companies we held that have less cyclical businesses and with good valuation support declined less.

 

 

·

We are extremely disappointed with the Portfolio’s performance; however, we have strong conviction in the Portfolio’s current holdings. If market conditions are now turning and the momentum and liquidity that have driven many stock valuations to full, if not extended levels, is now waning, we believe the Portfolio’s defensive characteristics, quality bias and strong valuation support should position it well.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees and other Portfolio expenses. These examples are intended to help you understand

 

77


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

International Small Cap Portfolio

 

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, 2007 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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning Account Value July 1, 2007

 

Ending Account
Value December 31,
2007

 

Expenses Paid
During Period*
December 31, —
2007

Class A

 

 

 

 

 

 

Actual

 

$1,000.00

 

$890.50

 

$5.24

Hypothetical (5% average annual

 

 

 

 

 

 

return before expenses)

 

1,000.00

 

1,019.66

 

5.60

 

*

Expenses are equal to Class A annualized net expense ratios of 1.10%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

 

*

Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

78


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments

 

International Small Cap Portfolio

 

 

 

Shares

 

Value
(000)

 

Common Stocks (98.3%)
Australia (6.0%)

Goodman Fielder Ltd.

 

6,985,939

 

$ 11,591

 

Infomedia Ltd.

 

10,849,874

 

5,124

 

MYOB Ltd.

 

7,285,574

 

9,273

 

Pacific Brands Ltd.

 

5,881,780

 

16,753

 

Ramsay Health Care Ltd.

 

508,092

 

4,874

 

 

 

 

 

47,615

 

Austria (1.0%)
Zumtobel AG

 

211,886

 

7,606

 

Belgium (2.2%)
Omega Pharma S.A.

 

251,374

 

17,437

 

Denmark (2.6%)

 

 

 

 

 

Carlsberg A/S, Class B

 

77,435

 

9,315

 

Danisco A/S

 

163,483

 

11,552

 

 

 

 

 

20,867

 

Finland (3.1%)

 

 

 

 

 

Cargotec Corp., Class B

 

159,005

 

7,310

 

Elisa Oyj

 

226,848

 

6,922

 

HKScan Oyj

 

299,028

 

6,113

 

YIT Oyj

 

209,893

 

4,536

 

 

 

 

 

24,881

 

France (6.5%)
Bull S.A.

 

(a)1,024,801

 

5,653

 

GL Trade S.A.

 

157,681

 

7,100

 

Icade

 

54,960

 

8,194

 

Ipsen S.A.

 

190,860

 

11,481

 

Nexans S.A.

 

30,072

 

3,724

 

Saft Groupe S.A.

 

202,436

 

9,082

 

Zodiac S.A.

 

(a)102,329

 

6,508

 

 

 

 

 

51,742

 

Germany (3.9%)

 

 

 

 

 

K&S AG

 

18,620

 

4,392

 

MTU Aero Engines Holding AG

 

285,614

 

16,585

 

Sartorius AG (Non-Voting Shares)

 

252,774

 

9,962

 

SCS Standard Computersysteme AG

 

(a)(d)(i)(l)21,289

 

—

 

 

 

 

 

30,939

 

Hong Kong (0.6%)

 

 

 

 

 

Solomon Systech International Ltd.

 

56,705,900

 

4,770

 

Ireland (4.5%)

 

 

 

 

 

DCC plc

 

174,381

 

4,896

 

Glanbia plc

 

2,410,129

 

16,310

 

Kerry Group plc, Class A

 

455,726

 

14,404

 

 

 

 

 

35,610

 

Italy (6.7%)

 

 

 

 

 

Banca CR Firenze

 

732,551

 

7,068

 

Buzzi Unicem S.p.A.

 

220,391

 

6,048

 

Davide Campari-Milano S.p.A.

 

1,929,916

 

18,374

 

Interpump S.p.A.

 

720,350

 

7,381

 

Prysmian S.p.A

 

(a)267,227

 

6,543

 

SAES Getters S.p.A.

 

143,847

 

4,309

 

Sogefi S.p.A.

 

483,698

 

3,844

 

 

 

 

 

53,567

 

Japan (27.8%)

 

 

 

 

 

Aplus Co., Ltd.

 

(a)3,970,300

 

$ 3,155

 

Arealink Co., Ltd.

 

1,139

 

373

 

Ariake Japan Co., Ltd.

 

1,280,100

 

22,895

 

Atrium Co., Ltd.

 

126,500

 

2,604

 

Doutor Nichires Holdings Co., Ltd.

 

(a)917,300

 

4,737

 

Fuyo General Lease Co., Ltd.

 

234,200

 

6,174

 

Hikari Tsushin, Inc.

 

513,100

 

17,399

 

Jaccs Co., Ltd.

 

938,000

 

2,112

 

Japan Securities Finance Co., Ltd.

 

1,500,100

 

13,087

 

Mabuchi Motor Co., Ltd.

 

183,000

 

11,049

 

Mars Engineering Corp.

 

555,900

 

6,376

 

Milbon Co., Ltd.

 

338,900

 

7,965

 

Miraca Holdings, Inc.

 

247,000

 

5,909

 

Miraial Co., Ltd.

 

172,200

 

4,868

 

Nakanishi, Inc.

 

88,700

 

11,465

 

Nihon Micro Coating Co., Ltd.

 

399,500

 

920

 

Nihon Trim Co., Ltd.

 

140,850

 

3,786

 

Okinawa Cellular Telephone Co.

 

2,079

 

4,564

 

Okinawa Electric Power Co., Inc.  (The)

 

229,300

 

10,662

 

Osaki Engineering Co., Ltd.

 

843

 

1,467

 

Rengo Co., Ltd.

 

385,000

 

2,509

 

Shinkawa Ltd.

 

497,400

 

7,622

 

Snow Brand Milk Products Co., Ltd.

 

1,201,000

 

3,934

 

Sokkia Co., Ltd.

 

729,000

 

4,181

 

Sun Frontier Fudousan Co., Ltd.

 

2,289

 

3,520

 

Takuma Co., Ltd.

 

735,000

 

2,961

 

Toei Animation Co., Ltd.

 

402,000

 

8,737

 

Tsumura & Co.

 

887,500

 

17,478

 

V Technology Co., Ltd.

 

1,176

 

3,225

 

Wacom Co., Ltd.

 

2,009

 

4,188

 

Yachiyo Bank Ltd.

 

2,570

 

9,451

 

Yamaichi Electronics Co., Ltd.

 

433,400

 

1,669

 

 

 

 

 

221,042

 

Netherlands (2.3%)

 

 

 

 

 

Advanced Metallurgical Group N.V.

 

(a)127,493

 

9,490

 

Wavin N.V.

 

658,806

 

8,715

 

 

 

 

 

18,205

 

New Zealand (1.0%)

 

 

 

 

 

Fisher & Paykel Healthcare Corp., Ltd.

 

1,377,380

 

3,694

 

Warehouse Group Ltd.

 

957,797

 

4,196

 

 

 

 

 

7,890

 

Norway (5.8%)

 

 

 

 

 

Fred Olsen Energy ASA

 

154,146

 

8,404

 

Pronova BioPharma AS

 

(a)1,778,185

 

7,177

 

Revus Energy ASA

 

(a)547,210

 

7,924

 

Schibsted ASA

 

344,994

 

14,739

 

TGS Nopec Geophysical Co., ASA

 

(a)465,047

 

6,313

 

Veidekke ASA

 

215,628

 

 2,003

 

 

 

 

 

46,560

 

Spain (0.5%)

 

 

 

 

 

Miquel y Costas & Miquel S.A.

 

178,758

 

3,848

 

Sweden (4.7%)

 

923,241

 

9,426

 

Billerud AB

 

 

 

 

 

 

The accompanying notes are an integral part of the financial statements.

79

 


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

International Small Cap Portfolio

 

 

 

Shares

 

Value
(000)

 

Sweden (cont’d)

 

 

 

 

 

Elekta AB, Class B

 

493,300

 

$ 8,156

 

Eniro AB

 

364,590

 

3,258

 

Micronic Laser Systems AB

 

(a)816,463

 

4,038

 

Saab AB, Class B

 

625,300

 

12,428

 

 

 

 

 

37,306

 

Switzerland (5.8%)

 

 

 

 

 

Bucher Industries AG (Registered)

 

36,788

 

8,411

 

Galenica AG (Registered)

 

17,493

 

7,598

 

Kaba Holding AG, Class B

 

26,613

 

8,320

 

LEM Holding SA (Registered)

 

14,499

 

4,100

 

Medisize Holding AG

 

56,070

 

3,960

 

Schindler Holding AG

 

78,924

 

5,045

 

Sia Abrasives Holding AG (Registered)

 

16,443

 

5,795

 

Zehnder Group AG, Class B

 

2,028

 

3,366

 

 

 

 

 

46,595

 

United Kingdom (13.3%)

 

 

 

 

 

Ark Therapeutics Group plc

 

(a)2,378,983

 

4,434

 

Britvic plc

 

2,404,904

 

16,482

 

Cattles plc

 

694,042

 

4,059

 

IMI plc

 

969,959

 

7,531

 

Luminar Group Holdings plc

 

1,476,685

 

12,588

 

Meggitt plc

 

750,876

 

4,942

 

Premier Foods plc

 

4,794,264

 

19,398

 

Rotork plc

 

289,435

 

5,540

 

Spirax-Sarco Engineering plc

 

337,221

 

5,861

 

William Hill plc

 

801,723

 

8,315

 

Wincanton plc

 

2,320,375

 

17,031

 

 

 

 

 

106,181

 

Total Common Stocks (Cost $727,180)

 

 

 

782,661

 

Total Investments (98.3%) (Cost $727,180)

 

 

 

(v)782,661

 

Other Assets in Excess of Liabilities (1.7%)

 

 

 

13,389

 

Net Assets (100%)

 

 

 

$796,050

 

 

(a)

 

Non-income producing security

(d)

 

Securities were valued at fair value — At December 31, 2007, the Portfolio held a fair valued security, valued at less than $500, representing less than 0.05% of net assets.

 

 

(i)

 

Restricted security valued at fair value and not registered under the Securities Act of 1933. SCS Standard Computersysteme AG was acquired 4/04 and has a current cost basis of $0. At December 31, 2007, this security had a market value of $0, representing 0.0% of net assets.

 

 

(l)

 

Security has been deemed illiquid at December 31, 2007.

(v)

 

The approximate market value and percentage of the investments, $782,661,000 and 100.0%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note A within the Notes to Financial Statements.

 

 

@

 

Value is less than $500.

 

Foreign Currency Exchange Contract Information:

 

The Portfolio had the following foreign currency exchange contract(s) open at period end:

 

Currency
to
Deliver
(000)

 

Value
(000)

 

Settlement
Date

 

In
Exchange
For
(000)

 

Value
(000)

 

Net
Unrealized
Appreciation
(Depreciation)
(000)

 

AUD

65

 

 

$       57

 

 

1/2/08

 

USD

57

 

 

$       57

 

 

$@—

 

 

AUD

564

 

 

495

 

 

1/3/08

 

USD

495

 

 

495

 

 

@—

 

 

CHF

317

 

 

280

 

 

1/3/08

 

USD

280

 

 

280

 

 

@—

 

 

CHF

2,194

 

 

1,938

 

 

1/3/08

 

USD

1,951

 

 

1,951

 

 

13

 

 

DKK

9,148

 

 

1,794

 

 

1/2/08

 

USD

1,765

 

 

1,765

 

 

(29

)

 

DKK

699

 

 

137

 

 

1/2/08

 

USD

138

 

 

138

 

 

1

 

 

DKK

4,993

 

 

979

 

 

1/3/08

 

USD

984

 

 

984

 

 

5

 

 

EUR

1,786

 

 

2,611

 

 

1/2/08

 

USD

2,570

 

 

2,570

 

 

(41

)

 

EUR

247

 

 

361

 

 

1/2/08

 

USD

358

 

 

358

 

 

(3

)

 

EUR

460

 

 

673

 

 

1/2/08

 

USD

662

 

 

662

 

 

(11

)

 

EUR

1,637

 

 

2,393

 

 

1/2/08

 

USD

2,406

 

 

2,406

 

 

13

 

 

EUR

1,698

 

 

2,482

 

 

1/2/08

 

USD

2,500

 

 

2,500

 

 

18

 

 

EUR

1,658

 

 

2,424

 

 

1/3/08

 

USD

2,436

 

 

2,436

 

 

12

 

 

GBP

851

 

 

1,694

 

 

1/2/08

 

USD

1,702

 

 

1,702

 

 

8

 

 

HKD

1,240

 

 

159

 

 

1/2/08

 

USD

159

 

 

159

 

 

@—

 

 

JPY

15,257

 

 

137

 

 

1/7/08

 

USD

134

 

 

134

 

 

(3

)

 

JPY

651,703

 

 

5,836

 

 

1/7/08

 

USD

5,766

 

 

5,766

 

 

(70

)

 

JPY

575,838

 

 

5,158

 

 

1/8/08

 

USD

5,146

 

 

5,146

 

 

(12

)

 

NOK

8,339

 

 

1,536

 

 

1/2/08

 

USD

1,497

 

 

1,497

 

 

(39

)

 

NOK

4,193

 

 

772

 

 

1/2/08

 

USD

753

 

 

753

 

 

(19

)

 

NOK

1,464

 

 

269

 

 

1/2/08

 

USD

270

 

 

270

 

 

1

 

 

NOK

4,417

 

 

814

 

 

1/3/08

 

USD

814

 

 

814

 

 

@—

 

 

NOK

16,015

 

 

2,950

 

 

1/4/08

 

USD

2,959

 

 

2,959

 

 

9

 

 

NZD

18

 

 

14

 

 

1/3/08

 

USD

14

 

 

14

 

 

@—

 

 

NZD

156

 

 

120

 

 

1/4/08

 

USD

121

 

 

121

 

 

1

 

 

SEK

18,137

 

 

2,806

 

 

1/2/08

 

USD

2,756

 

 

2,756

 

 

(50

)

 

SEK

4,694

 

 

726

 

 

1/2/08

 

USD

733

 

 

733

 

 

7

 

 

SEK

7,220

 

 

1,117

 

 

1/3/08

 

USD

1,122

 

 

1,122

 

 

 

5

 

 

 

 

 

 

$40,732

 

 

 

 

 

 

 

 

$40,548

 

 

 

$(184

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AUD

—

Australian Dollar

CHF

—

Swiss Franc

DKK

—

Danish Krona

EUR

—

Euro

GBP

—

British Pound

HKD

—

Hong Kong Dollar

JPY

—

Japanese Yen

NOK

—

Norwegian Krone

NZD

—

New Zealand Dollar

SEK

—

Swedish Krona

USD

—

United States Dollar

 

80

The accompanying notes are an integral part of the financial statements.

 


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (unaudited)

 

Disciplined Large Cap Value Active Extension Portfolio

 

 

*    Minimum Investment

**  Commenced operations on May 31, 2007

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the Russell 1000® Value Index(1) and the Lipper Multi-Cap Value Funds Index(2)

 

 

 

Total Returns(3)

 

 

 

Cumulative

 

 

 

Since

 

 

 

Inception(5)

 

 

 

 

 

Portfolio – Class A (4)

 

(13.93

)%

 

Russell 1000® Value Index

 

(8.22

)

 

Lipper Multi-Cap Value Funds Index

 

(9.18

)

 

 

 

 

 

 

Portfolio – Class B (4)

 

(14.06

)

 

Russell 1000® Value Index

 

(8.22

)

 

Lipper Multi-Cap Value Funds Index

 

(9.18

)

 

 

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 www.morganstanley.com/msim. 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.

 

(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. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)

 

The Lipper Multi-Cap Value Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Multi-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 Multi-Cap Value Funds classification.

(3)

 

Total returns for the Portfolio reflect fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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 May 31, 2007

(5)

 

For comparative purposes, cumulative 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.

 

The Disciplined Large Cap Value Active Extension Portfolio (the “Portfolio”) seeks long-term capital appreciation by investing primarily in equity securities of large capitalization companies. The Adviser seeks to construct a diversified portfolio primarily consisting of undervalued, large capitalization equity securities using quantitative security selection models that attempt to identify securities that are undervalued, have attractive operating attributes and improving market price behaviors. The Portfolio primarily invests in common stocks but may also invest in preferred stocks, convertible securities and warrants. In addition to purchasing equity securities (i.e., taking long positions), the Adviser attempts to identify stocks in the Adviser’s large

 

 

81

 


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

Disciplined Large Cap Value Active Extension Portfolio

 

capitalization universe that it believes will underperform relative to the average stock in the universe and will sell these securities short on behalf of the Portfolio. Short sales expose the Portfolio to the risk that it will be required to cover its short positions at a time when securities have appreciated in value, thus resulting in a loss to the portfolio. Leverage may cause the Portfolio’s net asset value to be more volatile than if it had not been leveraged because leverage tends to magnify the effect of any increases or decreases in the value of Portfolio’s securities. The Portfolio cannot assure you that the use of leverage will result in a higher return on your investment.

 

Performance

 

For the period from May 31, 2007 (commencement of operations) to December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of -13.93%, net of fees, for Class A shares and -14.06%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares underperformed against its benchmark, the Russell 1000® Value Index (the “Index”) which returned -8.22% for the same period.

 

Factors Affecting Performance

 

·                  Although the broad stock market advanced during the year, value stocks overall significantly lagged behind their growth counterparts. Over the period, investors favored larger companies perceived to have better potential of sustainable above-average growth in a volatile economic environment impacted by a deteriorating housing market, declining consumer spending, high oil prices and uncertainty surrounding future corporate profitability.

 

·                  The Portfolio’s quantitative stock selection models are based on valuation, operating and trading (12-month momentum) factors. Against the market backdrop in which value underperformed growth, the Portfolio’s active exposure to valuation factors such as relatively higher book-to-price and trailing earnings yield hindered overall performance relative to the Index for the period from May 31, 2007 (the Portfolio’s inception) through December 31, 2007.

 

·                  The largest detractor from relative returns came from security selection within the financials sector. Here, the Portfolio’s long positions in banks unfortunately overshadowed the benefits gained from its short positions. Further dampening performance were individual stock positions within the consumer staples sector, predominately on the long side.

 

·                  In contrast, the models’ emphasis on stocks with attractive long-term price momentum (measured over a 12-month period) contributed to the Portfolio’s relative performance. Stocks with good long-term price momentum benefited in this recent market environment, where market participants tended to react strongly to news, thereby creating short-term price volatility.

 

·                  The information technology sector had the largest positive impact on relative returns, primarily due to favorable short positions. Furthermore, the Portfolio’s long holdings in the health care sector also added to relative performance, especially those within the health care equipment and services industry group.

 

Management Strategies

 

·                  In actively managing the portfolio, we apply a bottom-up, quantitative approach. The process for identifying securities to hold long and to short encompasses proprietary, robust quantitative models of valuation (including price relative to trailing earnings), operating (including change in shares outstanding) and momentum (including growth rate in twelve-month price) factors.

 

·                  We use history as a guide to the future—historical testing is an essential part of our research process. The models we use are designed to favor long-term trends and be less reactive to short-term fluctuations.

 

·                  At the close of the period, energy and industrials represented the largest sector overweights in the Portfolio while health care and financials represented the largest sector underweights.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 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),

 

82


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

Disciplined Large Cap Value Active Extension Portfolio

 

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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning
Account Value
July 1, 2007

 

Ending
Account Value
December 31,
2007

 

Expenses Paid
During Period*
July 1, 2007 — December 31,
2007

 

Class A

 

 

 

 

 

 

 

Actual

 

$1,000.00

 

$    892.00

 

$10.83

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,013.76

 

11.52

 

 

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

 

Actual

 

1,000.00

 

892.40

 

11.83

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,012.70

 

12.58

 

*

Expenses are equal to Class A and Class B annualized net expense ratios of 2.27% and 2.48%, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

*

Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

83


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments

 

Disciplined Large Cap Value Active Extension

 

 

 

Shares

 

Value
(000)

Long Positions (126.1%)

 

 

 

 

Common Stocks (126.1%)

 

 

 

 

Aerospace (2.5%)

 

 

 

 

Northrop Grumman Corp.

 

(q)1,572

 

$

124

Raytheon Co.

 

(q)1,752

 

106

 

 

 

 

230

Auto Trucks & Parts (1.0%)

 

 

 

 

Paccar, Inc.

 

(q)1,703

 

93

Banks: Outside New York City (6.1%)

 

 

 

 

City National Corp.

 

(q)1,501

 

89

Comerica, Inc.

 

(q)2,049

 

89

National City Corp.

 

(q)4,446

 

73

Northern Trust Corp.

 

1,232

 

95

Popular, Inc.

 

(q)5,338

 

57

U.S. Bancorp

 

135

 

4

UnionBanCal Corp.

 

1,829

 

89

Wells Fargo & Co.

 

(q)2,321

 

70

 

 

 

 

566

Beverages: Brewers (Wineries) (0.7%)

 

 

 

 

Molson Coors Brewing Co., Class B

 

(q)1,328

 

69

Beverages: Soft Drinks (1.2%)

 

 

 

 

Coca-Cola Enterprises, Inc.

 

4,107

 

107

Biotechnology Research & Production (1.1%)

 

 

 

 

Charles River Laboratories International, Inc.

 

(a)(q)1,544

 

102

Cable Television Services (1.6%)

 

 

 

 

Liberty Global, Inc., Class A

 

(a)828

 

32

Liberty Media Corp. - Capital, Class A

 

(a)973

 

113

 

 

 

 

145

Chemicals (3.4%)

 

 

 

 

Dow Chemical Co. (The)

 

(q)3,474

 

137

Eastman Chemical Co.

 

(q)1,562

 

95

Lubrizol Corp.

 

(q)1,567

 

85

 

 

 

 

317

Communications & Media (1.3%)

 

 

 

 

CBS Corp., Class B

 

(q)4,305

 

117

Time Warner, Inc.

 

158

 

3

 

 

 

 

120

Communications Technology (1.1%)

 

 

 

 

Embarq Corp.

 

2,041

 

101

Computer Services Software & Systems (1.4%)

 

 

 

 

Computer Sciences Corp.

 

(a)1,802

 

89

Juniper Networks, Inc.

 

(a)741

 

24

Lexmark International, Inc., Class A

 

(a)(q)592

 

21

 

 

 

 

134

Computer Technology (2.4%)

 

 

 

 

Hewlett-Packard Co.

 

(q)1,820

 

92

International Business Machines Corp.

 

(q)1,207

 

130

 

 

 

 

222

Containers & Packaging: Metal & Glass (1.1%)

 

 

 

 

Owens-Illinois, Inc.

 

(a)(q)1 ,981

 

98

Cosmetics (1.0%)

 

 

 

 

Alberto-Culver Co.

 

3,915

 

96

Diversified Financial Services (10.8%)

 

 

 

 

Bank of America Corp.

 

(q)4,277

 

$

177

Bank of New York/Mellon Corp. (The)

 

(q)2,879

 

140

Citigroup, Inc.

 

(q)8,553

 

252

Goldman Sachs Group, Inc. (The)

 

(q)645

 

139

JPMorgan Chase & Co.

 

(q)2,887

 

126

Merrill Lynch & Co., Inc.

 

(q)2,378

 

128

Wachovia Corp.

 

(q)994

 

38

 

 

 

 

1,000

Drugs & Pharmaceuticals (2.6%)

 

 

 

 

Johnson & Johnson

 

(q)1,369

 

91

Pfizer, Inc.

 

(q)6,664

 

152

 

 

 

 

243

Electrical Equipment & Components (1.0%)

 

 

 

 

Energizer Holdings, Inc.

 

(a)(q)836

 

94

Electronics: Semi-Conductors/Components (1.8%)

 

 

 

 

Arrow Electronics, Inc.

 

(a)(q)2,487

 

98

Intersil Corp., Class A

 

2,774

 

68

 

 

 

 

166

Energy Equipment (0.8%)

 

 

 

 

Ensco International, Inc.

 

(q)1,294

 

77

Energy — Miscellaneous (2.8%)

 

 

 

 

Devon Energy Corp.

 

(q)1,583

 

141

Occidental Petroleum Corp.

 

204

 

16

Valero Energy Corp.

 

(q)1,532

 

107

 

 

 

 

264

Financial — Miscellaneous (3.0%)

 

 

 

 

Axis Capital Holdings, Ltd.

 

733

 

29

Countrywide Financial Corp.

 

(q)5,371

 

48

Fannie Mae

 

(q)794

 

32

MGIC Investment Corp.

 

(q)2,980

 

67

PartnerRe, Ltd.

 

364

 

30

PMI Group, Inc. (The)

 

(q)2,902

 

38

Radian Group, Inc.

 

(q)3,110

 

36

 

 

 

 

280

Foods (2.6%)

 

 

 

 

JM Smucker Co. (The)

 

1,875

 

96

Kraft Foods, Inc., Class A

 

94

 

3

Seaboard Corp.

 

(q)46

 

68

Tyson Foods, Inc., Class A

 

(q)5,069

 

78

 

 

 

 

245

Forest Products (1.0%)

 

 

 

 

Plum Creek Timber Co., Inc. REIT

 

2,062

 

95

Health Care Services (2.1%)

 

 

 

 

Aetna, Inc.

 

1,752

 

101

Coventry Health Care, Inc.

 

(a)1,630

 

97

 

 

 

 

198

Homebuilding (2.5%)

 

 

 

 

KB Home

 

(q)2,781

 

60

MDC Holdings, Inc.

 

2,438

 

91

NVR, Inc.

 

(a)(q)147

 

77

 

 

 

 

228

 

84

The accompanying notes are an integral part of the financial statements.

 


2007 Annual Report

2007 Annual Report

 

December 31, 2007

Portfolio of Investments (cont’d)

 

Disciplined Large Cap Value Active Extension

 

 

 

Shares

 

Value
(000)

Insurance: Life (2.0%)

 

 

 

 

Cigna Corp.

 

(q)1,715

 

$

 92

Nationwide Financial Services

 

(q)1,978

 

89

 

 

 

 

181

Insurance: Multi-Line (7.5%)

 

 

 

 

American International Group, Inc.

 

(q)1,475

 

86

American National Insurance Co.

 

(q)168

 

20

Assurant, Inc.

 

1,595

 

107

Hartford Financial Services Group, Inc. (The)

 

1,400

 

122

Loews Corp.

 

(q)2,527

 

127

MetLife, Inc.

 

(q)2,108

 

130

Unitrin, Inc.

 

(q)2,095

 

101

 

 

 

 

693

Insurance: Property & Casualty (2.9%)

 

 

 

 

Fidelity National Financial, Inc., Class A

 

(a)5,038

 

73

Safeco Corp.

 

(q)1,778

 

99

Transatlantic Holdings, Inc.

 

1,290

 

94

 

 

 

 

266

Investment Management Companies (2.6%)

 

 

 

 

Ameriprise Financial, Inc.

 

(q)1,856

 

102

Lehman Brothers Holdings, Inc.

 

(q)2,180

 

143

 

 

 

 

245

Leisure Equipment & Products (0.6%)

 

 

 

 

Brunswick Corp.

 

3,125

 

53

Machinery & Engineering (0.5%)

 

 

 

 

AGCO Corp.

 

(a)(q)710

 

48

Machinery: Engines (1.0%)

 

 

 

 

Cummins, Inc.

 

(q)721

 

92

Manufacturing (2.3%)

 

 

 

 

Eaton Corp.

 

(q)1,163

 

113

SPX Corp.

 

(q)962

 

99

 

 

 

 

212

Multi-Sector Companies (6.3%)

 

 

 

 

General Electric Co.

 

(q)10,111

 

375

Honeywell International, Inc.

 

(q)1,780

 

109

Tyco International, Ltd.

 

(q)2,540

 

101

 

 

 

 

585

Office Furniture & Business Equipment (1.2%)

 

 

 

 

Xerox Corp.

 

(q)6,634

 

107

Oil: Integrated (15.2%)

 

 

 

 

Chevron Corp.

 

(q)3,842

 

359

ConocoPhillips

 

(q)2,794

 

247

ExxonMobil Corp.

 

(q)6,922

 

648

Marathon Oil Corp.

 

2,490

 

151

 

 

 

 

1,405

Paints & Coatings (0.9%)

 

 

 

 

Sherwin Williams Co. (The)

 

1,400

 

81

Production Technology Equipment (0.6%)

 

 

 

 

Novellus Systems, Inc.

 

(a)(q)2,006

 

55

Publishing: Newspapers (1.1%)

 

 

 

 

Gannett Co., Inc.

 

(q)2,582

 

101

Real Estate Investment Trusts (REIT) (1.2%)

 

 

 

 

Colonial Properties Trust REIT

 

1,009

 

$

 23

HRPT Properties Trust REIT

 

11,800

 

91

 

 

 

 

114

Retail (1.8%)

 

 

 

 

Dollar Tree Stores, Inc.

 

(a)(q)2,621

 

68

Expedia, Inc.

 

(a)(q)3,106

 

98

McDonald’s Corp.

 

65

 

4

 

 

 

 

170

Services: Commercial (2.2%)

 

 

 

 

Avis Budget Group, Inc.

 

(a)(q)4,427

 

57

Convergys Corp.

 

(a)(q)2,719

 

45

Hewitt Associates, Inc., Class A

 

(a)(q)2,537

 

97

 

 

 

 

199

Soaps & Household Chemicals (1.2%)

 

 

 

 

Procter & Gamble Co.

 

(q)1,564

 

115

Textile Apparel Manufacturers (0.8%)

 

 

 

 

Jones Apparel Group, Inc.

 

(q)4,638

 

74

Textile Products (1.0%)

 

 

 

 

Mohawk Industries, Inc.

 

(a)(q)1,219

 

91

Tobacco (1.3%)

 

 

 

 

Altria Group, Inc.

 

(q)288

 

22

Loews Corp. - Carolina Group

 

1,147

 

98

 

 

 

 

120

Transportation — Miscellaneous (1.1%)

 

 

 

 

Overseas Shipholding Group, Inc.

 

1,415

 

105

Truckers (0.2%)

 

 

 

 

YRC Worldwide, Inc.

 

(a)(q)983

 

17

Utilities: Electrical (5.7%)

 

 

 

 

Alliant Energy Corp.

 

(q)2,379

 

97

DTE Energy Co.

 

(q)2,080

 

91

FirstEnergy Corp.

 

(q)521

 

38

Pepco Holdings, Inc.

 

(q)3,505

 

103

PG&E Corp.

 

(q)2,491

 

107

TECO Energy, Inc.

 

(q)5,609

 

97

 

 

 

 

533

Utilities — Miscellaneous (1.7%)

 

 

 

 

Dynegy, Inc., Class A

 

(a)9,399

 

67

Reliant Energy, Inc.

 

(a)(q)3,564

 

94

 

 

 

 

161

Utilities: Telecommunications (6.3%)

 

 

 

 

AT&T, Inc.

 

(q)6,306

 

262

CenturyTel, Inc.

 

(q)2,354

 

98

Telephone & Data Systems, Inc.

 

(q)1,526

 

95

Verizon Communications, Inc.

 

(q)2,959

 

129

 

 

 

 

584

Total Common Stocks (Cost $12,491)

 

 

 

11,697

Short-Term Investment (0.9%)

 

 

 

 

Investment Company (0.9%)

 

 

 

 

Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class (Cost $83)

 

(o)83,379

 

83

 

The accompanying notes are an integral part of the financial statements.

85

 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Disciplined Large Cap Value Active Extension

 

 

 

 

 

Value
(000)

Total Investments (127.0%) (Cost $12,574)

 

 

 

$

 11,780

Liabilities in Excess of Other Assets (-27.0%)

 

 

 

(2,501)

Net Assets (100%)

 

 

 

$

 9,279

 

 

Shares

 

 

Short Positions (28.6%)*

 

 

 

 

Common Stocks (28.6%)

 

 

 

 

Advertising Agencies (1.4%)

 

 

 

 

Interpublic Group of Cos., Inc.

 

(a)7,670

 

62

R.H. Donnelley Corp.

 

(a)1,726

 

63

 

 

 

 

125

Banks: Outside New York City (2.1%)

 

 

 

 

Bancorpsouth, Inc.

 

2,715

 

64

Cullen/Frost Bankers, Inc.

 

1,242

 

63

First Horizon National Corp.

 

680

 

12

Fulton Financial Corp.

 

5,291

 

60

 

 

 

 

199

Biotechnology Research & Production (1.1%)

 

 

 

 

Amgen, Inc.

 

(a)824

 

38

Applera Corp. - Applied Biosystems Group

 

1,888

 

64

 

 

 

 

102

Chemicals (0.7%)

 

 

 

 

Cabot Corp.

 

1,981

 

66

Communications & Media (1.5%)

 

 

 

 

News Corp, Inc., Class A

 

2,369

 

48

Regal Entertainment Group, Class A

 

3,520

 

64

Walt Disney Co. (The)

 

693

 

22

 

 

 

 

134

Communications Technology (0.7%)

 

 

 

 

JDS Uniphase Corp.

 

(a)4,976

 

66

Computer Services Software & Systems (1.9%)

 

 

 

 

QLogic Corp.

 

(a)4,647

 

66

Unisys Corp.

 

(a)11,949

 

57

Virgin Media, Inc.

 

3,113

 

53

 

 

 

 

176

Computer Technology (0.5%)

 

 

 

 

Sun Microsystems, Inc.

 

(a)2,588

 

47

Consumer Staples — Miscellaneous (0.8%)

 

 

 

 

Clorox Co.

 

1,082

 

71

Electrical & Electronics (0.7%)

 

 

 

 

Molex, Inc.

 

2,461

 

67

Electronics: Semi-Conductors/Components (2.1%)

 

 

 

 

Advanced Micro Devices, Inc.

 

(a)5,077

 

38

Atmel Corp.

 

(a)15,074

 

65

Integrated Device Technology, Inc.

 

(a)4,755

 

54

Micron Technology, Inc.

 

(a)5,103

 

37

 

 

 

 

194

Finance Companies (0.8%)

 

 

 

 

People’s United Financial, Inc.

 

4,114

 

73

Foods (0.7%)

 

 

 

 

McCormick & Co., Inc.

 

1,778

 

67

Health Care Facilities (0.6%)

 

 

 

 

Brookdale Senior Living, Inc.

 

2,033

 

58

Health Care Providers & Services (0.1%)

 

 

 

 

Tenet Healthcare Corp.

 

(a)1,109

 

$

 6

Insurance: Property & Casualty (0.1%)

 

 

 

 

Wesco Financial Corp.

 

18

 

7

Investment Management Companies (1.3%)

 

 

 

 

Allied Capital Corp.

 

2,407

 

52

Investment Technology Group, Inc.

 

(a)1,527

 

72

 

 

 

 

124

Machine Tools (0.7%)

 

 

 

 

Snap-On, Inc.

 

1,380

 

67

Medical & Dental Instruments & Supplies (0.3%)

 

 

 

 

Boston Scientific Corp.

 

(a)2,066

 

24

Real Estate Investment Trusts (REIT) (3.6%)

 

 

 

 

BRE Properties, Inc. REIT

 

95

 

4

CBL & Associates Properties, Inc. REIT

 

1,456

 

35

Douglas Emmett, Inc. REIT

 

401

 

9

Essex Property Trust, Inc. REIT

 

126

 

12

Federal Realty Investments Trust REIT

 

572

 

47

Health Care, Inc. REIT

 

1,155

 

52

Hospitality Properties Trust REIT

 

1,742

 

56

Host Hotels & Resorts, Inc. REIT

 

1,882

 

32

Regency Centers Corp. REIT

 

397

 

25

Taubman Centers, Inc. REIT

 

1,262

 

62

 

 

 

 

334

Retail (1.2%)

 

 

 

 

Liberty Media Corp. - Interactive, Class A

 

(a)(q)3,176

 

61

Rite Aid Corp.

 

(a)18,020

 

50

 

 

 

 

111

Savings & Loan (1.4%)

 

 

 

 

Capitol Federal Financial

 

2,127

 

66

Sovereign Bancorp, Inc.

 

5,232

 

60

 

 

 

 

126

Services: Commercial (1.1%)

 

 

 

 

Cintas Corp.

 

1,317

 

44

Hertz Global Holdings, Inc.

 

(a)3,871

 

62

 

 

 

 

106

Utilities: Cable TV & Radio (1.1%)

 

 

 

 

Cablevision Systems Corp.

 

(a)2,559

 

63

Comcast Corp., Class A

 

(a)2,377

 

43

 

 

 

 

106

Utilities: Electrical (0.7%)

 

 

 

 

Hawaiian Electric Industries, Inc.

 

2,881

 

66

Utilities: Gas Pipelines (0.7%)

 

 

 

 

UGI Corp.

 

2,424

 

66

Utilities: Water (0.7%)

 

 

 

 

Aqua America, Inc.

 

2,930

 

62

Total Short Positions (Cost $2,977)

 

 

 

$

 2,650

 

86

The accompanying notes are an integral part of the financial statements.

 

 

 


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Disciplined Large Cap Value Active Extension

 

*                                       Percentages are based on Net Assets.

(a)                                Non-income producing security.

(o)                               See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class.

(q)                              Securities are pledged with a broker as collateral for short sales.

REIT                Real Estate Investment Trust

 

 

The accompanying notes are an integral part of the financial statements.

 

87

 


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (unaudited)

 

Focus Equity Portfolio

 

 

*    Minimum Investment

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares based upon its different inception date and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the Russell 1000® Growth Index(1) and the Lipper Large-Cap Growth Funds Index(2)

 

 

 

 

Total Returns(3)

 

 

 

 

 

Average Annual

 

 

 

One
Year

 

Five
Years

 

Ten
Years

 

Since
Inception(6)

 

Portfolio – Class A (4)

 

24.02

%

15.98

%

6.58

%

13.41

%

Russell 1000® Growth Index

 

11.81

 

12.11

 

3.83

 

9.03

 

Lipper Large-Cap Growth Funds Index

 

14.97

 

12.06

 

3.64

 

8.54

 

 

 

 

 

 

 

 

 

 

 

Portfolio – Class B (5)

 

23.70

 

15.68

 

6.33

 

10.82

 

Russell 1000® Growth Index

 

11.81

 

12.11

 

3.83

 

7.27

 

Lipper Large-Cap Growth Funds Index

 

14.97

 

12.06

 

3.64

 

6.77

 

 

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 www.morganstanley.com/msim. 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.

 

(1)            The Russell 1000® Growth Index measures the performance of those Russell 1000® Index companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000® Index. The Russell 3000® Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)            The Lipper 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.

(3)            Total returns for the Portfolio reflect fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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 8, 1995

(5)            Commenced operations 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.

 

The Focus Equity Portfolio (the “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, 2007, the Portfolio had a total return based on net asset value per share of 24.02%, net of fees, for Class A shares and 23.70%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares outperformed against its benchmark, the Russell 1000® Growth Index (the “Index”) which returned 11.81%.

 

Factors Affecting Performance

 

·                  The broad equity market made a modest gain for the12-month period ended December 31, 2007, despite experiencing a decline in the second half of the year. During the summer, the subprime mortgage market suffered a complete collapse under the weight of rising loan defaults and home foreclosures. As a result, credit significantly tightened, liquidity decreased and consumer spending declined, particularly as gasoline prices once again surged upward. In response to this

 

88


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Investment Overview (cont’d)

 

Focus Equity Portfolio

 

rising volatility, the Federal Reserve began a series of cuts to the target federal funds rate and the discount rate. Although each announced rate reduction temporarily boosted investor sentiment, the broad market declined in the fourth quarter, reflecting investors’ concerns about the health of the financial markets in the coming year.

 

·                  In this environment, the market demonstrated a preference for growth equities over value equities, as well as for large- and mid-capitalization stocks.

 

·                  For the 12-month period, the Portfolio’s outperformance was driven by stock selection, while sector allocations detracted. It should be noted that sector allocations are a result of bottom-up stock selection and are not intentional top-down decisions.

 

·                  The technology sector had the largest positive impact on performance for the period. Here, stock selection in the communications technology and computer technology sectors greatly added to relative returns, and offset the negative influence of an underweight allocation.

 

·                  In the materials and processing sector, an overweight allocation together with a single holding in an agricultural fishing and ranching company significantly helped performance. Additionally, security selection in the consumer discretionary sector was advantageous. Favorable investment in retail, consumer electronics, and hotel/motel companies more than made up for the negative effect of the sector’s overweight position.

 

·                  In contrast, the financial services sector had the most unfavorable impact on performance due to security selection. Selection in financial data processing companies and a single holding in a financial information services company were the primary detractors.

 

·                  The Portfolio’s zero exposure to the consumer staples sector was also disadvantageous to performance, as was an underweight allocation in the producer durables sector.

 

Management Strategies

 

·                  It is our goal to hold a portfolio of high quality growth stocks we believe will perform well regardless of the market environment. We continue to favor companies that have some uniqueness or dynamic competitive advantage in their business model, with a high quality stream of cash flow and the ability to redeploy capital at a high rate of return.

 

·                  At the close of the period, consumer discretionary represented the largest sector weight and overweight in the Portfolio, followed by the multi-industry and financial services sectors. The multi-industry sector (which includes conglomerates) was overweight versus the Index, and the financial services sector was weighted in-line with the Index.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any

 

89


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

Focus Equity Portfolio

 

transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning
Account Value

 

Ending Account
Value
December 31,

 

Expenses Paid
During Period*
July 1, 2007 —
December 31,

 

 

 

July 1, 2007

 

2007

 

2007

 

Class A

 

 

 

 

 

 

 

Actual

 

$1,000.00

 

$1,117.40

 

$5.34

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,020.16

 

5.09

 

 

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

 

Actual

 

1,000.00

 

1,115.70

 

6.67

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,018.90

 

6.36

 

*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 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

* Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

90


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments

 

Focus Equity Portfolio

 

 

 

Shares

 

Value
(000)

 

Common Stocks (93.6%)

 

 

 

 

 

Air Transport (1.9%)

 

 

 

 

 

Expeditors International Washington, Inc.

 

7,266

 

$    325

 

Building: Cement (2.9%)

 

 

 

 

 

Cemex S.A.B. de C.V. ADR

 

(a)18,674

 

483

 

Casinos & Gambling (3.9%)

 

 

 

 

 

Wynn Resorts Ltd.

 

5,901

 

662

 

Chemicals (8.8%)

 

 

 

 

 

Monsanto Co.

 

13,187

 

1,473

 

Communications Technology (11.5%)

 

 

 

 

 

America Movil S.A.B. de C.V., Class L ADR

 

11,692

 

718

 

Cisco Systems, Inc.

 

(a)15,006

 

406

 

Research In Motion Ltd.

 

(a)7,161

 

812

 

 

 

 

 

1,936

 

Computer Services Software & Systems (12.4%)

 

 

 

 

 

Baidu.com ADR

 

(a)1,104

 

431

 

Google, Inc., Class A

 

(a)1,959

 

1,354

 

Tencent Holdings Ltd.

 

40,000

 

298

 

 

 

 

 

2,083

 

Computer Technology (3.8%)

 

 

 

 

 

Apple, Inc.

 

(a)3,237

 

641

 

Diversified Financial Services (3.0%)

 

 

 

 

 

CME Group, Inc.

 

745

 

511

 

Energy — Miscellaneous (7.8%)

 

 

 

 

 

Ultra Petroleum Corp.

 

(a)18,201

 

1,301

 

Financial — Miscellaneous (6.3%)

 

 

 

 

 

American Express Co.

 

10,442

 

543

 

Berkshire Hathaway, Inc., Class B

 

(a)108

 

512

 

 

 

 

 

1,055

 

Insurance: Multi-Line (3.9%)

 

 

 

 

 

Loews Corp.

 

12,955

 

652

 

Real Estate (5.0%)

 

 

 

 

 

Brookfield Asset Management, Inc., Class A

 

23,590

 

841

 

Restaurants (2.9%)

 

 

 

 

 

Starbucks Corp.

 

(a)23,482

 

481

 

Retail (8.5%)

 

 

 

 

 

Abercrombie & Fitch Co.

 

5,117

 

409

 

Amazon.com, Inc.

 

(a)10,884

 

1,008

 

 

 

 

 

1,417

 

Services: Commercial (6.2%)

 

 

 

 

 

Corporate Executive Board Co.

 

4,379

 

263

 

eBay, Inc.

 

(a)23,250

 

772

 

 

 

 

 

1,035

 

Shipping (2.6%)

 

 

 

 

 

C.H. Robinson Worldwide, Inc.

 

7,915

 

428

 

Wholesalers (2.2%)

 

 

 

 

 

Li & Fung Ltd.

 

92,000

 

368

 

Total Common Stocks (Cost $12,362)

 

 

 

15,692

 

Short-Term Investment (6.8%)

 

 

 

 

 

Investment Company (6.8%)

 

 

 

 

 

Morgan Stanley Institutional Liquidity Money Market Portfolio

 

 

 

 

 

— Institutional Class (Cost $1,147)

 

(o)1,147,002

 

$  1,147

 

Total Investments (100.4%) (Cost $13,509)

 

 

 

(v)16,839

 

Liabilities in Excess of Other Assets (-0.4%)

 

 

 

(74)

 

Net Assets (100%)

 

 

 

$16,765

 

 

 

 

(a)

 

Non-income producing security.

(o)

 

See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class.

(v)

 

The approximate market value and percentage of the investments, $666,000 and 4.0%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note A within the Notes to Financial Statements.

ADR

 

American Depositary Receipt

 

The accompanying notes are an integral part of the financial statements.

91

 


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (unaudited)

 

Large Cap Relative Value Portfolio

 

 

*    Minimum Investment

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares based upon its different inception date and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the Russell 1000® Value Index(1) and the Lipper Large-Cap Value Funds Index(2)

 

 

 

Total Returns(3)

 

 

 

 

 

Average Annual

 

 

 

One

 

Five

 

Ten

 

Since

 

 

 

Year

 

Years

 

Years

 

Inception(6)

 

 

 

 

 

 

 

 

 

 

 

Portfolio – Class A (4)

 

2.90

% 

14.70

%

7.82

%

10.90

%

Russell 1000® Value Index

 

(0.17

)

14.63

 

7.68

 

12.03

 

Lipper Large-Cap Value Funds Index

 

2.46

 

13.04

 

6.12

 

10.72

 

 

 

 

 

 

 

 

 

 

 

Portfolio – Class B (5)

 

2.72

 

14.40

 

7.56

 

10.07

 

Russell 1000® Value Index

 

(0.17

)

14.63

 

7.68

 

10.81

 

Lipper Large-Cap Value Funds Index

 

2.46

 

13.04

 

6.12

 

8.96

 

 

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 www.morganstanley.com/msim. 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.

 

(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. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)

The Lipper 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.

(3)

Total returns for the Portfolio reflect fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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 31, 1990

(5)

Commenced operations 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.

 

The Large Cap Relative Value Portfolio (the “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. Investments in foreign markets entail special risks such as currency, political, economic, and market risks.

 

Performance

 

For the year ended December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of 2.90%, net of fees, for Class A shares and 2.72%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares outperformed against its

 

92


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

Large Cap Relative Value Portfolio

 

benchmark, the Russell 1000® Value Index (the “Index”) which returned -0.17%.

 

Factors Affecting Performance

 

·                 The broad stock market had a modest gain for the year; however, value stocks lagged the broad average. Investors began to favor growth stocks, as economic and market outlooks were dampened by high oil prices, diminished consumer spending, a weak housing market, and concerns about corporate profitability.

 

·                 Relative to the Index, the Portfolio benefited primarily from an underweight to the financial sector (although we note that all sector weights are a result of our bottom-up stock selection process and are not intentional top-down allocations). Through limited exposures to regional banks and diversified financial companies, and no holdings in real estate investment trusts, the Portfolio had minimal exposure to the damage caused by the subprime mortgage collapse.

 

·                 The materials sector also bolstered relative performance, but this was primarily due to a single holding which generates a larger share of its business in the health care sector than in the materials sector.

 

·                 An overweight in the consumer staples sector contributed positively to relative returns as well.

 

·                 Detractors from performance included an underweight in the energy sector.

 

·                 Stock selection in the technology sector was another area of weakness, due to holdings in hardware and equipment, software and services, and semiconductor companies.

 

Management Strategies

 

·                 We continue to seek value stocks using our bottom-up security selection process. We look for undervalued companies that offer a potential catalyst for change. Such catalysts could be new company management, growth or consolidation within an industry or sector, or new products.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

93


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

Large Cap Relative Value Portfolio

 

 

 

Beginning
Account Value

 

Ending Account
Value
December 31,

 

Expenses Paid
During Period* 
July 1, 2007 —December 31,

 

 

July 1, 2007

 

2007

 

2007

Class A

 

 

 

 

 

 

Actual

 

$1,000.00

 

$   956.60

 

$3.25

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,021.88

 

3.36

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

Actual

 

1,000.00

 

955.50

 

4.49

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,020.62

 

4.63

* Expenses are equal to Class A and Class B annualized net expense ratios of 0.66% and 0.91%, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

* Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

94


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments

 

Large Cap Relative Value Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Common Stocks (98.1%)

 

 

 

 

Aerospace (1.6%)

 

 

 

 

Raytheon Co.

 

73,450

 

$   4,458

Automobiles (0.5%)

 

 

 

 

Honda Motor Co., Ltd. ADR

 

43,630

 

1,446

Banks: Outside New York City (1.0%)

 

 

 

 

PNC Financial Services Group, Inc.

 

41,710

 

2,738

Beverages: Soft Drinks (1.9%)

 

 

 

 

Coca Cola Co. (The)

 

89,230

 

5,476

Chemicals (4.4%)

 

 

 

 

Bayer AG ADR

 

121,910

 

11,117

E.I. Du Pont de Nemours & Co.

 

35,730

 

1,575

 

 

 

 

12,692

Communications & Media (4.9%)

 

 

 

 

Time Warner, Inc.

 

427,649

 

7,060

Viacom, Inc., Class B

 

(a)158,146

 

6,946

 

 

 

 

14,006

Communications Technology (2.2%)

 

 

 

 

Alcatel-Lucent ADR

 

433,650

 

3,174

Cisco Systems, Inc.

 

(a)63,260

 

1,713

Embarq Corp.

 

31,416

 

1,556

 

 

 

 

6,443

Computer Services Software & Systems (0.9%)

 

 

 

 

Oracle Corp.

 

(a)36,300

 

820

Symantec Corp.

 

(a)104,430

 

1,685

 

 

 

 

2,505

Computer Technology (1.3%)

 

 

 

 

EMC Corp.

 

(a)35,800

 

663

Hewlett-Packard Co.

 

63,679

 

3,215

 

 

 

 

3,878

Consumer Electronics (1.5%)

 

 

 

 

Sony Corp. ADR

 

14,300

 

777

Yahoo!, Inc.

 

(a)152,418

 

3,545

 

 

 

 

4,322

Consumer Staples — Miscellaneous (0.6%)

 

 

 

 

Kimberly-Clark Corp.

 

23,130

 

1,604

Cosmetics (0.6%)

 

 

 

 

Estee Lauder Co., Inc. (The)

 

39,060

 

1,703

Diversified Financial Services (5.8%)

 

 

 

 

Bank of America Corp.

 

61,059

 

2,519

Citigroup, Inc.

 

118,454

 

3,487

JPMorgan Chase & Co.

 

199,184

 

8,694

Merrill Lynch & Co., Inc.

 

34,677

 

1,862

 

 

 

 

16,562

Drugs & Pharmaceuticals (14.0%)

 

 

 

 

Abbott Laboratories

 

142,520

 

8,003

Bristol-Myers Squibb Co.

 

225,000

 

5,967

Eli Lilly & Co.

 

92,790

 

4,954

Novartis AG ADR

 

52,920

 

2,874

Pfizer, Inc.

 

49,990

 

1,136

Roche Holding AG ADR

 

42,600

 

3,680

Schering-Plough Corp.

 

320,510

 

8,538

Wyeth

 

114,820

 

$   5,074

 

 

 

 

40,226

Electronics: Instruments Gauges & Meters (0.5%)

 

 

 

 

Applera Corp. - Applied Biosystems Group

 

42,600

 

1,445

Electronics: Semi-Conductors/Components (1.8%)

 

 

 

 

Intel Corp.

 

153,991

 

4,105

Micron Technology, Inc.

 

(a)164,920

 

1,196

 

 

 

 

5,301

Energy Equipment (1.6%)

 

 

 

 

Schlumberger Ltd.

 

46,570

 

4,581

Energy — Miscellaneous (2.2%)

 

 

 

 

Devon Energy Corp.

 

14,980

 

1,332

Occidental Petroleum Corp.

 

65,300

 

5,027

 

 

 

 

6,359

Financial — Miscellaneous (3.5%)

 

 

 

 

Freddie Mac

 

95,496

 

3,254

Marsh & McLennan Cos., Inc.

 

251,265

 

6,651

 

 

 

 

9,905

Foods (5.4%)

 

 

 

 

Cadbury Schweppes plc ADR

 

88,660

 

4,377

ConAgra Foods, Inc.

 

66,470

 

1,581

Kraft Foods, Inc.

 

112,528

 

3,672

Unilever N.V.

 

158,210

 

5,769

 

 

 

 

15,399

Insurance: Life (0.3%)

 

 

 

 

Cigna Corp.

 

18,690

 

1,004

Insurance: Multi-Line (1.5%)

 

 

 

 

Aegon N.V. (Registered)

 

77,950

 

1,367

Hartford Financial Services Group, Inc.

 

34,970

 

3,049

 

 

 

 

4,416

Insurance: Property & Casualty (3.4%)

 

 

 

 

Chubb Corp.

 

88,970

 

4,856

Travelers Cos., Inc. (The)

 

93,705

 

5,041

 

 

 

 

9,897

Investment Management Companies (0.4%)

 

 

 

 

Lehman Brothers Holdings, Inc.

 

15,902

 

1,041

Manufacturing (3.3%)

 

 

 

 

Siemens AG ADR

 

45,360

 

7,138

Tyco International, Ltd.

 

60,155

 

2,385

 

 

 

 

9,523

Materials & Processing — Miscellaneous (1.6%)

 

 

 

 

Newmont Mining Corp.

 

91,950

 

4,490

Medical & Dental Instruments & Supplies (1.3%)

 

 

 

 

Boston Scientific Corp.

 

(a)145,310

 

1,690

Covidien Ltd.

 

48,145

 

2,132

 

 

 

 

3,822

Multi-Sector Companies (2.3%)

 

 

 

 

General Electric Co.

 

175,870

 

6,520

Oil: Integrated (5.6%)

 

 

 

 

ConocoPhillips

 

58,840

 

5,195

ExxonMobil Corp.

 

41,620

 

3,899

Marathon Oil Corp.

 

15,000

 

913

 

 

The accompanying notes are an integral part of the financial statements.

95

 


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Large Cap Relative Value Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Royal Dutch Shell plc ADR

 

74,070

 

$    6,237

 

 

 

 

16,244

Restaurants (0.5%)

 

 

 

 

Starbucks Corp.

 

(a)67,800

 

1,388

Retail (4.9%)

 

 

 

 

Home Depot, Inc. (The)

 

51,050

 

1,375

McDonald’s Corp.

 

26,680

 

1,572

Office Depot, Inc.

 

(a)91,298

 

1,270

Rite Aid Corp.

 

(a)212,940

 

594

Wal-Mart Stores, Inc.

 

195,170

 

9,277

 

 

 

 

14,088

Securities Brokerage & Services (2.2%)

 

 

 

 

Bear Stearns Cos., Inc. (The)

 

33,301

 

2,939

Charles Schwab Corp. (The)

 

128,032

 

3,271

 

 

 

 

6,210

Soaps & Household Chemicals (1.2%)

 

 

 

 

Procter & Gamble Co.

 

48,020

 

3,526

Tobacco (1.5%)

 

 

 

 

Altria Group, Inc.

 

58,430

 

4,416

Utilities: Cable TV & Radio (0.7%)

 

 

 

 

Comcast Corp., Class A

 

(a)102,723

 

1,876

Utilities: Electrical (6.0%)

 

 

 

 

American Electric Power Co., Inc.

 

131,290

 

6,113

Entergy Corp.

 

60,092

 

7,182

FirstEnergy Corp.

 

53,760

 

3,889

 

 

 

 

17,184

Utilities: Gas Pipelines (0.7%)

 

 

 

 

Williams Cos., Inc.

 

56,600

 

2,025

Utilities: Telecommunications (4.5%)

 

 

 

 

France Telecom S.A. ADR

 

90,930

 

3,240

Sprint Nextel Corp.

 

92,409

 

1,213

Verizon Communications, Inc.

 

195,639

 

8,548

 

 

 

 

13,001

Total Common Stocks (Cost $248,521)

 

 

 

281,720

Investment Company (1.0%)

 

 

 

 

iShares MSCI Japan Index Fund (Cost $2,976)

 

204,080

 

2,712

Short-Term Investment (1.7%)

 

 

 

 

Investment Company (1.7%)

 

 

 

 

Morgan Stanley Institutional Liquidity Money Market Portfolio
— Institutional Class (Cost $4,943)

 

(o)4,942,781

 

4,943

Total Investments (100.8%) (Cost $256,440)

 

 

 

289,375

Liabilities in Excess of Other Assets (-0.8%)

 

 

 

(2,304)

Net Assets (100%)

 

 

 

$   287,071

 

(a)

 

Non-income producing security.

(o)

 

See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class.

ADR

 

American Depositary Receipt

 

96

The accompanying notes are an integral part of the financial statements.

 

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (unaudited)

 

Small Company Growth Portfolio

 

 

 

*    Minimum Investment

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares based upon its different inception date and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the Russell 2000® Growth Index(1) and the Lipper Small-Cap Growth Funds Index(2)

 

 

 

Total Returns(3)

 

 

 

 

 

Average Annual

 

 

 

One
Year

 

Five
Years

 

Ten
Years

 

Since
Inception

(6)

 

 

 

 

 

 

 

 

 

 

Portfolio – Class A (4)

 

3.04

%

17.59

%

13.63

%

12.85

%

Russell 2000® Growth Index

 

7.05

 

16.50

 

4.32

 

7.65

 

Lipper Small-Cap Growth Funds Index

 

9.68

 

15.44

 

6.79

 

10.40

 

 

 

 

 

 

 

 

 

 

 

Portfolio – Class B (5)

 

2.81

 

17.30

 

13.34

 

12.31

 

Russell 2000® Growth Index

 

7.05

 

16.50

 

4.32

 

5.57

 

Lipper Small-Cap Growth Funds Index

 

9.68

 

15.44

 

6.79

 

8.00

 

 

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 www.morganstanley.com/msim. 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.

 

(1)            The Russell 2000® Growth Index measures the performance of those Russell 2000® Index companies with higher price-to-book ratios and higher forecasted growth values. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)            The Lipper 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 fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and expense reimbursements, total returns would have been lower. Fee waivers and/or expense 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 operations 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.

 

The Small Company Growth Portfolio (the “Portfolio”) seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of small capitalization 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.

 

97

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (cont’d)

 

Small Company Growth Portfolio

 

Performance

 

For the year ended December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of 3.04%, net of fees, for Class A shares and 2.8 1%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares underperformed against its benchmark, the Russell 2000® Growth Index (the “Index”) which returned 7.05%.

 

Factors Affecting Performance

 

·      The broad equity market made a modest gain for the 12-month period ended December 31, 2007, despite experiencing a decline in the second half of the year. During the summer, the subprime mortgage market suffered a complete collapse under the weight of rising loan defaults and home foreclosures. As a result, credit significantly tightened as liquidity decreased, and consumers became far more cautious in their expenditures, particularly as gasoline prices once again surged upward.

 

·      In response to this rising volatility, the Federal Reserve began a series of cuts to the target federal funds rate and the discount rate. Although each announced rate reduction temporarily boosted investor sentiment, the broad market declined in the fourth quarter, reflecting investors’ concerns about the health of the financial markets in the coming year.

 

·      In this environment, the market demonstrated a preference for growth equities over value equities; however, small capitalization stocks lagged the broad market as investors sought the relatively more stable earnings potential of larger-cap companies.

 

·      For the 12-month period, the Portfolio’s underperformance was due to sector allocations, although security selection overall helped to mitigate overall performance. It should be noted that sector allocations are a result of bottom-up stock selection and are not intentional top-down decisions.

 

·      In the consumer discretionary sector, stock selection together with a large overweight allocation had the largest negative effect on performance. Here, restaurants, consumer electronics, entertainment and leisure time holdings detracted from relative returns, and offset gains made by investments in the education services and retail segments.

 

·      Security selection in the materials and processing sector also hindered relative returns. A single holding in a construction company hurt performance, as did the Portfolio’s avoidance of fertilizer companies and diversified materials and processing firms. Additionally, an underweight position in the health care sector adversely affected overall performance.

 

·      However, there were several areas of strength for the Portfolio. The financial services sector offered the greatest contribution to performance due to stock selection, particularly in financial information services firms and real estate investment trusts (REITs).

 

·      In the autos and transportation sector, investment in a transportation and logistics company, together with a sector underweight, further boosted relative returns. Moreover, the Portfolio’s positioning in the technology sector was advantageous to overall performance.

 

Management Strategies

 

·      It is our goal to hold a portfolio of high-quality growth stocks we believe will perform well regardless of the market environment. We continue to favor companies that have some uniqueness or a dynamic competitive advantage in their business model, with a high quality stream of cash flow and the ability to redeploy capital at a high rate of return.

 

·      At the close of the period, consumer discretionary represented the largest sector weight and overweight in the Portfolio, followed by the financial services and technology sectors. The financial services sector was overweight versus the Index, and the technology sector was underweight.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 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

 

98

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (cont’d)

 

Small Company Growth Portfolio

 

estimate the expenses you paid on your account during this period.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning 
Account Value

 

Ending Account
Value
December 31,

 

Expenses Paid
During Period*
July 1, 2007 —
December 31,

 

 

July 1, 2007

 

2007

 

2007

Class A

 

 

 

 

 

 

Actual

 

$1,000.00

 

$   972.70

 

$4.97

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,020.16

 

5.09

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

Actual

 

1,000.00

 

971.90

 

6.21

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,018.90

 

6.36

* 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 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

* Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

99

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Portfolio of Investments

 

Small Company Growth Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Common Stocks (99.2%)

 

 

 

 

Aluminum (1.7%)

 

 

 

 

Kaiser Aluminum Corp.

 

384,956

 

$    30,596

Biotechnology Research & Production (4.0%)

 

 

 

 

Alnylam Pharmaceuticals, Inc.

 

(a)963,471

 

28,018

Illumina, Inc.

 

(a)775,359

 

45,948

 

 

 

 

73,966

Building: Cement (4.7%)

 

 

 

 

Eagle Materials, Inc.

 

1,456,692

 

51,684

Texas Industries, Inc.

 

488,717

 

34,259

 

 

 

 

85,943

Casinos & Gambling (0.2%)

 

 

 

 

Lakes Entertainment, Inc.

 

(a)613,119

 

4,249

Commercial Information Services (1.4%)

 

 

 

 

Viad Corp.

 

816,789

 

25,794

Communications & Media (0.7%)

 

 

 

 

CKX, Inc.

 

(a)1,117,557

 

13,411

Communications Technology (1.9%)

 

 

 

 

Gmarket, Inc. ADR

 

(a)743,870

 

18,522

GSI Commerce, Inc.

 

(a)793,738

 

15,478

 

 

 

 

34,000

Computer Services Software & Systems (11.0%)

 

 

 

 

Bankrate, Inc.

 

(a)351,912

 

16,923

Blackboard, Inc.

 

(a)753,873

 

30,343

comScore, Inc.

 

(a)453,065

 

14,784

Equinix, Inc.

 

(a)359,228

 

36,307

Forrester Research, Inc.

 

(a)1,071,769

 

30,031

IHS, Inc., Class A

 

(a)441,442

 

26,734

Longtop Financial Technologies Ltd. ADR

 

(a)1,163,963

 

27,563

NetSuite, Inc.

 

(a)476,767

 

18,680

 

 

 

 

201,365

Consumer Electronics (1.0%)

 

 

 

 

CNET Networks, Inc.

 

(a)1,939,946

 

17,731

Consumer Staples — Miscellaneous (1.1%)

 

 

 

 

Peet’s Coffee & Tea, Inc.

 

(a)678,664

 

19,729

Diversified Financial Services (0.9%)

 

 

 

 

Information Services Group, Inc.

 

(a)2,539,066

 

17,393

Education Services (6.4%)

 

 

 

 

Ambassadors Group, Inc.

 

1,092,345

 

20,001

American Public Education, Inc.

 

(a)455,647

 

19,037

Strayer Education, Inc.

 

465,392

 

79,386

 

 

 

 

118,424

Electronics: Semi-Conductors/Components (1.3%)

 

 

 

 

Tessera Technologies, Inc.

 

(a)566,661

 

23,573

Electronics: Technology (2.5%)

 

 

 

 

Cogent Communications Group, Inc.

 

(a)1,932,042

 

45,809

Engineering & Contracting Services (2.4%)

 

 

 

 

Grupo Aeroportuario del Pacifico S.A. de C.V. ADR

 

982,302

 

43,840

Entertainment (2.9%)

 

 

 

 

Vail Resorts, Inc.

 

(a)980,265

 

52,748

Financial — Miscellaneous (2.9%)

 

 

 

 

Interactive Data Corp.

 

1,617,731

 

53,401

Homebuilding (2.1%)

 

 

 

 

Gafisa S.A. ADR

 

(a)1,052,022

 

$    39,398

Hotel/Motel (2.4%)

 

 

 

 

Gaylord Entertainment Co.

 

(a)1,085,650

 

43,936

Insurance: Multi-Line (0.7%)

 

 

 

 

Greenlight Capital Re Ltd., Class A

 

(a)611,487

 

12,713

Investment Management Companies (3.2%)

 

 

 

 

Greenhill & Co., Inc.

 

827,760

 

55,030

Pzena Investment Management, Inc., Class A

 

305,000

 

3,477

 

 

 

 

58,507

Leisure Time (2.6%)

 

 

 

 

Aruze Corp.

 

940,900

 

35,756

Premier Exhibitions, Inc.

 

(a)1,091,963

 

11,946

 

 

 

 

47,702

Machinery: Industrial/Specialty (1.5%)

 

 

 

 

Middleby Corp.

 

(a)368,084

 

28,203

Medical & Dental Instruments & Supplies (3.6%)

 

 

 

 

Techne Corp.

 

(a)1,003,832

 

66,303

Oil: Crude Producers (2.1%)

 

 

 

 

Carrizo Oil & Gas, Inc.

 

(a)398,938

 

21,842

GMX Resources, Inc.

 

(a)515,901

 

16,653

 

 

 

 

38,495

Printing & Copying Services (1.5%)

 

 

 

 

VistaPrint Ltd.

 

(a)649,907

 

27,849

Publishing — Miscellaneous (4.4%)

 

 

 

 

Morningstar, Inc.

 

(a)1,030,732

 

80,139

Real Estate Investment Trusts (REIT) (0.5%)

 

 

 

 

Consolidated-Tomoka Land Co.

 

137,806

 

8,638

Restaurants (2.5%)

 

 

 

 

BJ’s Restaurants, Inc.

 

(a)1,114,800

 

18,127

P.F. Chang’s China Bistro, Inc.

 

(a)1,223,955

 

27,955

 

 

 

 

46,082

Retail (10.8%)

 

 

 

 

AFC Enterprises, Inc.

 

(a)1,552,798

 

17,578

American Apparel, Inc.

 

(a)1,780,614

 

26,709

Blue Nile, Inc.

 

(a)1,149,201

 

78,215

Citi Trends, Inc.

 

(a)920,097

 

14,206

Ctrip.com International Ltd. ADR

 

505,880

 

29,073

Dena Co., Ltd.

 

2,988

 

14,322

Lululemon Athletica, Inc.

 

(a)412,005

 

19,517

 

 

 

 

199,620

Services: Commercial (10.6%)

 

 

 

 

Advisory Board Co. (The)

 

(a)985,839

 

63,281

Ambassadors International, Inc.

 

635,342

 

9,263

Arbitron, Inc.

 

371,953

 

15,462

Corporate Executive Board Co.

 

448,883

 

26,978

CoStar Group, Inc.

 

(a)1,026,052

 

48,481

Macquarie Infrastructure Co. LLC

 

791,516

 

32,080

 

 

 

 

195,545

Shoes (1.0%)

 

 

 

 

Iconix Brand Group, Inc.

 

(a)892,691

 

17,550

 

100

The accompanying notes are an integral part of the financial statements.

 

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Portfolio of Investments (cont’d)

 

Small Company Growth Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Technology — Miscellaneous (0.7%)

 

 

 

 

Housevalues, Inc.

 

(a)1,073,753

 

$    3,328

Rediff.com India Ltd. ADR

 

(a)860,468

 

9,388

 

 

 

 

12,716

Toys (1.4%)

 

 

 

 

Marvel Entertainment, Inc.

 

(a)938,501

 

25,067

Transportation — Miscellaneous (0.6%)

 

 

 

 

Integrated Distribution Services Group Ltd.

 

3,785,000

 

11,491

Total Common Stocks (Cost $1,555,585)

 

 

 

1,821,926

Preferred Stock (0.4%)

 

 

 

 

Biotechnology Research & Production (0.4%)

 

 

 

 

Microbia, Inc., Series F (Convertible)

 

 

 

 

(Cost $7,581)

 

(d)(l)1,212,976

 

7,581

Short-Term Investment (0.8%)

 

 

 

 

Investment Company (0.8%)

 

 

 

 

Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class (Cost $13,933)

 

(o)13,933,171

 

13,933

Total Investments (100.4%) (Cost $1,577,099)

 

 

 

(v)1,843,440

Liabilities in Excess of Other Assets (-0.4%)

 

 

 

(7,418)

Net Assets (100%)

 

 

 

$1,836,022

 

(a)

 

Non-income producing security.

(d)

 

Security was valued at fair value — At December 31, 2007, the Portfolio held approximately $7,581,000 of fair valued securities, representing 0.4% of net assets.

(l)

 

Security has been deemed illiquid at December 31, 2007.

(o)

 

See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Market Portfolio — Institutional Class.

(v)

 

The approximate market value and percentage of the investments, $61,569,000 and 3.3%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note A within the Notes to Financial Statements.

ADR

 

American Depositary Receipt

 

 

The accompanying notes are an integral part of the financial statements.

101

 


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (unaudited)

 

Systematic Active Large Cap Core Portfolio

 

 

 

*

Minimum Investment

* *

Commenced operations on April 28, 2006

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the S&P 500® Index(1) and the Lipper Large-Cap Core Funds Index(2)

 

 

 

Total Returns(2)

 

 

Average Annual

 

 

One
Year

 

Since
Inception(5)

 

 

 

 

 

 

 

Portfolio – Class A (4)

 

6.07

%

8.35

%

S&P 500® Index

 

5.49

 

9.07

 

Lipper Large-Cap Core Funds Index

 

6.63

 

8.61

 

 

 

 

 

 

 

Portfolio – Class B (4)

 

5.81

 

8.09

 

S&P 500® Index

 

5.49

 

9.07

 

Lipper Large-Cap Core Funds Index

 

6.63

 

8.61

 

 

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 www.morganstanley.com/msim. 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.

 

(1)            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. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)            The Lipper Large-Cap Core Funds Index is an equally weighted performance index of the largest qualifying funds (based on net

assets) in the Lipper 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 30 funds represented in this Index. As of the date of this report, the Portfolio is in the Lipper Large-Cap Core Funds classification.

(3)            Total returns for the Portfolio reflect fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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 April 28, 2006

(5)            For comparative purposes, average 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.

 

The Systematic Active Large Cap Core Portfolio (the “Portfolio”) seeks long-term capital appreciation by investing primarily in equity securities of large capitalization companies.

 

Performance

 

For the year ended December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of 6.07%, net of fees, for Class A shares and 5.81%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares outperformed against its benchmark, the S&P 500® Index (the “Index”) which returned 5.49%.

 

102


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

Systematic Active Large Cap Core Portfolio

 

Factors Affecting Performance

 

·                  The 12 months ended December 31, 2007 were characterized by pronounced volatility in stock prices, largely driven by credit market woes and deteriorating economic outlooks. By the third quarter, evidence mounted that the subprime market’s troubles spilled into the credit market and the broader economy. A tightening in credit standards, mortgage lender bankruptcies and hedge fund implosions were followed by multi-billion dollar losses reported at several large financial institutions in the fourth quarter. At the same time, a cross current of unfavorable data buffeted the market, indicating a languishing housing market, declining consumer spending, rising oil prices and negative year-over-year corporate profit growth. Although the market rallied each time the Federal Reserve’s (the “Fed”) reduced the target federal funds rate, skepticism quickly returned as investors worried that the Fed’s ability to steer the economy away from recession would be limited by rising inflation pressures. Fourth quarter corporate earnings expectations were dismal, with only the largest multi-national companies expected to generate growth. In this environment, large-cap equities outperformed small-caps, and growth beat value for the year overall.

 

·                  Based on total returns, the Portfolio’s best performing sectors were materials, energy and telecommunication services. The consumer discretionary and financials sectors were the only sectors in the Portfolio with negative returns for the period.

 

·                  In terms of contribution to the Portfolio’s overall absolute return, the materials and consumer discretionary sectors were the most additive to performance. In materials, the Portfolio’s exposure to metals and mining stocks benefited from a favorable backdrop of a weak U.S. dollar, rising commodity prices for metals and industry consolidation. Positive performance in the consumer discretionary sector stemmed largely from the Portfolio’s holdings in a fast food chain with good earnings throughout the year and a travel services provider that advanced on strong sales. Additionally within the sector, we avoided investment in two home improvement retailers that declined significantly amid the weakening housing market.

 

·                  Detractors from overall absolute return were primarily in the technology and financials sectors. The Portfolio maintained a below-Index weight in a number of strong-performing technology stocks. In the financials sector, weak performance came from a wide range of holdings, due to their exposure to capital markets, mortgage lending or mortgage loan insurance, and/or investments in subprime mortgage backed securities.

 

·                  Relative outperformance was driven by the energy sector, which more than offset the relative underperformance of the financials sector.

 

Management Strategies

 

·                  We believe that we can enhance returns by employing a quantitative model that uses multiple, independent factors to examine the fundamentals of a company. We further believe that our quantitative efforts in combination with our fundamental analysis can exploit market inefficiencies.

 

·                  We employ a quantitative approach to stock selection utilizing a proprietary quantitative model. The model is driven by rigorous fundamental and quantitative research that screens a universe of large-capitalization companies. The model employs three quantitative screens based on the following primary inputs: earnings expectations, price trends and relative valuations. Individual securities and industries are ranked within each sector by the most effective combination of these disciplines based on the current phase of the economic cycle. We then decide whether to buy, sell or hold a security based on its fundamental analysis and the results of this model-driven approach.

 

·                  Accordingly, the stock selection process yielded overweight positions in the consumer discretionary and health care sectors; underweight positions in the consumer staples, energy, financials, industrials, telecommunication services and utilities sectors; and market-weight positions in the technology and materials sectors.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 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

 

103


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

Systematic Active Large Cap Core Portfolio

 

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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

 

 

 

 

Expenses Paid

 

 

 

 

 

Ending Account

 

 

During Period*

 

 

 

Beginning

 

 

Value

 

 

July 1, 2007 —

 

 

 

Account Value

 

 

December 31,

 

 

December 31,

 

 

 

July 1, 2007

 

 

2007

 

 

2007

 

Class A

 

 

 

 

 

 

Actual

 

$1,000.00

 

$978.40

 

$3.09

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,022.08

 

3.16

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

Actual

 

1,000.00

 

977.70

 

4.34

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,020.82

 

4.43

*  Expenses are equal to Class A and Class B annualized net expense ratios of 0.62% and 0.87%, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

*  Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

104


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments

 

Systematic Active Large Cap Core Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Common Stocks (96.6%)

 

 

 

 

Aerospace & Defense (5.0%)

 

 

 

 

BE Aerospace, Inc.

 

(a)(c)767

 

$     41

Boeing Co. (The)

 

368

 

32

DRS Technologies, Inc.

 

(c)448

 

24

General Dynamics Corp.

 

566

 

50

Honeywell International, Inc.

 

543

 

34

L-3 Communications Holdings, Inc.

 

295

 

31

Lockheed Martin Corp.

 

406

 

43

Northrop Grumman Corp.

 

653

 

51

Raytheon Co.

 

373

 

23

 

 

 

 

329

Airlines (0.4%)

 

 

 

 

AMR Corp.

 

(a)837

 

12

US Airways Group, Inc.

 

(a)(c)823

 

12

 

 

 

 

24

Auto Components (0.7%)

 

 

 

 

Autoliv, Inc.

 

413

 

22

BorgWarner, Inc.

 

496

 

24

 

 

 

 

46

Beverages (1.3%)

 

 

 

 

Molson Coors Brewing Co., Class B

 

585

 

30

Pepsi Bottling Group, Inc.

 

763

 

30

PepsiAmericas, Inc.

 

737

 

25

 

 

 

 

85

Biotechnology (2.0%)

 

 

 

 

Genzyme Corp.

 

(a)605

 

45

Gilead Sciences, Inc.

 

(a)1,337

 

62

Invitrogen Corp.

 

(a)248

 

23

 

 

 

 

130

Capital Markets (3.7%)

 

 

 

 

Bear Stearns Cos, Inc. (The)

 

141

 

12

E*Trade Financial Corp.

 

(a)(c)1,887

 

7

Goldman Sachs Group, Inc.

 

503

 

108

Lehman Brothers Holdings, Inc.

 

1,056

 

69

Merrill Lynch & Co., Inc.

 

869

 

47

 

 

 

 

243

Chemicals (2.0%)

 

 

 

 

FMC Corp.

 

(c)528

 

29

Monsanto Co.

 

488

 

55

Thermo Fisher Scientific, Inc.

 

(a)802

 

46

Tronox, Inc., Class B

 

(c)20

 

@—

 

 

 

 

130

Commercial Banks (0.3%)

 

 

 

 

Wells Fargo & Co.

 

636

 

19

Commercial Services & Supplies (0.2%)

 

 

 

 

Monster Worldwide, Inc.

 

(a)390

 

13

Communications Equipment (2.1%)

 

 

 

 

Ciena Corp.

 

(a)(c)697

 

24

Cisco Systems, Inc.

 

(a)1,644

 

44

F5 Networks, Inc.

 

(a)(c)464

 

13

Garmin Ltd.

 

129

 

13

NII Holdings, Inc.

 

(a)272

 

13

QLogic Corp.

 

(a)888

 

$     13

Qualcomm, Inc.

 

459

 

18

 

 

 

 

138

Computers & Peripherals (6.5%)

 

 

 

 

Apple, Inc.

 

(a)550

 

109

Cognizant Tech Solutions Corp., Class A

 

(a)367

 

12

Dell, Inc.

 

(a)1,288

 

32

Diebold, Inc.

 

428

 

12

Hewlett-Packard Co.

 

2,789

 

141

International Business Machines Corp.

 

1,053

 

114

Network Appliance, Inc.

 

(a)508

 

13

 

 

 

 

433

Construction & Engineering (0.6%)

 

 

 

 

Jacobs Engineering Group, Inc.

 

(a)385

 

37

Consumer Finance (0.8%)

 

 

 

 

American Express Co.

 

431

 

22

AmeriCredit Corp.

 

(a)(c)1,179

 

15

First Marblehead Corp (The)

 

(c)1,140

 

18

 

 

 

 

55

Diversified Financial Services (3.0%)

 

 

 

 

Bank of America Corp.

 

1,096

 

45

CIT Group, Inc.

 

965

 

23

Citigroup, Inc.

 

2,356

 

69

JPMorgan Chase & Co.

 

816

 

36

Nasdaq Stock Market, Inc. (The)

 

(a)574

 

29

 

 

 

 

202

Diversified Telecommunication Services (2.7%)

 

 

 

 

American Tower Corp., Class A

 

(a)308

 

13

AT&T, Inc.

 

2,892

 

120

Verizon Communications, Inc.

 

1,115

 

49

 

 

 

 

182

Electric Utilities (0.8%)

 

 

 

 

Exelon Corp.

 

641

 

52

Electrical Equipment (0.3%)

 

 

 

 

General Cable Corp.

 

(a)(c)297

 

22

Electronic Equipment & Instruments (0.8%)

 

 

 

 

Amphenol Corp., Class A

 

595

 

27

Gamestop Corp., Class A

 

(a)207

 

13

Jabil Circuit, Inc.

 

698

 

11

 

 

 

 

51

Energy (0.2%)

 

 

 

 

Sunpower Corp., Class A

 

(a)(c)97

 

13

Energy Equipment & Services (2.8%)

 

 

 

 

Energen Corp.

 

397

 

26

Halliburton Co.

 

432

 

16

National-Oilwell Varco, Inc.

 

(a)568

 

42

Pride International, Inc.

 

(a)408

 

14

Superior Energy Services, Inc.

 

(a)1,187

 

41

Transocean, Inc.

 

330

 

47

 

 

 

 

186

Food & Staples Retailing (2.0%)

 

 

 

 

Costco Wholesale Corp.

 

605

 

42

 

 

The accompanying notes are an integral part of the financial statements.

105

 


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Systematic Active Large Cap Core Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Food & Staples Retailing (cont’d)

 

 

 

 

CVS/Caremark Corp.

 

2,372

 

$     94

 

 

 

 

136

Food Products (0.4%)

 

 

 

 

Archer-Daniels-Midland Co.

 

592

 

27

Gas Utilities (0.5%)

 

 

 

 

Questar Corp.

 

569

 

31

Health Care Equipment & Supplies (0.2%)

 

 

 

 

HLTH Corp.

 

(a)971

 

13

Health Care Providers & Services (4.7%)

 

 

 

 

Aetna, Inc.

 

783

 

45

Davita, Inc.

 

(a)430

 

24

Express Scripts, Inc.

 

(a)498

 

37

Humana, Inc.

 

(a)464

 

35

McKesson Corp.

 

629

 

41

Medco Health Solutions, Inc.

 

(a)346

 

35

Quest Diagnostics, Inc.

 

(c)926

 

49

WebMD Health Corp., Class A

 

(a)(c)325

 

13

Wellpoint Health Networks, Inc.

 

(a)397

 

35

 

 

 

 

314

Hotels, Restaurants & Leisure (2.7%)

 

 

 

 

Burger King Holdings, Inc.

 

(c)975

 

28

Harrah’s Entertainment, Inc.

 

257

 

23

Las Vegas Sands Corp.

 

(a)116

 

12

McDonald’s Corp.

 

1,568

 

92

Starbucks Corp.

 

(a)626

 

13

Wynn Resorts Ltd.

 

110

 

12

 

 

 

 

180

Household Durables (0.9%)

 

 

 

 

Lennar Corp., Class A

 

(c)751

 

13

Pulte Homes, Inc.

 

1,255

 

13

Tempur-Pedic International, Inc.

 

(c)1,199

 

32

 

 

 

 

58

Household Products (1.0%)

 

 

 

 

Energizer Holdings, Inc.

 

(a)(c)238

 

27

Kimberly-Clark Corp.

 

554

 

38

 

 

 

 

65

Independent Power Producers & Energy Traders (0.3%)

 

 

 

 

AES Corp. (The)

 

(a)1,019

 

22

Industrial Conglomerates (1.3%)

 

 

 

 

General Electric Co.

 

2,029

 

75

UTi Worldwide, Inc.

 

654

 

13

 

 

 

 

88

IInformation Technology Services (0.4%)

 

 

 

 

Global Payments, Inc.

 

(c)541

 

25

Insurance (6.2%)

 

 

 

 

AMBAC Financial Group, Inc.

 

(c)946

 

24

American Financial Group, Inc.

 

795

 

23

American International Group, Inc.

 

783

 

46

Chubb Corp.

 

710

 

39

CNA Financial Corp.

 

1,145

 

39

Hartford Financial Services Group, Inc.

 

625

 

54

Loews Corp.

 

903

 

45

MBIA, Inc.

 

(c)628

 

$     12

Metlife, Inc.

 

718

 

44

Philadelphia Consolidated Holding Corp.

 

(a)(c)585

 

23

Prudential Financial, Inc.

 

335

 

31

Travelers Cos., Inc. (The)

 

609

 

33

 

 

 

 

413

Internet & Catalog Retail (0.9%)

 

 

 

 

Amazon.Com, Inc.

 

(a)141

 

13

Coldwater Creek, Inc.

 

(a)(c)1,909

 

13

Expedia, Inc.

 

(a)976

 

31

 

 

 

 

57

Internet Software & Services (2.7%)

 

 

 

 

Akamai Technologies, Inc.

 

(a)358

 

12

eBay, Inc.

 

(a)1,151

 

38

Google, Inc., Class A

 

(a)91

 

63

McAfee, Inc.

 

(a)1,422

 

53

NutriSystem, Inc.

 

(a)(c)468

 

13

 

 

 

 

179

Machinery (2.5%)

 

 

 

 

AGCO Corp.

 

(a)489

 

33

Deere & Co.

 

872

 

81

Joy Global, Inc.

 

619

 

41

The Manitowoc Company, Inc.

 

269

 

13

 

 

 

 

168

Media (1.0%)

 

 

 

 

DIRECTV Group, Inc. (The)

 

(a)1,254

 

29

Walt Disney Co. (The)

 

730

 

24

Warner Music Group Corp.

 

(c)2,072

 

12

 

 

 

 

65

Metals & Mining (2.1%)

 

 

 

 

Alcoa, Inc.

 

319

 

12

Freeport-McMoran Copper & Gold, Inc.

 

209

 

21

Rio Tinto plc ADR

 

83

 

35

Southern Copper Corp.

 

(c)326

 

34

United States Steel Corp.

 

302

 

37

 

 

 

 

139

Multiline Retail (0.2%)

 

 

 

 

J.C. Penney Co., Inc.

 

293

 

13

Oil, Gas & Consumable Fuels (10.3%)

 

 

 

 

Anadarko Petroleum Corp.

 

342

 

22

Chevron Corp.

 

908

 

85

ConocoPhillips

 

1,428

 

126

ENSCO International, Inc.

 

223

 

13

Exxon Mobil Corp.

 

2,142

 

201

Frontier Oil Corp.

 

308

 

12

Helix Energy Solutions Group, Inc.

 

(a)314

 

13

Hess Corp.

 

355

 

36

Marathon Oil Corp.

 

972

 

59

Overseas Shipholding Group, Inc.

 

576

 

43

Spectra Energy Corp.

 

473

 

12

Valero Energy Corp.

 

907

 

64

 

 

 

 

686

 

106

The accompanying notes are an integral part of the financial statements.

 

 


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Systematic Active Large Cap Core Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Personal Products (0.2%)

 

 

 

 

Bare Escentuals, Inc.

 

(a)(c)510

 

$     12

Pharmaceuticals (3.0%)

 

 

 

 

APP Pharmaceuticals, Inc.

 

(a)(c)1,234

 

13

Johnson & Johnson

 

544

 

36

Merck & Co., Inc.

 

1,795

 

104

Sepracor, Inc.

 

(a)501

 

13

Teva Pharmaceutical Industries Ltd. ADR

 

(c)773

 

36

 

 

 

 

202

Road & Rail (1.8%)

 

 

 

 

Avis Budget Group, Inc.

 

(a)978

 

13

Burlington North Santa Fe Corp.

 

385

 

32

CSX Corp.

 

680

 

30

Union Pacific Corp.

 

360

 

45

 

 

 

 

120

Semiconductors & Semiconductor Equipment (3.3%)

 

 

 

 

Cypress Semiconductor Corp.

 

(a)1,082

 

39

Integrated Device Technology, Inc.

 

(a)1,116

 

12

Intel Corp.

 

2,799

 

74

LSI Corp.

 

(a)2,383

 

13

MEMC Electronic Materials, Inc.

 

(a)595

 

53

Micron Technology, Inc.

 

(a)1,621

 

12

Texas Instruments, Inc.

 

478

 

16

 

 

 

 

219

Software (3.5%)

 

 

 

 

Electronic Arts, Inc.

 

(a)217

 

13

Microsoft Corp.

 

2,718

 

97

Oracle Corp.

 

(a)2,529

 

57

Salesforce.com, Inc.

 

(a)666

 

41

Symantec Corp.

 

(a)781

 

13

VMware, Inc., Class A

 

(a)(c)141

 

12

 

 

 

 

233

Specialty Retail (0.6%)

 

 

 

 

American Eagle Outfitters, Inc.

 

1

 

@—

Chico’s FAS, Inc.

 

(a)(c)1,308

 

12

Office Depot, Inc.

 

(a)953

 

13

OfficeMax, Inc.

 

603

 

13

 

 

 

 

38

Textiles, Apparel & Luxury Goods (1.9%)

 

 

 

 

Coach, Inc.

 

(a)401

 

12

CROCS, Inc.

 

(a)(c)307

 

11

Guess?, Inc.

 

321

 

12

Jones Apparel Group, Inc.

 

779

 

13

Liz Claiborne, Inc.

 

594

 

12

Nike, Inc., Class B

 

608

 

39

Polo Ralph Lauren Corp.

 

232

 

15

Urban Outfitters, Inc.

 

(a)(c)480

 

13

 

 

 

 

127

Thrifts & Mortgage Finance (2.2%)

 

 

 

 

Countrywide Financial Corp.

 

(c)2,614

 

23

Fannie Mae

 

360

 

15

Freddie Mac

 

406

 

14

MGIC Investment Corp.

 

(c)1,422

 

32

PMI Group, Inc. (The)

 

(c)969

 

13

Radian Group, Inc.

 

(c)2,943

 

$     34

Sovereign Bancorp, Inc.

 

1,084

 

12

Washington Mutual, Inc.

 

(c)456

 

6

 

 

 

 

149

Tobacco (3.6%)

 

 

 

 

Altria Group, Inc.

 

1,965

 

148

Loews Corp. - Carolina Group

 

1,075

 

92

 

 

 

 

240

Total Common Stocks (Cost $5,691)

 

 

 

6,409

 

 

Face

 

 

 

 

Amount

 

 

 

 

(000)

 

 

Short-Term Investments (15.4%)

 

 

 

 

Short-Term Debt Securities held as Collateral on Loaned Securities (11.2%)

 

 

 

 

Alliance & Leicester plc,

 

 

 

 

5.26%, 9/2/08

 

$        (h)22

 

22

Bancaja,

 

 

 

 

5.35%, 8/12/08

 

11

 

11

Bank of New York Co., Inc.,

 

 

 

 

5.24%, 8/8/08

 

(h)11

 

11

BASF AG,

 

 

 

 

5.18%, 8/19/08

 

(h)11

 

11

BNP Paribas plc,

 

 

 

 

4.90%, 5/19/08

 

(h)22

 

22

CAM US Finance S.A. Unipersonal,

 

 

 

 

5.24%, 7/25/08

 

(h)45

 

45

Canadian Imperial Bank of Commerce, New York,

 

 

 

 

4.42%, 7/28/08

 

(h)22

 

22

CC USA, Inc.,

 

 

 

 

3.89%, 1/28/08

 

(h)11

 

11

CIT Group Holdings,

 

 

 

 

5.23%, 6/18/08

 

(h)40

 

40

Citigroup Global Markets Holdings, Inc.,

 

 

 

 

4.51%, 1/2/08

 

152

 

152

Credit Suisse First Boston, New York,

 

 

 

 

4.32%, 3/14/08

 

(h)22

 

22

First Tennessee Bank,

 

 

 

 

5.05%, 8/15/08

 

(h)11

 

11

5.06%, 8/15/08

 

(h)45

 

45

Goldman Sachs Group, Inc.,

 

 

 

 

4.62%, 2/13/09

 

(h)21

 

21

5.10%, 9/12/08

 

(h)11

 

11

HSBC Finance Corp.,

 

 

 

 

5.26%, 8/5/08

 

(h)11

 

11

IBM Corp.,

 

 

 

 

5.27%, 9/8/08

 

(h)45

 

45

Lehman Brothers, Inc.,

 

 

 

 

4.49%, 1/2/08

 

19

 

19

Macquarie Bank Ltd.,

 

 

 

 

4.95%, 8/20/08

 

(h)22

 

22

Metropolitan Life Global Funding,

 

 

 

 

4.89%, 8/21/08

 

(h)33

 

33

National Bank of Canada,

 

 

 

 

5.21%, 4/2/08

 

(h)45

 

45

 

 

The accompanying notes are an integral part of the financial statements.

107

 


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Systematic Active Large Cap Core Portfolio

 

 

 

Face

 

 

 

 

Amount

 

Value

 

 

(000)

 

(000)

Short-Term Debt Securities held as Collateral on Loaned Securities (cont’d)

 

 

 

 

National Rural Utilities Cooperative Finance Corp.,

 

 

 

 

5.24%, 9/2/08

 

$        (h)45

 

$

45

Nationwide Building Society,

 

 

 

 

4.92%, 7/28/08

 

(h)26

 

26

Unicredito Italiano Bank (Ireland) plc,

 

 

 

 

5.04%, 8/14/08

 

(h)24

 

24

5.26%, 8/8/08

 

(h)16

 

16

 

 

 

 

743

 

 

Shares

 

 

Investment Company (4.2%)

 

 

 

 

Morgan Stanley Institutional Liquidity Money Market Portfolio
— Institutional Class

 

(o)279,630

 

280

Total Short Term Investments (Cost $1,023)

 

 

 

1,023

Total Investments (112.0%) (Cost $6,714) including $724 of Securities Loaned

 

 

 

7,432

Liabilities in Excess of Other Assets (-12.0%)

 

 

 

(796)

Net Assets (100%)

 

 

 

$

6,636

 

(a)

Non-income producing security.

(c)

All or portion of security on loan at December 31, 2007.

(h)

Variable/Floating rate security — Interest rate changes on these instruments are based on changes in a designated rate. The rates shown are those in effect on December 31, 2007.

(o)

See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class.

@

Value is less than $500.

ADR

American Depositary Receipt

 

Futures Contracts:

 

The Portfolio had the following futures contract(s) open at period end:

 

 

 

Number
of
Contracts

 

Value
(000)

 

Expiration
Date

 

Net
Unrealized
Appreciation
(Depreciation)
(000)

Long:

 

 

 

 

 

 

 

 

E-Mini S&P 500 (United States)

 

4

 

$295

 

Mar-08

 

 

$@—

 

 

 

 

 

 

 

 

 

 

 

108

The accompanying notes are an integral part of the financial statements.

 

 


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (unaudited)

 

Systematic Active Small Cap Core Portfolio

 

 

 

 

*

Minimum Investment

* *

Commenced operations on April 28, 2006

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the Russell 2000® Index(1) and the Lipper Small-Cap Core Funds Index(2)

 

 

 

Total Returns(3)

 

 

 

 

Average Annual

 

 

 

One

 

Since   

 

 

Year

 

Inception(5)

 

 

 

 

 

 

Portfolio – Class A (4)

 

(8.35)

%

(5.30

)%

Russell 2000® Index

 

(1.57

)

1.35

 

Lipper Small-Cap Core Funds Index

 

1.92

 

1.81

 

 

 

 

 

 

 

Portfolio – Class B (4)

 

(8.49

)

(5.48

)

Russell 2000® Index

 

(1.57

)

1.35

 

Lipper Small-Cap Core Funds Index

 

1.92

 

1.81

 

 

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 www.morganstanley.com/msim. 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.

 

(1)

The Russell 2000® Index is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. The Russell 2000® includes the smallest 2000 securities in the Russell 3000®. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)

The Lipper Small-Cap Core Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Small-Cap Core Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. As of the date of this report, the Portfolio is in the Lipper Small-Cap Core Funds classification.

(3)

Total returns for the Portfolio reflect fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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 April 28, 2006

(5)

For comparative purposes, average 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.

 

The Systematic Active Small Cap Core Portfolio (the “Portfolio”) seeks long-term capital appreciation by investing primarily in equity securities of small capitalization 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.

 

109


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (cont’d)

 

Systematic Active Small Cap Core Portfolio

 

Performance

 

For the year ended December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of -8.35%, net of fees, for Class A shares and -8.49%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares underperformed against its benchmark, the Russell 2000®Index (the “Index”) which returned -1.57%.

 

Factors Affecting Performance

 

·    The 12 months ended December 31, 2007 were characterized by pronounced volatility in stock prices, largely driven by credit market woes and deteriorating economic outlooks. By the third quarter, evidence mounted that the subprime market’s troubles spilled into the credit market and the broader economy. A tightening in credit standards, mortgage lender bankruptcies and hedge fund implosions were followed by multi-billion dollar losses reported at several large financial institutions in the fourth quarter. At the same time, a cross current of unfavorable data buffeted the market, indicating a languishing housing market, declining consumer spending, rising oil prices and negative year-over-year corporate profit growth. Although the market rallied each time the Federal Reserve’s (the “Fed”) reduced the target federal funds rate, skepticism quickly returned as investors worried that the Fed’s ability to steer the economy away from recession would be limited by rising inflation pressures. Fourth quarter corporate earnings expectations were dismal, with only the largest multi-national companies expected to generate growth. In this environment, large-cap equities outperformed small-caps, and growth beat value for the year overall.

 

·    Based on total returns, the Portfolio’s best performing sectors were telecommunication services, health care and energy. Financials and consumer discretionary were the weakest sector performers for the Portfolio during the period.

 

·    The largest detractors from the Portfolio’s overall absolute return were the industrials and consumer discretionary sectors. Within the industrials sector, exposure to an airline stock hurt performance, owing to the company’s weak earnings, and several temporary employment services providers hampered performance as the outlook for labor trends languished. Consumer discretionary holdings that had a negative influence on return included several specialty retailers, a resort and planned communities developer/operator, and an auto components manufacturer.

 

·    In contrast, the health care sector contributed positively to the Portfolio’s overall absolute return. Holdings in a generic drug manufacturer and a diagnostic devices maker performed well, due to the companies’ strong earnings during the period.

 

·    The Portfolio’s relative underperformance was driven primarily by the consumer discretionary and financials sectors.

 

Management Strategies

 

·    We believe that we can enhance returns by employing a quantitative model that uses multiple, independent factors to examine the fundamentals of a company. We further believe that our quantitative efforts in combination with our fundamental analysis can exploit market inefficiencies.

 

·    We employ a quantitative approach to stock selection utilizing a proprietary quantitative model. The model is driven by rigorous fundamental and quantitative research that screens a universe of small capitalization companies. The model employs three quantitative screens based on the following primary inputs – earnings expectations, price trends and relative valuations. Individual securities and industries are ranked within each sector by the most effective combination of these disciplines based on the current phase of the economic cycle. We then decide whether to buy, sell or hold a security based on its fundamental analysis and the results of this model-driven approach.

 

·    Accordingly, the stock selection process yielded an overweight position in the utilities sector; underweight positions in the consumer discretionary, technology, financials and industrials sectors; and market-weight positions in the energy, health care, materials, telecommunication services and consumer staples sectors.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 and held for the entire six-month period.

 

110


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

Systematic Active Small Cap Core Portfolio

 

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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning
Account Value
July 1, 2007

 

 

Ending
Account Value
December 31,
2007

 

 

Expenses Paid
During Period*
July 1, 2007—December 31,
2007

 

Class A

 

 

 

 

 

 

Actual

 

$1,000.00

 

$

868.40

 

$4.80

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,020.06

 

5.19

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

Actual

 

1,000.00

 

867.90

 

6.31

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,018.45

 

6.82

*

Expenses are equal to Class A and Class B annualized net expense ratios of 1.02% and 1.34%, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

* Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

111


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Portfolio of Investments

 

Systematic Active Small Cap Core Portfolio

 

 

 

Shares

 

Value
(000)

Common Stocks (89.2%)

 

 

 

 

Advertising Agencies (0.4%)

 

 

 

 

InVentiv Health, Inc.

 

(a)753

 

$

23

Aerospace (0.8%)

 

 

 

 

AAR Corp.

 

(a)(c)931

 

35

MTC Technologies, Inc.

 

(a)(c)491

 

12

 

 

 

 

47

Air Transport (1.9%)

 

 

 

 

Alaska Air Group, Inc.

 

(a)(c)1,387

 

35

Bristow Group, Inc.

 

(a)536

 

30

ExpressJet Holdings, Inc.

 

(a)3,122

 

8

Republic Airways Holdings, Inc.

 

(a)795

 

15

Skywest, Inc.

 

882

 

24

 

 

 

 

112

Auto Parts: After Market (0.1%)

 

 

 

 

Commercial Vehicle Group, Inc.

 

(a)515

 

7

Auto Parts: Original Equipment (0.1%)

 

 

 

 

Noble International, Ltd.

 

(c)304

 

5

Auto, Trucks & Parts (0.7%)

 

 

 

 

American Axle & Manufacturing Holdings, Inc.

 

1,987

 

37

Miller Industries, Inc.

 

(a)562

 

8

 

 

 

 

45

Automobiles (0.3%)

 

 

 

 

Force Protection, Inc.

 

(a)1,619

 

7

Wabash National Corp.

 

1,020

 

8

 

 

 

 

15

Banks: New York City (0.6%)

 

 

 

 

Community Bank System, Inc.

 

(c)1,170

 

23

Signature Bank/NY

 

(a)308

 

10

 

 

 

 

33

Banks: Outside New York City (5.2%)

 

 

 

 

1st Source Corp.

 

(c)342

 

6

BankFinancial Corp.

 

(c)1,550

 

24

Boston Private Financial Holdings, Inc.

 

(c)1,220

 

33

Capital Bancorp Ltd.

 

393

 

8

Centennial Bank Holdings, Inc.

 

(a)(c)3,568

 

21

First Bancorp/Puerto Rico

 

(c)4,444

 

32

First Community Bancorp, Inc./CA

 

(c)940

 

39

Franklin Bank Corp./Houston TX

 

(a)1,824

 

8

Freemont General Corp.

 

(a)2,006

 

7

Hanmi Financial Corp.

 

913

 

8

Imperial Capital Bancorp, Inc.

 

556

 

10

Independent Bank Corp./MI

 

820

 

8

Irwin Financial Corp.

 

1,049

 

8

Midwest Banc Holdings, Inc.

 

629

 

8

Oriental Financial Group

 

1,652

 

22

Security Bank Corp./GA

 

853

 

8

Sun Bancorp, Inc./NJ

 

(a)(c)664

 

10

Susquehanna Bancshares, Inc.

 

(c)982

 

18

Umpqua Holdings Corp.

 

(c)1,952

 

30

 

 

 

 

308

Biotechnology Research & Production (3.6%)

 

 

 

 

Albany Molecular Research, Inc.

 

(a)1,867

 

27

American Oriental Bioengineering, Inc.

 

(a)684

 

$

8

Applera Corp. - Celera Group

 

(a)656

 

10

Cubist Pharmaceuticals, Inc.

 

(a)366

 

7

Idenix Pharmaceuticals, Inc.

 

(a)2,913

 

8

InterMune, Inc.

 

(a)583

 

8

Kendle International, Inc.

 

(a)(c)907

 

44

MannKind Corp.

 

(a)974

 

8

Martek Biosciences Corp.

 

(a)(c)862

 

26

Momenta Pharmaceuticals, Inc.

 

(a)1,063

 

8

Nabi Biopharmaceuticals

 

(a)(c)5,787

 

21

Nastech Pharmaceutical, Inc.

 

(a)1,966

 

7

Neurocrine Biosciences, Inc.

 

(a)1,734

 

8

Omrix Biopharmaceuticals, Inc.

 

(a)226

 

8

Protalix BioTherapeutics, Inc.

 

(a)2,365

 

7

Vanda Pharmaceuticals, Inc.

 

(a)1,149

 

8

 

 

 

 

213

Building: Cement (0.1%)

 

 

 

 

US Concrete, Inc.

 

(a)2,302

 

8

Building — Miscellaneous (0.3%)

 

 

 

 

Builders Firstsource, Inc.

 

(a)1,093

 

8

Trex Co., Inc.

 

(a)895

 

7

 

 

 

 

15

Building: Plumbing & Heating (0.2%)

 

 

 

 

Aaon, Inc.

 

512

 

10

Building Materials (0.4%)

 

 

 

 

NCI Building Systems, Inc.

 

(a)(c)626

 

17

PGT, Inc.

 

(a)1,616

 

8

 

 

 

 

25

Business & Consumer Discretionary — Miscellaneous (0.3%)

 

 

 

 

Core-Mark Holding Co., Inc.

 

(a)(c)529

 

15

Casinos & Gambling (0.0%)

 

 

 

 

Magna Entertainment Corp.

 

(a)1,095

 

1

Chemicals (2.4%)

 

 

 

 

Arch Chemicals, Inc.

 

570

 

21

Georgia Gulf Corp.

 

1,131

 

8

HB Fuller

 

443

 

10

Landec Corp.

 

(a)773

 

10

PolyOne Corp.

 

(a)6,251

 

41

Spartech Corp.

 

(c)1,518

 

22

Stepan Co.

 

(c)216

 

7

Symyx Technologies, Inc.

 

(a)959

 

7

Tronox, Inc., Class B

 

920

 

8

Zep, Inc.

 

(a)379

 

5

 

 

 

 

139

Commercial Information Services (0.3%)

 

 

 

 

CMGI, Inc.

 

(a)1,394

 

18

Communications & Media (0.1%)

 

 

 

 

Westwood One, Inc.

 

3,884

 

8

Communications Technology (2.7%)

 

 

 

 

3Com Corp.

 

(a)8,755

 

39

Black Box Corp.

 

684

 

25

Cbeyond, Inc.

 

(a)(c)828

 

32

 

112

The accompanying notes are an integral part of the financial statements.

 

 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Systematic Active Small Cap Core Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Communications Technology (cont’d)

 

 

 

 

CommScope, Inc.

 

(a)154

 

$

8

MasTec, Inc.

 

(a)(c)1,335

 

14

Network Equipment Technologies

 

(a)937

 

8

Novatel Wireless, Inc.

 

(a)482

 

8

Optium Corp.

 

(a)1,024

 

8

Utstarcom, Inc.

 

(a)(c)6,013

 

16

 

 

 

 

158

Computer Services Software & Systems (5.5%)

 

 

 

 

American Reprographics Co.

 

(a)470

 

7

Anixter International, Inc.

 

(a)(c)668

 

42

Ariba, Inc.

 

(a)(c)4,504

 

50

CACI International, Inc., Class A

 

(a)428

 

19

Chordiant Software, Inc.

 

(a)913

 

8

COMSYS IT Partners, Inc.

 

(a)(c)476

 

8

iGate Corp.

 

(a)907

 

8

JDA Software Group, Inc.

 

(a)2,167

 

44

Mantech International Corp., Class A

 

(a)481

 

21

Mentor Graphics Corp.

 

(a)925

 

10

Midway Games, Inc.

 

(a)2,808

 

8

Move, Inc.

 

(a)3,186

 

8

Openwave Systems, Inc.

 

5,820

 

15

Packeteer, Inc.

 

(a)1,284

 

8

Perot Systems Corp.

 

(a)2,979

 

40

Schawk, Inc.

 

676

 

11

SourceForge, Inc.

 

(a)3,350

 

7

Sykes Enterprises, Inc.

 

(a)421

 

8

 

 

 

 

322

Computer Technology (0.9%)

 

 

 

 

Imation Corp.

 

(c)947

 

20

Isilon Systems, Inc.

 

(a)1,561

 

8

Rackable Systems, Inc.

 

(a)803

 

8

Synaptics, Inc.

 

(a)189

 

8

Zoran Corp.

 

(a)349

 

8

 

 

 

 

52

Construction (0.3%)

 

 

 

 

Dycom Industries, Inc.

 

(a)(c)701

 

19

Consumer Electronics (0.8%)

 

 

 

 

Earthlink, Inc.

 

(a)(c)4,666

 

33

InterNap Network Services Corp.

 

(a)904

 

7

ipass, Inc.

 

(a)1,735

 

7

 

 

 

 

47

Containers & Packaging: Paper & Plastic (0.2%)

 

 

 

 

Graphic Packaging Corp.

 

(a)(c)2,766

 

10

Consumer Staples — Miscellaneous (1.0%)

 

 

 

 

American Greetings Corp. Class A

 

(c)1,626

 

33

Prestige Brands Holdings, Inc.

 

(a)3,020

 

23

 

 

 

 

56

Diversifed (0.3%)

 

 

 

 

Hudson Highland Group, Inc.

 

(a)989

 

8

Beacon Roofing Supply, Inc.

 

(a)918

 

8

 

 

 

 

16

Diversified Financial Services (0.8%)

 

 

 

 

CompuCredit Corp.

 

(a)813

 

8

Clayton Holdings, Inc.

 

(a)1,719

 

$

9

First Niagara Financial Group, Inc.

 

2,564

 

31

 

 

 

 

48

Drug & Grocery Store Chains (0.1%)

 

 

 

 

Winn-Dixie Stores, Inc.

 

(a)464

 

8

Drugs & Pharmaceuticals (3.7%)

 

 

 

 

Emergent Biosolutions, Inc.

 

(a)1,510

 

8

KV Pharmaceutical Co.

 

(a)271

 

8

Medarex, Inc.

 

(a)(c)1,863

 

19

Nektar Therapeutics

 

(a)1,177

 

8

Obagi Medical Products, Inc.

 

(a)425

 

8

OSI Pharmaceuticals, Inc.

 

(a)1,275

 

62

Penwest Pharmaceuticals Co.

 

(a)1,320

 

8

Perrigo Co.

 

2,099

 

74

Quidel Corp.

 

(a)399

 

8

Santarus, Inc.

 

(a)3,098

 

8

Trubion Pharmaceuticals, Inc.

 

(a)749

 

7

 

 

 

 

218

Electrical Equipment & Components (1.1%)

 

 

 

 

Belden, Inc.

 

231

 

10

Greatbatch, Inc.

 

(a)512

 

10

Power-One, Inc.

 

(a)1,908

 

8

RF Micro Devices, Inc.

 

(a)(c)6,837

 

39

 

 

 

 

67

Electronics (0.2%)

 

 

 

 

Multi-Fineline Electronix, Inc.

 

(a)499

 

9

Electronics: Instruments Gauges & Meters (0.1%)

 

 

 

 

Measurement Specialties, Inc.

 

(a)355

 

8

Electronics: Medical Systems (0.5%)

 

 

 

 

Cynosure, Inc. - Class A

 

(a)295

 

8

Hologic, Inc.

 

(a)(c)359

 

24

 

 

 

 

32

Electronics: Semi-Conductors/Components (3.0%)

 

 

 

 

Anadigics, Inc.

 

(a)663

 

8

Genesis Microchip, Inc.

 

(a)(c)1,056

 

9

IXYS Corp.

 

(a)1,404

 

11

Microsemi Corp.

 

(a)350

 

8

ON Semiconductor Corp.

 

(a)875

 

8

Plexus Corp.

 

(a)(c)991

 

26

Powerwave Technologies, Inc.

 

(a)(c)1,592

 

6

Rogers Corp.

 

(a)(c)462

 

20

Silicon Image, Inc.

 

(a)1,693

 

8

Silicon Storage Technology, Inc.

 

(a)(c)8,973

 

27

Skyworks Solutions, Inc.

 

(a)(c)2,520

 

21

Spansion, Inc.

 

(a)1,956

 

8

Syntax-Brillian Corp.

 

(a)2,576

 

8

Trident Microsystems, Inc.

 

(a)1,271

 

8

 

 

 

 

176

Electronics: Technology (1.1%)

 

 

 

 

Checkpoint Systems, Inc.

 

(a)928

 

24

Innovative Solutions & Support, Inc.

 

(a)837

 

8

Omnivision Technologies, Inc.

 

(a)(c)1,779

 

28

Zygo Corp.

 

(a)(c)542

 

6

 

 

 

 

66

 

 

The accompanying notes are an integral part of the financial statements.

113

 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Portfolio of Investments (cont’d)

 

Systematic Active Small Cap Core Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Energy — Miscellaneous (3.0%)

 

 

 

 

Alon USA Energy, Inc.

 

1,575

 

$

43

Atwood Oceanics, Inc.

 

(a)102

 

10

Bois d’Arc Energy, Inc.

 

(a)523

 

10

Callon Petroleum Co.

 

(a)675

 

12

Energy Partners Ltd.

 

(a)645

 

8

GeoMet, Inc.

 

(a)1,495

 

8

Harvest Natural Resources, Inc.

 

(a)(c)877

 

11

Helix Energy Solutions Group, Inc.

 

(a)253

 

10

Mariner Energy, Inc.

 

(a)805

 

18

Pacific Ethanol, Inc.

 

(a)906

 

7

Pioneer Drilling Co.

 

(a)(c)1,345

 

16

Swift Energy Co.

 

(a)418

 

18

Verenium Corp.

 

(a)1,504

 

8

 

 

 

 

179

Energy Equipment (0.6%)

 

 

 

 

Exterran Holdings, Inc.

 

(a)327

 

27

Geokinetics, Inc.

 

(a)411

 

8

 

 

 

 

35

Engineering & Contracting Services (0.1%)

 

 

 

 

Integrated Electric Services

 

(a)414

 

8

Entertainment (1.1%)

 

 

 

 

Bluegreen Corp.

 

(a)(c)3,561

 

26

Carmike Cinemas, Inc.

 

1,252

 

9

Take-Two Interactive Software, Inc.

 

(a)(c)1,594

 

29

 

 

 

 

64

Financial — Miscellaneous (1.9%)

 

 

 

 

Advanta Corp., Class B

 

978

 

8

Assured Guaranty Ltd.

 

400

 

10

Global Cash Access Holding, Inc.

 

(a)1,237

 

8

Imergent, Inc.

 

728

 

8

Ocwen Financial Corp.

 

(a)1,406

 

8

Odyssey Re Holdings Corp.

 

(c)559

 

21

Platinum Underwriters Holdings, Ltd.

 

659

 

23

RAM Holdings Ltd.

 

(a)1,558

 

8

Security Capital Group, Inc.

 

1,971

 

8

Triad Guaranty, Inc.

 

(a)785

 

8

 

 

 

 

110

Forest Products (0.2%)

 

 

 

 

Universal Forest Products, Inc.

 

(c)297

 

9

Health Care Facilities (0.1%)

 

 

 

 

Sun Healthcare Group, Inc.

 

(a)449

 

8

Health Care Management Services (0.3%)

 

 

 

 

Eclipsys Corp.

 

(a)303

 

8

Omnicell, Inc.

 

(a)289

 

8

 

 

 

 

16

Health Care Services (0.6%)

 

 

 

 

Amedisys, Inc.

 

(a)159

 

8

Bio-Reference Labs, Inc.

 

(a)(c)515

 

17

Hythiam, Inc.

 

(a)2,798

 

8

 

 

 

 

33

Homebuilding (0.9%)

 

 

 

 

Amrep Corp.

 

259

 

$

8

Beazer Homes USA, Inc.

 

1,098

 

8

Hovnanian Enterprises, Inc.

 

(a)1,146

 

8

M/I Homes, Inc.

 

772

 

8

Meritage Homes Corp.

 

(a)525

 

8

WCI Communities, Inc.

 

(a)(c)3,101

 

12

 

 

 

 

52

Hotel/Motel (0.6%)

 

 

 

 

Lodgian, Inc.

 

(a)(c)3,381

 

38

Household Furnishings (0.3%)

 

 

 

 

American Woodmark Corp.

 

400

 

7

La-Z-Boy, Inc.

 

(c)1,115

 

9

Lifetime Brands, Inc.

 

(c)228

 

3

 

 

 

 

19

Identification Control & Filter Devices (0.1%)

 

 

 

 

Asyst Technology Corp.

 

(a)2,462

 

8

Industrial Products (0.7%)

 

 

 

 

Castle (A.M.) & Co.

 

(c)892

 

24

Mueller Industries, Inc.

 

710

 

21

 

 

 

 

45

Insurance: Life (0.9%)

 

 

 

 

Presidential Life Corp.

 

2,065

 

36

Stancorp Financial Group

 

207

 

10

Universal American Financial Corp.

 

(a)308

 

8

 

 

 

 

54

Insurance: Multi-Line (0.3%)

 

 

 

 

Corvel Corp.

 

(a)338

 

8

Max Re Capital Ltd.

 

369

 

10

 

 

 

 

18

Insurance: Property & Casualty (2.1%)

 

 

 

 

Commerce Group, Inc.

 

(c)1,430

 

51

First Acceptance Corp.

 

(a)1,872

 

8

IPC Holdings Ltd.

 

407

 

12

Landamerica Financial Group

 

233

 

8

Meadowbrook Insurance Group

 

(a)1,082

 

10

Selective Insurance Group

 

(c)962

 

22

Tower Group, Inc.

 

314

 

11

 

 

 

 

122

Investment Management Companies (1.6%)

 

 

 

 

Apollo Investment Corp.

 

(c)2,473

 

42

Cowen Group, Inc.

 

(a)779

 

7

Friedman Billings Ramsey Group, Inc.

 

8,428

 

27

Gladstone Capital Corp.

 

248

 

4

Labranche & Co.

 

(a)1,515

 

8

W. P. Stewart & Co., Ltd.

 

1,606

 

8

 

 

 

 

96

Leisure Time (0.5%)

 

 

 

 

Nautilus Group, Inc.

 

1,533

 

8

Premier Exhibitions, Inc.

 

(a)707

 

8

Steinway Musical Instruments

 

(c)142

 

4

West Marine, Inc.

 

(a)865

 

8

 

 

 

 

28

 

114

The accompanying notes are an integral part of the financial statements.

 

 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Systematic Active Small Cap Core Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Machine Tools (0.6%)

 

 

 

 

Regal-Beloit Corp.

 

(c)791

 

$

36

Machinery & Engineering (0.7%)

 

 

 

 

Applied Industrial Technologies, Inc.

 

(c)1,090

 

32

DXP Enterprises, Inc.

 

(a)165

 

8

 

 

 

 

40

Machinery: Engines (0.7%)

 

 

 

 

Briggs & Stratton Corp.

 

(c)1,830

 

41

Machinery: Industrial/Specialty (0.1%)

 

 

 

 

Kennametal, Inc.

 

268

 

10

Machinery: Oil Well Equipment & Services (1.0%)

 

 

 

 

Lufkin Industries, Inc.

 

637

 

37

Oil States International, Inc.

 

(a)774

 

26

 

 

 

 

63

Manufactured Housing (0.1%)

 

 

 

 

Skyline Corp.

 

288

 

8

Manufacturing (0.9%)

 

 

 

 

Acuity Brands, Inc.

 

529

 

24

Ameron International Corp.

 

(c)208

 

19

Griffon Corp.

 

(a)611

 

8

 

 

 

 

51

Materials & Processing — Miscellaneous (0.2%)

 

 

 

 

USEC, Inc.

 

(a)(c)1,526

 

14

Medical & Dental Instruments & Supplies (1.3%)

 

 

 

 

Inverness Medical Innovations, Inc.

 

(a)604

 

34

Orthofix International N.V.

 

(a)133

 

7

STERIS Corp.

 

1,024

 

29

Vital Sign

 

152

 

8

 

 

 

 

78

Metal Fabricating (0.2%)

 

 

 

 

Encore Wire Corp.

 

(c)556

 

9

Office Furniture & Business Equipment (1.0%)

 

 

 

 

Herman Miller, Inc.

 

775

 

25

Ikon Office Solutions, Inc.

 

(c)2,348

 

31

 

 

 

 

56

Oil: Crude Producers (1.2%)

 

 

 

 

Edge Petroleum Corp.

 

(a)(c)1,886

 

11

Stone Energy Corp.

 

(a)1,215

 

57

 

 

 

 

68

Paper (1.0%)

 

 

 

 

AbitibiBowater, Inc.

 

(c)1,311

 

27

Chesapeake Corp.

 

1,411

 

7

Rock-Tenn Co.

 

866

 

22

 

 

 

 

56

Pollution Control & Environmental Services (0.1%)

 

 

 

 

Aventine Renewable Energy Holdings, Inc.

 

(a)617

 

8

Printing & Copying Services (0.1%)

 

 

 

 

VistaPrint Ltd.

 

(a)182

 

8

Production Technology Equipment (0.6%)

 

 

 

 

Credence Systems Corp.

 

(a)(c)11,340

 

27

Mattson Technology, Inc.

 

(a)923

 

$

8

 

 

 

 

35

Publishing — Miscellaneous (0.4%)

 

 

 

 

Scholastic Corp.

 

(a)776

 

27

Real Estate Investment Trusts (REIT) (4.8%)

 

 

 

 

Alesco Financial, Inc.

 

2,380

 

8

American Financial Realty Trust

 

(a)4,960

 

40

Anthracite Capital, Inc.

 

(c)1,057

 

8

BioMed Realty Trust, Inc.

 

(c)1,290

 

30

CBRE Realty Finance, Inc.

 

1,374

 

7

Deerfield Capital Corp.

 

(c)2,663

 

21

Equity One, Inc.

 

(c)1,030

 

24

Lexington Realty Trust

 

(c)2,446

 

35

Novastar Financial, Inc.

 

(a)2,602

 

7

Pennsylvania Real Estate Investment Trust

 

(c)1,182

 

35

RAIT Investment Trust

 

(c)1,868

 

16

Realty Income Corp.

 

(c)1,505

 

41

Tarragon Corp.

 

(a)(c)850

 

1

U-Store-It Trust

 

844

 

8

 

 

 

 

281

Restaurants (1.1%)

 

 

 

 

Bob Evans Farms, Inc.

 

(c)1,406

 

38

O’Charleys, Inc.

 

(c)699

 

10

Jamba, Inc.

 

(a)2,065

 

8

Ruby Tuesday, Inc.

 

817

 

8

 

 

 

 

64

Retail (5.1%)

 

 

 

 

Bon-Ton Stores, Inc. (The)

 

(c)1,039

 

10

Borders Group, Inc.

 

(c)2,501

 

27

Brown Shoe Co., Inc.

 

267

 

4

Cabela’s, Inc., Class A

 

(a)(c)1,868

 

28

Casual Male Retail Group, Inc.

 

(a)1,464

 

8

Cato Corp. (The), Class A

 

(c)1,674

 

26

Charming Shoppes, Inc.

 

(a)(c)4,436

 

24

Citi Trends, Inc.

 

(a)498

 

8

Collective Brands, Inc.

 

(a)1,743

 

30

Conn’s, Inc.

 

(a)(c)573

 

10

CSK Auto Corp.

 

(a)1,623

 

8

Jo-Ann Stores, Inc.

 

(a)229

 

3

Krispy Kreme Doughnuts, Inc.

 

(a)2,470

 

8

Lawson Products, Inc.

 

228

 

9

Pantry, Inc. (The)

 

(a)(c)642

 

17

Regis Corp.

 

1,058

 

29

Retail Ventures, Inc.

 

(a)1,473

 

7

Rush Enterprises, Inc.

 

(a)295

 

5

Stein Mart, Inc.

 

(c)3,047

 

14

Tuesday Morning Corp.

 

1,564

 

8

World Fuel Services Corp.

 

477

 

14

 

 

 

 

297

Savings & Loan (1.1%)

 

 

 

 

BankAtlantic Bancorp, Inc., Class A

 

1,824

 

7

Bankunited Financial Corp.

 

1,143

 

8

Downey Financial Corp.

 

248

 

8

Flagstar Bancorp, Inc.

 

(c)1,039

 

7

NewAlliance Bancshares, Inc.

 

(c)1,976

 

23

 

 

The accompanying notes are an integral part of the financial statements.

115

 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Portfolio of Investments (cont’d)

 

Systematic Active Small Cap Core Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Savings & Loan (cont’d)

 

 

 

 

PFF Bancorp, Inc.

 

657

 

$

8

United Community Financial Corp.

 

(c)645

 

4

 

 

 

 

65

Services: Commercial (4.7%)

 

 

 

 

Ambassadors International, Inc.

 

573

 

8

AMN Healthcare Services, Inc.

 

(a)(c)666

 

12

BearingPoint, Inc.

 

(a)(c)6,395

 

18

Gevity HR, Inc.

 

965

 

7

ICT Group, Inc.

 

(a)654

 

8

Kelly Services, Inc., Class A

 

1,354

 

25

Kforce, Inc.

 

(a)(c)3,710

 

36

Live Nation, Inc.

 

(a)2,398

 

35

MPS Group, Inc.

 

(a)1,177

 

13

Perficient, Inc.

 

(a)487

 

8

PHH Corp.

 

(a)1,094

 

19

Providence Service Corp. (The)

 

(a)278

 

8

RSC Holdings, Inc.

 

(a)823

 

10

Source Information Management Co.

 

(a)2,720

 

8

Travelzoo, Inc.

 

(a)558

 

8

TrueBlue, Inc.

 

(a)(c)1,055

 

15

Volt Information Sciences, Inc.

 

(a)1,737

 

31

Walter Industries Corp.

 

287

 

10

 

 

 

 

279

Shipping (0.1%)

 

 

 

 

American Commercial Lines

 

(a)467

 

7

Shoes (0.1%)

 

 

 

 

Shoe Carnival, Inc.

 

(a)(c)333

 

5

Steel (0.7%)

 

 

 

 

Esmark, Inc.

 

(a)(c)609

 

8

Schnitzer Steel Industries, Inc.

 

(c)443

 

31

 

 

 

 

39

Textile Apparel Manufacturers (0.9%)

 

 

 

 

Heelys, Inc.

 

(a)1,116

 

8

Kellwood Co.

 

(c)604

 

10

Warnaco Group, Inc. (The)

 

(a)997

 

34

 

 

 

 

52

Textile Products (0.2%)

 

 

 

 

Interface, Inc.

 

633

 

10

Tobacco (0.1%)

 

 

 

 

Alliance One International, Inc.

 

(a)(c)1,377

 

6

Transportation — Miscellaneous (1.1%)

 

 

 

 

General Maritime Corp.

 

424

 

10

Pacer International, Inc.

 

2,166

 

32

Saia, Inc.

 

(a)1,110

 

15

Celadon Group, Inc.

 

(a)858

 

8

 

 

 

 

65

Truckers (0.3%)

 

 

 

 

Arkansas Best Corp.

 

(c)237

 

5

Old Dominion Freight Line, Inc.

 

(a)(c)592

 

14

 

 

 

 

19

Utilities: Electrical (1.0%)

 

 

 

 

PNM Resources, Inc.

 

(c)1,852

 

40

Unisource Energy Corp.

 

592

 

$

18

 

 

 

 

58

Utilities: Telecommunications (0.2%)

 

 

 

 

North Pittsburgh Systems, Inc.

 

422

 

10

Wholesale & International Trade (0.7%)

 

 

 

 

Central European Distribution Corp.

 

(a)(c)740

 

43

Wholesalers (0.8%)

 

 

 

 

BlueLinx Holdings, Inc.

 

(c)2,688

 

11

Building Material Holding Corp.

 

(c)1,821

 

10

United Stationers, Inc.

 

(a)592

 

27

 

 

 

 

48

Total Common Stocks (Cost $6,106)

 

 

 

5,257

 

 

Face

 

 

 

 

Amount

 

 

 

 

(000)

 

 

Short-Term Investments (44.8%)

 

 

 

 

Short-Term Debt Securities held as Collateral on Loaned Securities (32.6%)

 

 

 

 

Alliance & Leicester plc,

 

 

 

 

5.26%, 9/2/08

 

$

(h)57

 

57

Bancaja,

 

 

 

 

5.35%, 8/12/08

 

29

 

29

Bank of New York Co., Inc.,

 

 

 

 

5.24%, 8/8/08

 

(h)29

 

29

BASF AG,

 

 

 

 

5.18%, 8/19/08

 

(h)29

 

29

BNP Paribas plc,

 

 

 

 

4.90%, 5/19/08

 

(h)57

 

57

CAM US Finance S.A. Unipersonal,

 

 

 

 

5.24%, 7/25/08

 

(h)115

 

115

Canadian Imperial Bank of Commerce, New York,

 

 

 

 

4.42%, 7/28/08

 

(h)57

 

57

CC USA, Inc.,

 

 

 

 

3.89%, 1/28/08

 

(h)29

 

29

CIT Group Holdings,

 

 

 

 

5.23%, 6/18/08

 

(h)104

 

104

Citigroup Global Markets Holdings, Inc.,

 

 

 

 

4.51%, 1/2/08

 

392

 

392

Credit Suisse First Boston, New York,

 

 

 

 

4.32%, 3/14/08

 

(h)57

 

57

First Tennessee Bank,

 

 

 

 

5.05%, 8/15/08

 

(h)29

 

29

5.06%, 8/15/08

 

(h)115

 

115

Goldman Sachs Group, Inc.,

 

 

 

 

4.62%, 2/13/09

 

(h)54

 

54

5.10%, 9/12/08

 

(h)29

 

29

HSBC Finance Corp.,

 

 

 

 

5.26%, 8/5/08

 

(h)29

 

29

IBM Corp.,

 

 

 

 

5.27%, 9/8/08

 

(h)115

 

115

Lehman Brothers, Inc.,

 

 

 

 

4.49%, 1/2/08

 

49

 

49

Macquarie Bank Ltd.,

 

 

 

 

4.95%, 8/20/08

 

(h)57

 

57

Metropolitan Life Global Funding,

 

 

 

 

4.89%, 8/21/08

 

(h)86

 

86

 

116

The accompanying notes are an integral part of the financial statements.

 

 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Systematic Active Small Cap Core Portfolio

 

 

 

Face

 

 

 

 

Amount

 

Value

 

 

(000)

 

(000)

Short-Term Debt Securities held as Collateral on Loaned Securities (cont’d)

 

 

 

 

National Bank of Canada,

 

 

 

 

5.21%, 4/2/08

 

$

(h)115

 

$

115

National Rural Utilities Cooperative Finance Corp.,

 

 

 

 

5.24%, 9/2/08

 

(h)115

 

115

Nationwide Building Society,

 

 

 

 

4.92%, 7/28/08

 

(h)67

 

67

Unicredito Italiano Bank (Ireland) plc,

 

 

 

 

5.04%, 8/14/08

 

(h)64

 

64

5.26%, 8/8/08

 

(h)40

 

40

 

 

 

 

1,919

 

 

Shares

 

 

Investment Company (12.2%)

 

 

 

 

Morgan Stanley Institutional Liquidity

 

 

 

 

Money Market Portfolio — Institutional Class

 

(o)716,637

 

717

Total Short-Term Investments (Cost $2,636)

 

 

 

2,636

Total Investments (134.0%) (Cost $8,742) — including $1,826 of Securities Loaned

 

 

 

(v)7,893

Liabilities in Excess of Other Assets (-34.0%)

 

 

 

(2,001)

Net Assets (100%)

 

 

 

$5,892

 

(a)

 

Non-income producing security.

(c)

 

All or a portion of security on loan at December 31, 2007.

(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, 2007.

(o)

 

See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class.

(v)

 

The approximate market value and percentage of the investments, $11,000 and 0.1%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note A within the Notes to Financial Statements.

REIT

 

Real Estate Investment Trust

 

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:

 

 

 

 

 

 

 

 

 

E-Mini Russell 2000

 

4

 

$309

 

Mar-08

 

 

$7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the financial statements.

117

 


2007 Annual Report

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (unaudited)

 

Systematic Active Small Cap Growth Portfolio

 

 

 

*    Minimum Investment

* * Commenced operations on April 28, 2006

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the Russell 2000® Growth Index(1) and the Lipper Small-Cap Growth Funds Index(2)

 

 

 

Total Returns(3)

 

 

 

Average Annual

 

 

 

One

 

Since

 

 

 

Year

 

Inception(5)

 

Portfolio – Class A (4)

 

0.82

%

(0.83

)%

Russell 2000® Growth Index

 

7.05

 

3.77

 

Lipper Small-Cap Growth Funds Index

 

9.68

 

4.57

 

 

 

 

 

 

 

Portfolio – Class B (4)

 

0.50

 

(1.09

)

Russell 2000® Growth Index

 

7.05

 

3.77

 

Lipper Small-Cap Growth Funds Index

 

9.68

 

4.57

 

 

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 www.morganstanley.com/msim. 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.

 

(1)

 

The Russell 2000® Growth Index measures the performance of those Russell 2000® companies with higher price-to-book ratios and higher forecasted growth values. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)

 

The Lipper 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 fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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 April 28, 2006

(5)

 

For comparative purposes, average 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.

 

The Systematic Active Small Cap Growth Portfolio (the “Portfolio”) seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of small capitalization 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.

 

Performance

 

For the year ended December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of 0.82%, net of fees, for Class A shares

 

118


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Investment Overview (cont’d)

 

Systematic Active Small Cap Growth Portfolio

 

and 0.50%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares underperformed against its benchmark, the Russell 2000® Growth Index (the “Index”) which returned 7.05%.

 

Factors Affecting Performance

 

·                  The 12 months ended December 31, 2007 were characterized by pronounced volatility in stock prices, largely driven by credit market woes and deteriorating economic outlooks. By the third quarter, evidence mounted that the subprime market’s troubles spilled into the credit market and the broader economy. A tightening in credit standards, mortgage lender bankruptcies and hedge fund implosions were followed by multi-billion dollar losses reported at several large financial institutions in the fourth quarter. At the same time, a cross current of unfavorable data buffeted the market, indicating a languishing housing market, declining consumer spending, rising oil prices and negative year-over-year corporate profit growth. Although the market rallied each time the Federal Reserve’s (the “Fed”) reduced the target federal funds rate, skepticism quickly returned as investors worried that the Fed’s ability to steer the economy away from recession would be limited by rising inflation pressures. Fourth quarter corporate earnings expectations were dismal, with only the largest multi-national companies expected to generate growth. In this environment, large-cap equities outperformed small-caps, and growth beat value for the year overall.

 

·                  Based on total returns, the Portfolio’s best performing sectors were materials, health care and telecommunication services. Financials and consumer discretionary were the weakest sector performers for the Portfolio during the period.

 

·                  The largest detractors from the Portfolio’s overall absolute return were the consumer discretionary and financials sectors. In the consumer discretionary sector, several specialty retail holdings lagged as declining retail sales hurt profits for these companies. Limited exposure to a restaurant stock that advanced strongly following its spin-off also dampened the overall sector’s contribution to returns. In the financials sector, weak performance came from a wide range of holdings, due to their exposure to the deteriorating real estate market and concerns about the credit market.

 

·                  In contrast, the health care sector contributed positively to the Portfolio’s overall absolute return. Holdings in a generic drug manufacturer and a diagnostic devices maker performed well, owing to these companies’ strong earnings during the period. Strong performance also came from a company that acquires and develops hematology and oncology treatments, which rallied twice during the year: first, on news of favorable drug trial results and later on an announced acquisition by a biotechnology company.

 

·                  The Portfolio’s relative underperformance was driven primarily by the consumer discretionary and financials sectors.

 

Management Strategies

 

·                  We believe that we can enhance returns by employing a quantitative model that uses multiple, independent factors to examine the fundamentals of a company. We further believe that our quantitative efforts in combination with our fundamental analysis can exploit market inefficiencies.

 

·                  We employ a quantitative approach to stock selection utilizing a proprietary quantitative model. The model is driven by rigorous fundamental and quantitative research that screens a universe of small capitalization companies. The model employs three quantitative screens based on the following primary inputs – earnings expectations, price trends and relative valuations. Individual securities and industries are ranked within each sector by the most effective combination of these disciplines based on the current phase of the economic cycle. We then decide whether to buy, sell or hold a security based on its fundamental analysis and the results of this model-driven approach.

 

·                  Accordingly, the stock selection process yielded an overweight position in the consumer staples sector; underweight positions in the consumer discretionary, health care and technology sectors; and market-weight positions in the energy, financials, industrials, materials and telecommunication services sectors. The Portfolio had a zero weighting in the utilities sector.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 and held for the entire six-month period.

 

119


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (cont’d)

 

Systematic Active Small Cap Growth Portfolio

 

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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning
Account Value July 1, 2007

 

Ending Account
Value
December 31,
2007

 

Expenses Paid
During Period*
July 1, 2007 —
December 31,
2007

 

Class A

 

 

 

 

 

 

 

Actual

 

$

1,000.00

 

$

906.30

 

$

5.24

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,019.71

 

5.55

 

 

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

 

Actual

 

1,000.00

 

904.90

 

6.43

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,018.45

 

6.82

 

* Expenses are equal to Class A and Class B annualized net expense ratios of 1.09% and 1.34%, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

* Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

120


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments

 

Systematic Active Small Cap Growth Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Common Stocks (90.6%)

 

 

 

 

Aerospace (1.7%)

 

 

 

 

AAR Corp.

 

(a)1,213

 

$

46

Esterline Technologies Corp.

 

(a)1,266

 

66

 

 

 

 

112

Air Transport (0.3%)

 

 

 

 

Alaska Air Group, Inc.

 

(a)(c)505

 

13

ExpressJet Holdings, Inc.

 

(a)(c)1,786

 

4

 

 

 

 

17

Auto Parts: Original Equipment (0.1%)

 

 

 

 

Noble International Ltd.

 

(c)310

 

5

Auto, Trucks & Parts (0.3%)

 

 

 

 

Accuride Corp.

 

(a)(c)991

 

8

Amerigon, Inc.

 

(a)563

 

12

 

 

 

 

20

Automobiles (0.2%)

 

 

 

 

Navistar International Corp.

 

(a)252

 

14

Banks: Outside New York City (1.5%)

 

 

 

 

Cascade Bancorp

 

1,169

 

16

International Bancshares Corp.

 

(c)1,762

 

37

Superior Bancorp

 

(a)2,924

 

16

Western Alliance Bancorp

 

(a)923

 

17

Wintrust Financial Corp.

 

(c)320

 

11

 

 

 

 

97

Biotechnology Research & Production (1.9%)

 

 

 

 

Idenix Pharmaceuticals, Inc.

 

(a)(c)2,308

 

6

Kendle International, Inc.

 

(a)966

 

48

Lexicon Pharmaceuticals, Inc.

 

(a)6,985

 

21

Qiagen N.V.

 

(a)(c)1,529

 

32

Telik, Inc.

 

(a)(c)4,839

 

17

 

 

 

 

124

Building Materials (0.5%)

 

 

 

 

NCI Building Systems, Inc.

 

(a)(c)659

 

19

PGT, Inc.

 

(a)3,559

 

17

 

 

 

 

36

Building — Miscellaneous (0.3%)

 

 

 

 

Trex Co., Inc.

 

(a)1,990

 

17

Casinos & Gambling (0.7%)

 

 

 

 

MTR Gaming Group, Inc.

 

(a)(c)611

 

4

Pinnacle Entertainment, Inc.

 

(a)1,173

 

27

Shuffle Master, Inc.

 

(a)974

 

12

 

 

 

 

43

Chemicals (1.5%)

 

 

 

 

Arch Chemicals, Inc.

 

410

 

15

Hercules, Inc.

 

3,129

 

61

Olin Corp.

 

714

 

14

Zep, Inc.

 

(a)541

 

7

 

 

 

 

97

Coal (1.0%)

 

 

 

 

Alpha Natural Resources, Inc.

 

(a)(c)1,393

 

45

International Coal Group, Inc.

 

(a)3,085

 

17

Westmoreland Coal Co.

 

(a)(c)166

 

$

2

 

 

 

 

64

Commercial Information Services (0.2%)

 

 

 

 

infoUSA, Inc.

 

(c)1,377

 

12

Communications & Media (0.2%)

 

 

 

 

Martha Stewart Living Omnimedia, Inc., Class A

 

(a)1,272

 

12

Communications Technology (2.7%)

 

 

 

 

Cbeyond, Inc.

 

(a)(c)935

 

36

CSG System International, Inc.

 

(a)1,156

 

17

Optium Corp.

 

(a)2,288

 

18

RealNetworks, Inc.

 

(a)(c)4,551

 

28

SAVVIS, Inc.

 

(a)(c)574

 

16

Smith Micro Software, Inc.

 

(a)2,017

 

17

Standard Micosystems Corp.

 

(a)(c)572

 

22

Tekelec

 

(a)(c)1,001

 

13

Utstarcom, Inc.

 

(a)(c)3,139

 

9

 

 

 

 

176

Computer Services Software & Systems (8.9%)

 

 

 

 

American Reprographics Co.

 

(a)1,046

 

17

Anixter International, Inc.

 

(a)(c)524

 

33

Bankrate, Inc.

 

(a)367

 

18

BluePhoenix Solutions Ltd.

 

(a)993

 

18

Brocade Communications Systems, Inc.

 

(a)1,693

 

12

CACI International, Inc., Class A

 

(a)704

 

31

COMSYS IT Partners, Inc.

 

(a)(c)491

 

8

Cray, Inc.

 

(a)2,859

 

17

Cybersource Corp.

 

(a)951

 

17

iGate Corp.

 

(a)2,680

 

23

Interactive Intelligence, Inc.

 

(a)639

 

17

JDA Software Group, Inc.

 

(a)1,750

 

36

Lionbridge Technologies

 

(a)4,881

 

17

Manhattan Associates, Inc.

 

(a)1,993

 

52

Mantech International Corp., Class A

 

(a)393

 

17

Mercury Computer Systems, Inc.

 

(a)(c)531

 

9

Midway Games, Inc.

 

(a)6,024

 

17

Ness Technologies, Inc.

 

(a)(c)3,361

 

31

Packeteer, Inc.

 

(a)2,788

 

17

Progress Software Corp.

 

(a)1,434

 

48

Schawk, Inc.

 

(c)663

 

10

SRA International, Inc., Class A

 

(a)1,447

 

43

Vignette Corp.

 

(a)(c)2,683

 

39

Wind River Systems, Inc.

 

(a)4,552

 

41

 

 

 

 

588

Computer Technology (0.7%)

 

 

 

 

Isilon Systems, Inc.

 

(a)3,497

 

18

Rackable Systems, Inc.

 

(a)1,737

 

17

Radisys Corp.

 

(a)(c)807

 

11

 

 

 

 

46

Construction (0.2%)

 

 

 

 

Granite Construction, Inc.

 

439

 

16

Consumer Electronics (0.7%)

 

 

 

 

InterNap Network Services Corp.

 

(a)1,972

 

17

ipass, Inc.

 

(a)(c)6,968

 

28

 

 

 

 

45

 

 

The accompanying notes are an integral part of the financial statements.

121

 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Portfolio of Investments (cont’d)

 

Systematic Active Small Cap Growth Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Consumer Products (0.2%)

 

 

 

 

NutriSystem, Inc.

 

(a)431

 

$

12

Consumer Staples — Miscellaneous (0.3%)

 

 

 

 

AACO Brands Corp.

 

(a)(c)573

 

9

Jarden Corp.

 

(a)343

 

8

 

 

 

 

17

Containers & Packaging: Paper & Plastic (0.9%)

 

 

 

 

Silgan Holdings, Inc.

 

1,109

 

58

Diversified (0.9%)

 

 

 

 

Beacon Roofing Supply, Inc.

 

(a)2,023

 

17

Hudson Highland Group, Inc.

 

(a)(c)4,835

 

41

 

 

 

 

58

Diversified Financial Services (1.2%)

 

 

 

 

Clayton Holdings Inc

 

(a)3,311

 

17

Grubb & Ellis Co.

 

2,788

 

18

Knight Capital Group, Inc., Class A

 

(a)3,295

 

47

 

 

 

 

82

Drug & Grocery Store Chains (0.2%)

 

 

 

 

Casey’s General Stores, Inc.

 

(c)449

 

13

Drugs & Pharmaceuticals (5.9%)

 

 

 

 

Alkermes, Inc.

 

(a)739

 

11

Medicis Pharmaceuticals, Class A

 

(c)916

 

24

Nektar Therapeutics

 

(a)2,599

 

17

Obagi Medical Products, Inc.

 

(a)649

 

12

OSI Pharmaceuticals, Inc.

 

(a)(c)1,843

 

89

Perrigo Co.

 

2,533

 

89

Pharmion Corp.

 

(a)(c)1,406

 

88

Salix Pharmaceuticals Ltd.

 

(a)(c)3,893

 

31

Valeant Pharmaceuticals International

 

(a)(c)2,320

 

28

 

 

 

 

389

Education Services (0.7%)

 

 

 

 

Corinthian Colleges, Inc.

 

(a)2,827

 

43

Electrical & Electronics (0.3%)

 

 

 

 

TTM Technologies, Inc.

 

(a)(c)1,781

 

21

Electrical Equipment & Components (0.4%)

 

 

 

 

RF Micro Devices, Inc.

 

(a)(c)5,126

 

29

Electronics (0.4%)

 

 

 

 

Avid Technology, Inc.

 

(a)(c)411

 

11

Cypress Semiconductor Corp.

 

(a)464

 

17

 

 

 

 

28

Electronics: Instruments Gauges & Meters (0.2%)

 

 

 

 

Watts Water Technologies, Inc., Class A

 

372

 

11

Electronics: Medical Systems (2.3%)

 

 

 

 

Bruker BioSciences Corp.

 

(a)(c)4,896

 

65

Candela Corp.

 

(a)(c)4,452

 

25

Cynosure, Inc., Class A

 

(a)432

 

11

Natus Medical, Inc.

 

(a)621

 

12

TomoTherapy, Inc.

 

(a)944

 

19

Zoll Medical Corp.

 

(a)726

 

19

 

 

 

 

151

Electronics: Semi-Conductors/Components (4.3%)

 

 

 

 

Amkor Technology, Inc.

 

(a)(c)3,582

 

31

Benchmark Electronics, Inc.

 

(a)(c)1,653

 

29

DSP Group, Inc.

 

(a)1,382

 

17

Genesis Microchip, Inc.

 

(a)(c)1,471

 

$

13

Ikanos Communications, Inc.

 

(a)1,986

 

11

IXYS Corp.

 

(a)1,022

 

8

Monolithic Power Systems, Inc.

 

(a)815

 

18

ON Semiconductor Corp.

 

(a)(c)5,689

 

50

Photon Dynamics, Inc.

 

(a)(c)316

 

3

Plexus Corp.

 

(a)1,188

 

31

Silicon Image, Inc.

 

(a)3,617

 

16

Skyworks Solutions, Inc.

 

(a)(c)4,436

 

38

Trident Microsystems, Inc.

 

(a)2,801

 

18

 

 

 

 

283

Electronics: Technology (0.7%)

 

 

 

 

Omnivision Technologies, Inc.

 

(a)(c)2,204

 

35

Secure Computing Corp.

 

(a)1,367

 

13

 

 

 

 

48

Energy — Miscellaneous (1.9%)

 

 

 

 

Alon USA Energy, Inc.

 

(c)1,210

 

33

Energy Partners Ltd.

 

(a)(c)707

 

8

Grey Wolf, Inc.

 

(a)(c)5,913

 

32

Helix Energy Solutions Group, Inc.

 

(a)360

 

15

Mariner Energy, Inc.

 

(a)(c)1,141

 

26

Swift Energy Co.

 

(a)315

 

14

 

 

 

 

128

Entertainment (0.6%)

 

 

 

 

Take-Two Interactive Software, Inc.

 

(a)(c)2,245

 

41

Finance Companies (0.3%)

 

 

 

 

NewStar Financial, Inc.

 

(a)2,001

 

17

Financial Data Processing Services & Systems (0.5%)

 

 

 

 

CompuCredit Corp.

 

(a)1,702

 

17

Online Resources Corp.

 

(a)1,509

 

18

 

 

 

 

35

Financial — Miscellaneous (1.9%)

 

 

 

 

Advanta Corp., Class B

 

(c)3,580

 

29

Credit Acceptance Corp.

 

(a)861

 

18

First Cash Financial Services, Inc.

 

(a)1,142

 

17

Global Cash Access Holdings, Inc.

 

(a)2,775

 

17

Harris & Harris Group, Inc.

 

(a)1,285

 

11

MoneyGram International, Inc.

 

1,131

 

17

Nelnet, Inc., Class A

 

1,351

 

17

 

 

 

 

126

Forest Products (0.2%)

 

 

 

 

Universal Forest Products, Inc.

 

(c)379

 

11

Health Care Facilities (1.3%)

 

 

 

 

IRIS International, Inc.

 

(a)592

 

12

LCA-Vision, Inc.

 

568

 

11

Psychiatric Solutions, Inc.

 

(a)1,825

 

59

VistaCare, Inc., Class A

 

(a)(c)527

 

4

 

 

 

 

86

Health Care Management Services (0.6%)

 

 

 

 

American Dental Partners, Inc.

 

(a)3,263

 

33

Centene Corp.

 

(a)(c)253

 

7

 

 

 

 

40

 

122

The accompanying notes are an integral part of the financial statements.

 

 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Systematic Active Small Cap Growth Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Health Care — Miscellaneous (0.1%)

 

 

 

 

NBTY, Inc.

 

(a)365

 

$

10

Health Care Services (1.4%)

 

 

 

 

Amedisys, Inc.

 

(a)(c)922

 

45

Matria Healthcare, Inc.

 

(a)(c)728

 

17

Sunrise Senior Living, Inc.

 

(a)(c)979

 

30

 

 

 

 

92

Homebuilding (0.7%)

 

 

 

 

Brookfield Homes Corp.

 

(c)1,128

 

18

Gafisa S.A. ADR

 

(a)322

 

12

M/I Homes, Inc.

 

(c)1,514

 

16

 

 

 

 

46

Hotel/Motel (0.2%)

 

 

 

 

Home Inns & Hotels Management, Inc. ADR

 

(a)337

 

12

Household Furnishings (0.4%)

 

 

 

 

American Woodmark Corp.

 

(c)919

 

17

Select Comfort Corp.

 

(a)1,592

 

11

 

 

 

 

28

Industrial Products (0.7%)

 

 

 

 

Castle (A.M.) & Co.

 

(c)1,340

 

37

Mueller Industries, Inc.

 

419

 

12

 

 

 

 

49

Insurance: Multi-Line (0.1%)

 

 

 

 

Corvel Corp.

 

(a)(c)276

 

6

Investment Management Companies (0.7%)

 

 

 

 

Evercore Partners, Inc., Class A

 

831

 

18

Jefferies Group, Inc.

 

539

 

12

US Global Investors, Inc., Class A

 

964

 

16

 

 

 

 

46

Leisure Time (0.3%)

 

 

 

 

Premier Exhibitions, Inc.

 

(a)1,040

 

11

Town Sports International Holdings, Inc.

 

(a)1,213

 

12

 

 

 

 

23

Machine Tools (0.2%)

 

 

 

 

Regal-Beloit Corp.

 

(c)304

 

14

Machinery & Engineering (0.6%)

 

 

 

 

Applied Industrial Technologies, Inc.

 

(c)1,278

 

37

Machinery: Construction & Handling (0.7%)

 

 

 

 

Astec Industries, Inc.

 

(a)1,326

 

49

Machinery: Industrial/Specialty (0.3%)

 

 

 

 

Columbus McKinnon Corp./NY

 

(a)528

 

17

Machinery: Oil Well Equipment & Services (1.3%)

 

 

 

 

Complete Production Services, Inc.

 

(a)2,298

 

41

Gulf Island Fabrication, Inc.

 

366

 

12

Oil States International, Inc.

 

(a)350

 

12

W-H Energy Services, Inc.

 

(a)394

 

22

 

 

 

 

87

Machinery: Specialty (0.5%)

 

 

 

 

Semitool, Inc.

 

(a)(c)3,578

 

31

Manufactured Housing (0.6%)

 

 

 

 

Palm Harbor Homes, Inc.

 

(a)(c)679

 

7

Winnebago Industries, Inc.

 

(c)1,456

 

$

31

 

 

 

 

38

Manufacturing (2.2%)

 

 

 

 

Actuant Corp., Class A

 

(c)1,960

 

67

Acuity Brands, Inc.

 

(c)553

 

25

Barnes Group, Inc.

 

(c)1,206

 

40

Smith (A.O.) Corp.

 

(c)355

 

12

 

 

 

 

144

Medical & Dental Instruments & Supplies (3.7%)

 

 

 

 

BioMimetic Therapeutics, Inc.

 

(a)658

 

12

Cutera, Inc.

 

(a)753

 

12

Inverness Medical Innovations, Inc.

 

(a)816

 

46

Lifecell Corp.

 

(a)(c)1,954

 

84

NuVasive, Inc.

 

(a)285

 

11

Somanetics Corp.

 

(a)521

 

12

Sonic Innovations, Inc.

 

(a)(c)2,454

 

19

Spectranetics Corp.

 

(a)753

 

12

West Pharmacetical Services

 

842

 

34

 

 

 

 

242

Medical Services (0.6%)

 

 

 

 

Parexel International Corp.

 

(a)(c)816

 

39

Metal Fabricating (0.1%)

 

 

 

 

Superior Essex, Inc.

 

(a)392

 

9

Metals & Minerals — Miscellaneous (0.4%)

 

 

 

 

Brush Engineered Materials, Inc.

 

(a)(c)704

 

26

Office Furniture & Business Equipment (0.7%)

 

 

 

 

Herman Miller, Inc.

 

1,237

 

40

Kimball International, Inc., Class B

 

640

 

9

 

 

 

 

49

Offshore Drilling (0.1%)

 

 

 

 

Hercules Offshore, Inc.

 

(a)(c)231

 

5

Oil: Crude Producers (1.0%)

 

 

 

 

PetroHawk Energy Corp.

 

(a)3,789

 

66

Printing & Copying Services (0.3%)

 

 

 

 

Consolidated Graphics, Inc.

 

(a)459

 

22

Production Technology Equipment (0.4%)

 

 

 

 

Mattson Technology, Inc.

 

(a)(c)3,320

 

28

Real Estate Investment Trusts (REIT) (2.4%)

 

 

 

 

Alexandria Real Estate Equities, Inc.

 

357

 

36

Eastgroup Properties, Inc.

 

(c)1,150

 

48

Glimcher Realty Trust

 

1,174

 

17

Kite Realty Group Trust

 

(c)752

 

12

Mid-America Apartment Communities, Inc.

 

510

 

22

National Health Investors, Inc.

 

(c)912

 

25

 

 

 

 

160

Restaurants (1.3%)

 

 

 

 

BJ’s Restaurants, Inc.

 

(a)707

 

12

Jack In The Box, Inc.

 

(a)1,284

 

33

Ruby Tuesday, Inc.

 

(c)3,910

 

38

 

 

 

 

83

Retail (8.3%)

 

 

 

 

America’s Car-Mart, Inc.

 

(a)(c)1,166

 

14

Bon-Ton Stores, Inc. (The)

 

1,686

 

16

 

 

The accompanying notes are an integral part of the financial statements.

123

 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Portfolio of Investments (cont’d)

 

Systematic Active Small Cap Growth Portfolio

 

 

 

Shares

 

Value
(000)

Retail (cont’d)

 

 

 

 

Brown Shoe Co., Inc.

 

1,576

 

$

24

Build-A-Bear Workshop, Inc.

 

(a)(c)559

 

8

Casual Male Retail Group, Inc.

 

(a)2,253

 

12

Central Garden & Pet Co.

 

(a)(c)688

 

4

Charlotte Russe Holding, Inc.

 

(a)743

 

12

Charming Shoppes, Inc.

 

(a)(c)3,456

 

19

Childrens Place Retail Stores, Inc. (The)

 

(a)(c)1,617

 

42

Citi Trends, Inc.

 

(a)721

 

11

CKE Restaurants, Inc.

 

(c)2,464

 

32

Collective Brands, Inc.

 

(a)1,844

 

32

Conn’s, Inc.

 

(a)(c)879

 

15

CSK Auto Corp.

 

(a)2,522

 

13

Ctrip.com International Ltd. ADR

 

207

 

12

Dress Barn, Inc.

 

(a)(c)870

 

11

DSW, Inc., Class A

 

(a)690

 

13

HOT Topic, Inc.

 

(a)2,066

 

12

Jo-Ann Stores, Inc.

 

(a)920

 

12

MarineMax, Inc.

 

(a)(c)447

 

7

Morton’s Restaurant Group, Inc.

 

(a)(c)2,054

 

19

New York & Co., Inc.

 

(a)(c)3,530

 

22

Pantry, Inc. (The)

 

(a)(c)1,175

 

31

Priceline.com, Inc.

 

(a)(c)1,000

 

115

Retail Ventures, Inc.

 

(a)2,496

 

13

Triarc Companies, Inc., Class B

 

1,208

 

10

World Fuel Services Corp.

 

(c)644

 

19

 

 

 

 

550

Savings & Loan (0.2%)

 

 

 

 

NewAlliance Bancshares, Inc.

 

(c)1,424

 

16

Securities Brokerage & Services (0.3%)

 

 

 

 

Penson Worldwide, Inc.

 

(a)1,227

 

18

Services: Commercial (4.9%)

 

 

 

 

Aaron Rents, Inc.

 

(c)1,116

 

21

Ambassadors International, Inc.

 

831

 

12

AMN Healthcare Services, Inc.

 

(a)(c)1,862

 

32

Barrett Business Services

 

(c)289

 

5

Gevity HR, Inc.

 

2,014

 

15

Global Sources Ltd.

 

(a)381

 

11

ICT Group, Inc.

 

(a)1,491

 

18

Kelly Services, Inc., Class A

 

1,565

 

29

Kforce.com, Inc.

 

(a)(c)3,857

 

38

Live Nation, Inc.

 

(a)(c)2,316

 

34

MPS Group, Inc.

 

(a)1,638

 

18

Spherion Corp.

 

(a)5,333

 

39

Travelzoo, Inc.

 

(a)1,245

 

17

TrueBlue, Inc.

 

(a)(c)2,454

 

36

 

 

 

 

325

Shipping (0.2%)

 

 

 

 

American Commercial Lines, Inc.

 

(a)706

 

11

Shoes (0.2%)

 

 

 

 

Shoe Carnival, Inc.

 

(a)807

 

11

Steel (0.3%)

 

 

 

 

AK Steel Holding Corp.

 

(a)445

 

21

Telecommunications Equipment (1.0%)

 

 

 

 

Arris Group, Inc.

 

(a)4,155

 

41

Symmetricom, Inc.

 

(a)(c)4,577

 

$

22

 

 

 

 

 

63

 

Textile Apparel Manufacturers (1.0%)

 

 

 

 

 

Quicksilver, Inc.

 

(a)(c)3,028

 

26

 

Warnaco Group, Inc. (The)

 

(a)1,146

 

40

 

 

 

 

 

66

 

Toys (0.1%)

 

 

 

 

 

Leapfrog Enterprises, Inc.

 

(a)(c)1,169

 

8

 

Transportation — Miscellaneous (1.0%)

 

 

 

 

 

Celadon Group Inc.

 

(a)1,960

 

18

 

Genco Shipping & Trading Ltd

 

219

 

12

 

Dynamex, Inc.

 

(a)(c)273

 

8

 

Greenbrier Companies, Inc.

 

(c)361

 

8

 

Pacer International, Inc.

 

1,110

 

16

 

 

 

 

 

62

 

Truckers (0.2%)

 

 

 

 

 

Old Dominion Freight Line, Inc.

 

(a)(c)609

 

14

 

Utilities: Telecommunications (0.4%)

 

 

 

 

 

Centennial Communications Corp.

 

(a)2,919

 

27

 

Wholesale & International Trade (0.6%)

 

 

 

 

 

Central European Distribution Corp.

 

(a)(c)716

 

42

 

Wholesalers (0.1%)

 

 

 

 

 

WESCO International, Inc.

 

(a)232

 

9

 

Total Common Stocks (Cost $6,384)

 

 

 

5,969

 

 

 

Face

 

 

 

 

 

Amount

 

 

 

 

 

(000)

 

 

 

Short-Term Investments (43.2%)

 

 

 

 

 

Short-Term Debt Securities held as Collateral on Loaned Securities (30.0%)

 

 

 

Alliance & Leicester plc,

 

 

 

5.26%, 9/2/08

 

$

 (h)59

 

59

 

Bancaja,

 

 

 

 

 

 5.35%, 8/12/08

 

30

 

30

 

Bank of New York Co., Inc.,

 

 

 

 

 

 5.24%, 8/8/08

 

(h)30

 

30

 

BASF AG,

 

 

 

 

 

5.18%, 8/19/08

 

(h)30

 

30

 

BNP Paribas plc,

 

 

 

 

 

4.90%, 5/19/08

 

(h)59

 

59

 

CAM US Finance S.A. Unipersonal,

 

 

 

 

 

5.24%, 7/25/08

 

(h)118

 

118

 

Canadian Imperial Bank of Commerce, New York,

 

 

 

 

 

4.42%, 7/28/08

 

(h)59

 

59

 

CC USA, Inc.,

 

 

 

 

 

3.89%, 1/28/08

 

(h)30

 

30

 

CIT Group Holdings,

 

 

 

 

 

5.23%, 6/18/08

 

(h)106

 

106

 

Citigroup Global Markets Holdings, Inc.,

 

 

 

 

 

 4.51%, 1/2/08

 

403

 

403

 

Credit Suisse First Boston, New York,

 

 

 

 

 

4.32%, 3/14/08

 

(h)59

 

59

 

First Tennessee Bank,

 

 

 

 

 

5.05%, 8/15/08

 

(h)30

 

30

 

5.06%, 8/15/08

 

(h)118

 

118

 

 

124

The accompanying notes are an integral part of the financial statements.

 

 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Systematic Active Small Cap Growth Portfolio

 

 

 

Face

Amount
(000)

 

Value
(000)

Short-Term Debt Securities held as Collateral on Loaned Securities (cont’d)

 

 

Goldman Sachs Group, Inc.,

 

 

4.62%, 2/13/09

 

$

(h)56

 

$

56

5.10%, 9/12/08

 

(h)30

 

30

HSBC Finance Corp.,

 

 

 

 

5.26%, 8/5/08

 

(h)30

 

30

IBM Corp.,

 

 

 

 

 5.27%, 9/8/08

 

(h)118

 

118

Lehman Brothers, Inc.,

 

 

 

 

 4.49%, 1/2/08

 

50

 

50

Macquarie Bank Ltd.,

 

 

 

 

4.95%, 8/20/08

 

(h)59

 

59

Metropolitan Life Global Funding,

 

 

 

 

4.89%, 8/21/08

 

(h)89

 

89

National Bank of Canada,

 

 

 

 

5.21%, 4/2/08

 

(h)118

 

118

National Rural Utilities Cooperative Finance Corp.,

 

 

 

 

 5.24%, 9/2/08

 

(h)118

 

118

Nationwide Building Society,

 

 

 

 

4.92%, 7/28/08

 

(h)69

 

69

Unicredito Italiano Bank (Ireland) plc,

 

 

 

 

5.04%, 8/14/08

 

(h)65

 

65

5.26%, 8/8/08

 

(h)41

 

41

 

 

 

 

1,974

Investment Company (13.2%)

 

 

 

 

Morgan Stanley Institutional Liquidity

 

 

 

 

Money Market Portfolio —
Institutional Class

 

(o)870,379

 

870

Total Short-Term Investments (Cost $2,844)

 

 

 

2,844

Total Investments (133.8%) (Cost $9,228) —
Including $1,898 of Securities Loaned

 

 

 

8,813

Liabilities in Excess of Other Assets (-33.8%)

 

 

 

(2,227)

Net Assets (100%)

 

 

 

$6,586

 

(a)

Non-income producing security.

(c)

All or a portion of security on loan at December 31, 2007.

(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, 2007.

(o)

See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class.

ADR

American Depositary Receipt

REIT

Real Estate Investment Trust

 

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:

 

 

 

 

 

 

 

 

 

 

E-Mini Russell 2000

 

6

 

$ 463

 

Mar-08

 

 

$10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the financial statements.

125

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (unaudited)

 

Systematic Active Small Cap Value Portfolio

 

 

 

*                      Minimum Investment

* *            Commenced operations on April 28, 2006

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the Russell 2000® Value Index(1) and the Lipper Small-Cap Value Funds Index(2)

 

 

 

Total Returns(3)

 

 

 

Average Annual

 

 

One
Year

Since
Inception(5)

 

 

 

 

 

 

Portfolio – Class A (4)

 

(14.78

)%

(6.79

)%

Russell 2000® Value Index

 

(9.78

)

(1.26

)

Lipper Small-Cap Value Funds Index

 

(4.57

)

(0.39

)

 

 

 

 

 

 

Portfolio – Class B (4)

 

(15.03

)

(7.03

)

Russell 2000® Value Index

 

(9.78

)

(1.26

)

Lipper Small-Cap Value Funds Index

 

(4.57

)

(0.39

)

 

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 www.morganstanley.com/msim. 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.

 

(1)

 

The Russell 2000® Value Index measures the performance of those companies in the Russell 2000® Index with lower price-to-book ratios and lower forecasted growth values. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)

 

The Lipper Small-Cap Value Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Small-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 Small-Cap Value Funds classification.

(3)

 

Total returns for the Portfolio reflect fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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 April 28, 2006

(5)

 

For comparative purposes, average 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.

 

The Systematic Active Small Cap Value Portfolio (the “Portfolio”) seeks long-term capital appreciation by investing primarily in valued-oriented equity securities of small capitalization 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.

 

Performance

 

For the year ended December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of

 

126

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Investment Overview (cont’d)

 

Systematic Active Small Cap Value Portfolio

 

distributions per share of -14.78%, net of fees, for Class A shares and -15.03%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares underperformed against its benchmark, the Russell 2000® Value Index (the “Index”) which returned -9.78%.

 

Factors Affecting Performance

 

·                  The 12 months ended December 31, 2007 were characterized by pronounced volatility in stock prices, largely driven by credit market woes and deteriorating economic outlooks. By the third quarter, evidence mounted that the subprime market’s troubles spilled into the credit market and the broader economy. A tightening in credit standards, mortgage lender bankruptcies and hedge fund implosions were followed by multi-billion dollar losses reported at several large financial institutions in the fourth quarter. At the same time, a cross current of unfavorable data buffeted the market, indicating a languishing housing market, declining consumer spending, rising oil prices and negative year-over-year corporate profit growth. Although the market rallied each time the Federal Reserve’s (the “Fed”) reduced the target federal funds rate, skepticism quickly returned as investors worried that the Fed’s ability to steer the economy away from recession would be limited by rising inflation pressures. Fourth quarter corporate earnings expectations were dismal, with only the largest multi-national companies expected to generate growth. In this environment, large- cap equities outperformed small-caps, and growth beat value for the year overall.

 

·                  Based on total returns, the Portfolio’s best performing sectors were telecommunication services and health care. Financials and consumer discretionary were the weakest sector performers for the Portfolio during the period.

 

·                  The primary detractors from the Portfolio’s overall absolute return were the consumer discretionary and financials sectors. In the consumer discretionary sector, the Portfolio’s exposure to homebuilders and real estate- related companies hampered relative performance. In the financials sector, poor performance came from a wide range of holdings, due to their exposure to capital markets, mortgage lending or mortgage loan insurance, and/or investments in subprime mortgage backed securities.

 

·                  In contrast, the health care sector contributed positively to the Portfolio’s overall absolute return. Holdings in a generic drug manufacturer and a diagnostic devices maker performed well, owing to these companies’ strong earnings during the period.

 

·                  The Portfolio’s relative underperformance was driven by the consumer discretionary and financials sectors.

 

Management Strategies

 

·                  We believe that we can enhance returns by employing a quantitative model that uses multiple, independent factors to examine the fundamentals of a company. We further believe that our quantitative efforts in combination with our fundamental analysis can exploit market inefficiencies.

 

·                  We employ a quantitative approach to stock selection utilizing a proprietary quantitative model. The model is driven by rigorous fundamental and quantitative research that screens a universe of small capitalization companies. The model employs three quantitative screens based on the following primary inputs – earnings expectations, price trends and relative valuations. Individual securities and industries are ranked within each sector by the most effective combination of these disciplines based on the current phase of the economic cycle. We then decide whether to buy, sell or hold a security based on its fundamental analysis and the results of this model-driven approach.

 

·                  Accordingly, the stock selection process yielded an overweight positions in the health care and utilities sectors; underweight positions in the consumer discretionary, consumer staples, industrials, technology, materials and telecommunication services sectors; and market-weight positions in the energy and financials sectors.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 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),

 

127

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (cont’d)

 

Systematic Active Small Cap Value Portfolio

 

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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

 

 

 

 

Expenses Paid

 

 

 

 

 

 

Ending

 

 

During Period*

 

 

 

 

Beginning

 

 

Account Value

 

 

July 1, 2007 —

 

 

 

 

Account Value

 

 

December 31,

 

 

December 31,

 

 

 

 

July 1, 2007

 

 

2007

 

 

2007

 

 

Class A

 

 

 

 

 

 

 

Actual

 

$1,000.00

 

$   820.50

 

$5.00

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,019.71

 

5.55

 

 

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

 

Actual

 

1,000.00

 

819.70

 

6.15

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,018.45

 

6.82

 

*  Expenses are equal to Class A and Class B annualized net expense ratios of 1.09% and 1.34%, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

*

Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

128


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments

 

Systematic Active Small Cap Value Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Common Stocks (94.5%)

 

 

 

 

 

Aerospace & Defense (0.2%)

 

 

 

 

 

Esterline Technologies Corp.

 

(a)202

 

$

10

 

Air Transport (1.2%)

 

 

 

 

 

Continental Airlines, Inc., Class B

 

(a)507

 

11

 

ExpressJet Holdings, Inc.

 

(a)3,148

 

8

 

PHI, Inc.

 

(a)(c)1,056

 

33

 

Republic Airways Holdings, Inc.

 

(a)795

 

15

 

 

 

 

 

67

 

Auto Parts: After Market (0.1%)

 

 

 

 

 

Commercial Vehicle Group, Inc.

 

(a)553

 

8

 

Auto, Trucks & Parts (0.3%)

 

 

 

 

 

Modine Manufacturing Co.

 

695

 

11

 

Visteon Corp.

 

(a)1,813

 

8

 

 

 

 

 

19

 

Automobiles (0.4%)

 

 

 

 

 

Navistar International Corp.

 

(a)249

 

13

 

Wabash National Corp.

 

1,028

 

8

 

 

 

 

 

21

 

Banks: New York City (0.2%)

 

 

 

 

 

Signature Bank

 

(a)311

 

11

 

Banks: Outside New York City (10.3%)

 

 

 

 

 

1st Source Corp.

 

(c)614

 

11

 

Bancorp, Inc.

 

(a)593

 

8

 

Banner Corp.

 

(c)446

 

13

 

Cadence Financial Corp.

 

(c)124

 

2

 

Capitol Bancorp Ltd.

 

529

 

11

 

Cascade Bancorp

 

560

 

8

 

Centennial Bank Holdings, Inc.

 

(a)(c)4,353

 

25

 

Central Pacific Financial Corp.

 

2,125

 

39

 

Chemical Financial Corp.

 

(c)1,388

 

33

 

Citizens First Bancorp, Inc.

 

1,103

 

13

 

First Bancorp

 

(c)5,311

 

39

 

First Citizens BancShares, Inc., Class A

 

77

 

11

 

First Community Bancorp, Inc.

 

(c)748

 

31

 

First Merchants Corp.

 

(c)635

 

14

 

Franklin Bank Corp.

 

(a)(c)3,113

 

13

 

Freemont General Corp.

 

(a)(c)4,800

 

17

 

GB&T Bancshares, Inc.

 

1,892

 

18

 

Green Bankshares, Inc.

 

419

 

8

 

Hanmi Financial Corp.

 

1,227

 

11

 

Imperial Capital Bancorp, Inc.

 

(c)711

 

13

 

Independent Bank Corp.

 

1,103

 

10

 

Irwin Financial Corp.

 

(c)3,298

 

24

 

Macatawa Bank Corp.

 

895

 

8

 

MainSource Financial Group, Inc.

 

(c)426

 

7

 

MBT Financial Corp.

 

(c)326

 

3

 

Provident Bancshares Corp.

 

(c)1,115

 

24

 

Royal Bancshares of Pennsylvania

 

875

 

9

 

Seacoast Banking Corporation of Florida

 

761

 

8

 

Security Bank Corp.

 

(c)1,354

 

12

 

Simmons First National Corp., Class A

 

(c)857

 

23

 

South Financial Group, Inc. (The)

 

(c)787

 

12

 

Sun Bancorp, Inc.

 

(a)(c)677

 

11

 

Susquehanna Bancshares, Inc.

 

(c)2,522

 

46

 

Umpqua Holdings Corp.

 

(c)1,192

 

$

18

 

United Community Banks, Inc.

 

495

 

8

 

W Holding Co., Inc.

 

(c)5,667

 

7

 

 

 

 

 

568

 

Biotechnology Research & Production (1.7%)

 

 

 

 

 

MannKind Corp.

 

(a)982

 

8

 

Martek Biosciences Corp.

 

(a)(c)1,269

 

38

 

Momenta Pharmaceuticals, Inc.

 

(a)1,072

 

8

 

Neurocrine Biosciences, Inc.

 

(a)1,748

 

8

 

Omrix Biopharmaceuticals, Inc.

 

(a)303

 

10

 

PharmaNet Development Group, Inc.

 

(a)(c)536

 

21

 

 

 

 

 

93

 

Building Materials (0.1%)

 

 

 

 

 

PGT, Inc.

 

(a)1,629

 

8

 

Building — Miscellaneous (0.3%)

 

 

 

 

 

Builders FirstSource, Inc.

 

(a)1,102

 

8

 

Trex Co., Inc.

 

(a)902

 

8

 

 

 

 

 

16

 

Casinos & Gambling (0.1%)

 

 

 

 

 

Shuffle Master, Inc.

 

(a)663

 

8

 

Chemicals (3.8%)

 

 

 

 

 

A. Schulman, Inc.

 

2,096

 

45

 

Albemarle Corp.

 

249

 

10

 

Cabot Microelectronics Corp.

 

(a)284

 

10

 

Georgia Gulf Corp.

 

(c)2,675

 

18

 

Minerals Technologies, Inc.

 

154

 

10

 

Olin Corp.

 

799

 

16

 

PolyOne Corp.

 

(a)(c)3,368

 

22

 

Rockwood Holdings, Inc.

 

(a)1,837

 

61

 

Symyx Technologies, Inc

 

(a)1,289

 

10

 

Zep, Inc.

 

(a)266

 

4

 

 

 

 

 

206

 

Coal (1.5%)

 

 

 

 

 

International Coal Group, Inc.

 

(a)9,038

 

48

 

Massey Energy Co.

 

890

 

32

 

 

 

 

 

80

 

Communications & Media (0.1%)

 

 

 

 

 

Westwood One, Inc.

 

3,915

 

8

 

Communications Technology (1.5%)

 

 

 

 

 

Black Box Corp.

 

831

 

30

 

CommScope, Inc.

 

(a)206

 

10

 

Ditech Networks, Inc.

 

(a)2,235

 

8

 

Foundry Networks, Inc.

 

(a)587

 

10

 

Optium Corp.

 

(a)1,032

 

8

 

Utstarcom, Inc.

 

(a)(c)6,453

 

18

 

 

 

 

 

84

 

Computer Services Software & Systems (2.7%)

 

 

 

 

 

Anixter International, Inc.

 

(a)(c)254

 

16

 

Borland Software Corp.

 

(a)(c)2,803

 

8

 

Internet Capital Group, Inc.

 

(a)880

 

10

 

JDA Software Group, Inc.

 

(a)1,357

 

28

 

Lawson Software

 

(a)1,018

 

10

 

 

The accompanying notes are an integral part of the financial statements.

129

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Portfolio of Investments (cont’d)

 

Systematic Active Small Cap Value Portfolio

 

 

 

Shares

 

Value
(000)

 

Computer Services Software & Systems (cont’d)

 

 

 

 

 

Openwave Systems, Inc.

 

2,958

 

$

8

 

Perot Systems Corp., Class A

 

(a)3,768

 

51

 

Schawk, Inc.

 

1,162

 

18

 

 

 

 

 

149

 

Computer Technology (1.1%)

 

 

 

 

 

Hutchinson Technology, Inc.

 

(a)242

 

6

 

Imation Corp.

 

(c)1,323

 

28

 

Palm, Inc.

 

(c)2,657

 

17

 

Quantum Corp.

 

(a)616

 

2

 

Rackable Systems, Inc.

 

(a)809

 

8

 

 

 

 

 

61

 

Consumer Electronics (0.4%)

 

 

 

 

 

Earthlink, Inc.

 

(a)1,477

 

11

 

Infospace, Inc.

 

555

 

10

 

 

 

 

 

21

 

Consumer Staples — Miscellaneous (0.4%)

 

 

 

 

 

Spectrum Brands, Inc.

 

(a)1,936

 

10

 

Jarden Corp.

 

(a)398

 

9

 

 

 

 

 

19

 

Diversified (0.4%)

 

 

 

 

 

Hudson Highland Group, Inc.

 

(a)(c)1,695

 

14

 

Beacon Roofing Supply, Inc.

 

(a)925

 

8

 

 

 

 

 

22

 

Diversified Financial Services (0.6%)

 

 

 

 

 

Clayton Holdings, Inc.

 

(a)2,311

 

12

 

Knight Capital Group, Inc., Class A

 

(a)1,503

 

22

 

 

 

 

 

34

 

Drug & Grocery Store Chains (0.6%)

 

 

 

 

 

Casey’s General Stores, Inc.

 

1,097

 

33

 

Drugs & Pharmaceuticals (1.4%)

 

 

 

 

 

Noven Pharmaceuticals, Inc.

 

(a)548

 

8

 

Perrigo Co.

 

1,928

 

67

 

 

 

 

 

75

 

Electrical Equipment & Components (0.4%)

 

 

 

 

 

Belden, Inc.

 

233

 

10

 

Genlyte Group, Inc.

 

(a)110

 

11

 

 

 

 

 

21

 

Electronics (0.8%)

 

 

 

 

 

Avid Technology, Inc.

 

(a)(c)1,021

 

29

 

Methode Electonics, Inc.

 

268

 

4

 

OSI Systems, Inc.

 

(a)403

 

11

 

 

 

 

 

44

 

Electronics: Instruments Gauges & Meters (0.2%)

 

 

 

 

 

PerkinElmer, Inc.

 

(a)401

 

10

 

Electronics: Medical Systems (0.4%)

 

 

 

 

 

Analogic Corp.

 

151

 

10

 

Zoll Medical Corp.

 

(a)396

 

11

 

 

 

 

 

21

 

Electronics: Semi-Conductors/Components (3.4%)

 

 

 

 

 

Benchmark Electronics, Inc.

 

(a)2,332

 

41

 

Conexant Systems, Inc.

 

(a)(c)27,031

 

22

 

Cubic Corp.

 

(c)604

 

$

24

 

Genesis Microchip, Inc.

 

(a)785

 

7

 

Microsemi Corp.

 

(a)471

 

10

 

Powerwave Technologies, Inc.

 

(a)(c)2,758

 

11

 

Silicon Image, Inc.

 

(a)1,707

 

8

 

Silicon Storage Technology

 

(a)(c)6,691

 

20

 

Spansion Inc., Class A

 

(a)1,972

 

8

 

Syntax-Brillian Corp.

 

(a)2,597

 

8

 

Technitrol, Inc.

 

874

 

25

 

 

 

 

 

184

 

Electronics: Technology (0.9%)

 

 

 

 

 

Checkpoint Systems, Inc.

 

(a)1,550

 

40

 

Cogent Communications Group, Inc.

 

(a)(c)513

 

12

 

 

 

 

 

52

 

Energy — Miscellaneous (1.8%)

 

 

 

 

 

Callon Petroleum Co.

 

(a)3,541

 

59

 

Crosstex Energy, Inc.

 

277

 

10

 

Energy Partners Ltd.

 

(a)867

 

11

 

GeoMet, Inc.

 

(a)2,010

 

10

 

Pacific Ethanol, Inc.

 

(a)1,218

 

10

 

 

 

 

 

100

 

Energy Equipment (0.4%)

 

 

 

 

 

Allis-Chalmers Energy, Inc.

 

(a)696

 

10

 

Superior Energy Services, Inc.

 

(a)305

 

11

 

 

 

 

 

21

 

Engineering & Contracting Services (0.9%)

 

 

 

 

 

Emcor Group, Inc.

 

(a)1,980

 

47

 

Entertainment (1.3%)

 

 

 

 

 

Bluegreen Corp.

 

(a)(c)3,238

 

23

 

Carmike Cinemas

 

2,157

 

16

 

Six Flags, Inc.

 

(a)3,820

 

8

 

Take-Two Interactive Software, Inc.

 

(a)(c)1,387

 

25

 

 

 

 

 

72

 

Equipment — Miscellaneous (0.2%)

 

 

 

 

 

Helix Energy Solutions Group, Inc.

 

(a)255

 

11

 

Finance Companies (0.3%)

 

 

 

 

 

MCG Capital Corp.

 

(c)944

 

11

 

NewStar Financial, Inc.

 

(a)897

 

7

 

 

 

 

 

18

 

Financial — Miscellaneous (3.4%)

 

 

 

 

 

Advanta Corp., Class B

 

(c)2,217

 

18

 

Aspen Insurance Holdings, Ltd.

 

1,271

 

37

 

CBIZ, Inc.

 

(a)1,079

 

11

 

Deluxe Corp.

 

1,115

 

37

 

Endurance Specialty Holdings Ltd.

 

(c)620

 

26

 

Global Cash Access Holdings

 

(a)1,247

 

8

 

Nelnet, Inc., Class A

 

809

 

10

 

Ocwen Financial Corp.

 

(a)1,890

 

10

 

RAM Holdings Ltd.

 

(a)2,094

 

10

 

Security Capital Assurance Ltd.

 

2,649

 

10

 

Triad Guaranty, Inc.

 

(a)1,055

 

10

 

 

 

 

 

187

 

 

130

The accompanying notes are an integral part of the financial statements.

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Systematic Active Small Cap Value Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Financial Data Processing Services & Systems (0.4%)

 

 

 

 

 

CompuCredit Corp.

 

(a)1,093

 

$

11

 

ExlService Holdings, Inc.

 

(a)461

 

11

 

 

 

 

 

22

 

Foods (0.4%)

 

 

 

 

 

Del Monte Foods Co.

 

1,201

 

11

 

Ralcorp Holdings, Inc.

 

(a)158

 

10

 

 

 

 

 

21

 

Health Care Management Services (0.1%)

 

 

 

 

 

American Dental Partners, Inc.

 

(a)787

 

8

 

Health Care Services (1.2%)

 

 

 

 

 

AMERIGROUP Corp.

 

(a)1,084

 

40

 

Emeritus Corp.

 

(a)424

 

11

 

Odyssey HealthCare, Inc.

 

(a)1,210

 

13

 

 

 

 

 

64

 

Homebuilding (1.9%)

 

 

 

 

 

Amrep Corp.

 

262

 

8

 

Beazer Homes USA, Inc.

 

(c)1,938

 

14

 

Brookfield Homes Corp.

 

499

 

8

 

Hovnanian Enterprises, Inc., Class A

 

(a)3,150

 

23

 

M/I Homes, Inc.

 

779

 

8

 

Meritage Homes Corp.

 

(a)(c)1,466

 

21

 

Orleans Homebuilders, Inc.

 

(c)295

 

1

 

Standard Pacific Corp.

 

2,392

 

8

 

TOUSA, Inc.

 

(a)(c)297

 

@—

 

WCI Communities, Inc.

 

(a)(c)3,296

 

13

 

 

 

 

 

104

 

Household Furnishings (0.6%)

 

 

 

 

 

American Woodmark Corp.

 

403

 

7

 

La-Z-Boy, Inc.

 

(c)2,447

 

19

 

Select Comfort Corp.

 

(a)1,100

 

8

 

 

 

 

 

34

 

Identification Control & Filter Devices (0.1%)

 

 

 

 

 

Asyst Technologies, Inc.

 

(a)2,482

 

8

 

Industrial Products (1.2%)

 

 

 

 

 

Castle (A.M.) & Co.

 

(c)1,070

 

29

 

Commercial Metals Co.

 

406

 

12

 

Mueller Industries, Inc.

 

943

 

27

 

 

 

 

 

68

 

Insurance: Life (0.2%)

 

 

 

 

 

American Equity Investment Life Holding Co.

 

(c)123

 

1

 

Conseco, Inc.

 

(a)669

 

8

 

 

 

 

 

9

 

Insurance: Multi-Line (0.3%)

 

 

 

 

 

Hanover Insurance Group, Inc. (The)

 

298

 

14

 

Insurance: Property & Casualty (0.8%)

 

 

 

 

 

First Acceptance Corp.

 

(a)2,516

 

11

 

First Mercury Financial Corp.

 

(a)442

 

11

 

LandAmerica Financial Group, Inc.

 

(c)735

 

24

 

 

 

 

 

46

 

Investment Management Companies (3.3%)

 

 

 

 

 

Apollo Investment Corp.

 

(c)3,350

 

57

 

Cowen Group, Inc.

 

(a)785

 

8

 

Friedman Billings Ramsey Group, Inc., Class A

 

(c)7,781

 

$

24

 

Investment Technology Group, Inc.

 

(a)221

 

11

 

KKR Financial Holdings LLC

 

599

 

8

 

National Financial Partners Corp.

 

226

 

10

 

Piper Jaffray Cos.

 

(a)(c)710

 

33

 

SWS Group, Inc.

 

608

 

8

 

W.P. Stewart & Co Limited

 

2,159

 

11

 

Waddell & Reed Financial, Inc.

 

285

 

10

 

 

 

 

 

180

 

Leisure Time (0.1%)

 

 

 

 

 

Nautilus, Inc.

 

1,546

 

8

 

Machine Tools (0.6%)

 

 

 

 

 

Regal-Beloit Corp.

 

(c)749

 

34

 

Machinery: Engines (0.7%)

 

 

 

 

 

Briggs & Stratton Corp.

 

(c)1,813

 

41

 

Machinery: Industrial/Specialty (0.2%)

 

 

 

 

 

Kadant, Inc.

 

(a)336

 

10

 

Machinery: Oil Well Equipment & Services (0.1%)

 

 

 

 

 

Parker Drilling Co.

 

(a)(c)985

 

7

 

Manufacturing (1.2%)

 

 

 

 

 

Actuant Corp., Class A

 

303

 

10

 

Griffon Corp.

 

(a)2,019

 

25

 

Koppers Holdings, Inc.

 

610

 

27

 

Standex International Corp.

 

213

 

4

 

 

 

 

 

66

 

Materials & Processing — Miscellaneous (0.2%)

 

 

 

 

 

USEC, Inc.

 

(a)1,162

 

10

 

Medical & Dental Instruments & Supplies (1.2%)

 

 

 

 

 

Inverness Medical Innovations, Inc.

 

(a)797

 

46

 

Orthofix International N.V.

 

(a)178

 

10

 

Wright Medical Group, Inc.

 

(a)355

 

10

 

 

 

 

 

66

 

Metal Fabricating (0.3%)

 

 

 

 

 

Superior Essex, Inc.

 

(a)704

 

17

 

Milling: Fruit & Grain Processing (0.2%)

 

 

 

 

 

MGP Ingredients, Inc.

 

1,093

 

10

 

Multi-Sector Companies (0.6%)

 

 

 

 

 

Kaman Corp.

 

924

 

34

 

Office Furniture & Business Equipment (0.7%)

 

 

 

 

 

IKON Office Solutions, Inc.

 

(c)2,869

 

37

 

Oil: Crude Producers (2.0%)

 

 

 

 

 

Bronco Drilling Co., Inc.

 

(a)(c)2,582

 

39

 

Cimarex Energy Co.

 

286

 

12

 

Comstock Resources, Inc.

 

(a)301

 

10

 

Edge Petroleum Corp.

 

(a)1,735

 

10

 

Frontier Oil Corp.

 

255

 

10

 

Stone Energy Corp.

 

(a)629

 

30

 

 

 

 

 

111

 

Paper (1.3%)

 

 

 

 

 

AbitibiBowater, Inc.

 

(c)853

 

18

 

Caraustar Industries, Inc.

 

(a)(c)4,172

 

13

 

Chesapeake Corp.

 

3,143

 

16

 

Rock-Tenn Co., Class A

 

1,045

 

26

 

 

 

 

 

73

 

 

The accompanying notes are an integral part of the financial statements.

131

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Portfolio of Investments (cont’d)

 

Systematic Active Small Cap Value Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Pollution Control & Environmental Services (1.1%)

 

 

 

 

 

Aventine Renewable Energy Holdings, Inc.

 

(a)830

 

$

11

 

Metal Management, Inc.

 

(c)1,089

 

49

 

 

 

 

 

60

 

Production Technology Equipment (0.5%)

 

 

 

 

 

Photronics, Inc.

 

(a)(c)2,197

 

27

 

Publishing: Newspapers (0.3%)

 

 

 

 

 

Lee Enterprises, Inc.

 

541

 

8

 

Sun-Times Media Group, Inc.

 

(a)3,407

 

7

 

 

 

 

 

15

 

Radio & TV Broadcasters (0.3%)

 

 

 

 

 

Radio One, Inc., Class D

 

(a)3,392

 

8

 

Valuevision Media, Inc., Class A

 

(a)1,267

 

8

 

 

 

 

 

16

 

Railroad Equipment (0.1%)

 

 

 

 

 

Freightcar America, Inc.

 

(c)187

 

7

 

Real Estate (0.1%)

 

 

 

 

 

Avatar Holdings, Inc.

 

(a)199

 

8

 

Real Estate Investment Trusts (REIT) (8.3%)

 

 

 

 

 

Alesco Financial, Inc. REIT

 

3,199

 

10

 

American Financial Realty Trust REIT

 

4,675

 

37

 

Anworth Mortgage Asset Corp. REIT

 

1,472

 

12

 

Ashford Hospitality Trust, Inc. REIT

 

1,190

 

9

 

CBRE Realty Finance, Inc. REIT

 

1,847

 

10

 

Crystal River Capital, Inc. REIT

 

(c)1,354

 

19

 

Deerfield Capital Corp. REIT

 

(c)2,824

 

23

 

Entertainment Properties Trust REIT

 

1,109

 

52

 

First Industrial Realty Trust REIT

 

(c)894

 

31

 

GMH Communities Trust REIT

 

4,103

 

23

 

Healthcare Realty Trust, Inc. REIT

 

(c)1,443

 

37

 

Lexington Realty Trust REIT

 

(c)2,929

 

43

 

Luminent Mortgage Capital, Inc. REIT

 

(c)4,340

 

3

 

National Retail Properties REIT

 

(c)2,061

 

48

 

Newcastle Investment Corp. REIT

 

802

 

10

 

Novastar Financial, Inc. REIT

 

(a)3,497

 

10

 

Pennsylvania Real Estate Investment Trust REIT

 

(c)1,182

 

35

 

RAIT Investment Trust REIT

 

(c)1,279

 

11

 

Resource Capital Corp. REIT

 

(c)2,019

 

19

 

Tarragon Corp.

 

(a)5,282

 

8

 

U-Store-It Trust REIT

 

850

 

8

 

 

 

 

 

458

 

Rental & Leasing Services: Consumer (0.4%)

 

 

 

 

 

Dollar Thrifty Automotive Group

 

(a)(c)715

 

17

 

Rent-A-Center, Inc.

 

(a)531

 

8

 

 

 

 

 

25

 

Restaurants (0.9%)

 

 

 

 

 

Bob Evans Farms, Inc.

 

(c)943

 

25

 

Jamba, Inc.

 

(a)2,082

 

8

 

McCormick & Schmick’s Seafood Restaurants, Inc.

 

(a)656

 

8

 

Ruby Tuesday, Inc.

 

824

 

8

 

 

 

 

 

49

 

Retail (5.6%)

 

 

 

 

 

AC Moore Arts & Crafts, Inc.

 

(a)(c)959

 

13

 

Bon-Ton Stores, Inc. (The)

 

(c)1,749

 

17

 

Borders Group, Inc.

 

(c)2,443

 

$

26

 

Cache, Inc.

 

(a)793

 

7

 

Casual Male Retail Group, Inc.

 

(a)1,476

 

8

 

Central Garden & Pet Co.

 

(a)(c)2,934

 

17

 

Central Garden & Pet Co., Class A

 

(a)2,162

 

12

 

Charming Shoppes, Inc.

 

(a)(c)3,465

 

19

 

Childrens Place Retail Stores, Inc. (The)

 

(a)305

 

8

 

Conn’s, Inc.

 

(a)(c)533

 

9

 

CSK Auto Corp.

 

(a)1,636

 

8

 

Group 1 Automotive, Inc.

 

331

 

8

 

HOT Topic, Inc.

 

(a)1,361

 

8

 

Landry’s Seafood Restaurants

 

(c)1,828

 

36

 

Lithia Motors, Inc., Class A

 

590

 

8

 

MarineMax, Inc.

 

(a)(c)534

 

8

 

Pantry, Inc. (The)

 

(a)(c)832

 

22

 

Stein Mart, Inc.

 

(c)4,662

 

22

 

Triarc Companies, Inc., Class B

 

864

 

7

 

Tuesday Morning Corp.

 

1,577

 

8

 

Wet Seal, Inc. (The), Class A

 

(a)3,320

 

8

 

World Fuel Services Corp.

 

362

 

10

 

Zale Corp.

 

(a)(c)1,095

 

18

 

 

 

 

 

307

 

Savings & Loan (2.8%)

 

 

 

 

 

BankAtlantic Bancorp, Inc., Class A

 

2,451

 

10

 

BankUnited Financial Corp., Class A

 

1,536

 

11

 

Berkshire Hills Bancorp, Inc.

 

147

 

4

 

BFC Financial Corp., Class A

 

(a)1,004

 

1

 

Brookline Bancorp, Inc.

 

(c)2,628

 

26

 

Downey Financial Corp.

 

(c)989

 

31

 

Flagstar Bancorp, Inc.

 

(c)2,695

 

19

 

NewAlliance Bancshares, Inc.

 

(c)2,343

 

27

 

PFF Bancorp, Inc.

 

883

 

11

 

United Community Financial Corp.

 

1,954

 

11

 

 

 

 

 

151

 

Securities Brokerage & Services (0.1%)

 

 

 

 

 

Penson Worldwide, Inc.

 

(a)573

 

8

 

Services: Commercial (2.8%)

 

 

 

 

 

Ambassadors International, Inc.

 

578

 

8

 

Autobytel, Inc.

 

(a)1,160

 

3

 

BearingPoint, Inc.

 

(a)2,790

 

8

 

Corrections Corp. Of America

 

(a)360

 

11

 

Gevity HR, Inc.

 

972

 

7

 

ICT Group, Inc.

 

(a)660

 

8

 

Kelly Services, Inc., Class A

 

953

 

18

 

Live Nation, Inc.

 

(a)(c)1,619

 

24

 

Maximus, Inc.

 

(c)515

 

20

 

MPS Group, Inc.

 

(a)2,000

 

22

 

Source Interlink Cos., Inc.

 

(a)(c)5,312

 

15

 

Volt Information Sciences, Inc.

 

(a)432

 

8

 

 

 

 

 

152

 

Shoes (0.3%)

 

 

 

 

 

Finish Line, Class A

 

(c)1,487

 

4

 

Shoe Carnival, Inc.

 

(a)(c)1,070

 

15

 

 

 

 

 

19

 

 

132

The accompanying notes are an integral part of the financial statements.

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Systematic Active Small Cap Value Portfolio

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Steel (0.3%)

 

 

 

 

 

Esmark, Inc.

 

(a)(c)421

 

$

6

 

Shiloh Industries, Inc.

 

(a)1,219

 

12

 

 

 

 

 

18

 

Technology — Miscellaneous (0.2%)

 

 

 

 

 

L-1 Identity Solutions, Inc.

 

(a)575

 

10

 

Textile Apparel Manufacturers (0.8%)

 

 

 

 

 

Kellwood Co.

 

(c)1,899

 

32

 

Oxford Industries, Inc.

 

(c)171

 

4

 

Perry Ellis International, Inc.

 

(a)429

 

7

 

 

 

 

 

43

 

Tobacco (0.1%)

 

 

 

 

 

Alliance One International, Inc.

 

(a)(c)1,252

 

5

 

Transportation — Miscellaneous (0.4%)

 

 

 

 

 

Pacer International, Inc.

 

531

 

8

 

Saia, Inc.

 

(a)994

 

13

 

 

 

 

 

21

 

Truckers (0.3%)

 

 

 

 

 

PAM Transportation Services

 

(a)267

 

4

 

YRC Worldwide, Inc.

 

(a)(c)772

 

13

 

 

 

 

 

17

 

Utilities: Electrical (2.1%)

 

 

 

 

 

CH Energy Group, Inc.

 

(c)503

 

23

 

El Paso Electric Co.

 

(a)1,312

 

34

 

Empire District Electric Co. (The)

 

(c)266

 

6

 

PNM Resources, Inc.

 

1,790

 

38

 

Unisource Energy Corp.

 

415

 

13

 

 

 

 

 

114

 

Utilities: Gas Distributors (0.9%)

 

 

 

 

 

Laclede Group, Inc. (The)

 

(c)698

 

24

 

NorthWestern Corp.

 

860

 

25

 

 

 

 

 

49

 

Utilities: Telecommunications (0.9%)

 

 

 

 

 

Rural Cellular Corp., Class A

 

(a)1,066

 

47

 

Wholesale & International Trade (0.2%)

 

 

 

 

 

Central European Distribution Corp.

 

(a)177

 

10

 

Wholesalers (1.0%)

 

 

 

 

 

BlueLinx Holdings, Inc.

 

(c)2,766

 

11

 

Building Material Holding Corp.

 

(c)2,602

 

14

 

United Stationers, Inc.

 

(a)603

 

28

 

 

 

 

 

53

 

Total Common Stocks (Cost $6,531)

 

 

 

5,200

 

 

 

Face

 

 

 

 

 

Amount
(000)

 

 

 

Short-Term Investments (39.3%)

 

 

 

 

 

Short-Term Debt Securities held as Collateral on Loaned Securities (34.7%)

 

 

 

 

 

Alliance & Leicester plc,

 

 

 

 

 

5.26%, 9/2/08

 

$

(h)57

 

57

 

Bancaja,

 

 

 

 

 

5.35%, 8/12/08

 

29

 

29

 

 

 

 

 

 

Value

 

 

 

Shares

 

(000)

 

Bank of New York Co., Inc.,

 

 

 

 

 

5.24%, 8/8/08

 

$

(h)29

 

$

29

 

BASF AG,

 

 

 

 

 

5.18%, 8/19/08

 

(h)29

 

29

 

BNP Paribas plc,

 

 

 

 

 

4.90%, 5/19/08

 

(h)57

 

57

 

CAM US Finance S.A. Unipersonal,

 

 

 

 

 

5.24%, 7/25/08

 

(h)114

 

114

 

Canadian Imperial Bank of Commerce, New York,

 

 

 

 

 

4.42%, 7/28/08

 

(h)57

 

57

 

CC USA, Inc.,

 

 

 

 

 

3.89%, 1/28/08

 

(h)29

 

29

 

CIT Group Holdings,

 

 

 

 

 

5.23%, 6/18/08

 

(h)103

 

103

 

Citigroup Global Markets Holdings, Inc.,

 

 

 

 

 

4.51%, 1/2/08

 

390

 

390

 

Credit Suisse First Boston, New York,

 

 

 

 

 

4.32%, 3/14/08

 

(h)57

 

57

 

First Tennessee Bank,

 

 

 

 

 

5.05%, 8/15/08

 

(h)29

 

29

 

5.06%, 8/15/08

 

(h)115

 

115

 

Goldman Sachs Group, Inc.,

 

 

 

 

 

4.62%, 2/13/09

 

(h)54

 

54

 

5.10%, 9/12/08

 

(h)29

 

29

 

HSBC Finance Corp.,

 

 

 

 

 

5.26%, 8/5/08

 

(h)29

 

29

 

IBM Corp.,

 

 

 

 

 

5.27%, 9/8/08

 

(h)114

 

114

 

Lehman Brothers, Inc.,

 

 

 

 

 

4.49%, 1/2/08

 

49

 

49

 

Macquarie Bank Ltd.,

 

 

 

 

 

4.95%, 8/20/08

 

(h)57

 

57

 

Metropolitan Life Global Funding,

 

 

 

 

 

4.89%, 8/21/08

 

(h)86

 

86

 

National Bank of Canada,

 

 

 

 

 

5.21%, 4/2/08

 

(h)115

 

115

 

National Rural Utilities Cooperative Finance Corp.,

 

 

 

 

 

5.24%, 9/2/08

 

(h)114

 

114

 

Nationwide Building Society,

 

 

 

 

 

4.92%, 7/28/08

 

(h)66

 

66

 

Unicredito Italiano Bank (Ireland) plc,

 

 

 

 

 

5.04%, 8/14/08

 

(h)63

 

63

 

5.26%, 8/8/08

 

(h)40

 

40

 

 

 

 

 

1,911

 

 

 

Shares

 

 

 

Investment Company (4.6%)

 

 

 

 

 

Morgan Stanley Institutional Liquidity

 

 

 

 

 

Money Market Portfolio - Institutional Class

 

(o)249,800

 

250

 

Total Short-Term Investments (Cost $2,161)

 

 

 

2,161

 

Total Investments (133.8%) (Cost $8,692)

 

 

 

 

 

— including $1,802 of Securities Loaned

 

 

 

7,361

 

Liabilities in Excess of Other Assets (-33.8%)

 

 

 

(1,861)

 

Net Assets (100%)

 

 

 

$

5,500

 

 

 

The accompanying notes are an integral part of the financial statements.

133

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Portfolio of Investments (cont’d)

 

Systematic Active Small Cap Value Portfolio

 

(a)

Non-income producing security.

(c)

All or a portion of security on loan at December 31,2007.

(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, 2007.

(o)

See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class.

@

Value is less than $500

REIT

Real Estate Investment Trust

 

Futures Contracts:

 

 

The Portfolio had the following futures contract(s) open at period end:

 

 

 

Number
of
Contracts

 

Value
(000)

 

Expiration
Date

 

Net
Unrealized
Appreciation
(Depreciation)
(000)

 

Long:

 

 

 

 

 

 

 

 

 

E-Mini Russell 2000

 

3

 

$ 232

 

Mar-08

 

 

$

5

 

 

 

 

 

 

 

 

 

 

 

 

 

134

The accompanying notes are an integral part of the financial statements.

 


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (unaudited)

 

Systematic Large Cap Core Active Extension Portfolio

 

 

 

*   Minimum Investment

** Commenced operations on May 31, 2007

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the S&P 500® Index(1) and the Lipper Multi-Cap Value Funds Index(2)

 

 

 

Total Returns

(3)

 

 

Cumulative

 

 

Since

 

 

 

Inception

(5)

 

 

 

 

Portfolio – Class A (4)

 

(4.09

)%

S&P 500® Index

 

(3.01

)

Lipper Multi-Cap Value Funds Index

 

(9.18

)

 

 

 

 

Portfolio – Class B (4)

 

(4.20

)

S&P 500® Index

 

(3.01

)

Lipper Multi-Cap Value Funds Index

 

(9.18

)

 

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 www.morganstanley.com/msim. 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.

 

(1)

 

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. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)

 

The Lipper Multi-Cap Value Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Multi-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 Multi-Cap Value Funds classification.

(3)

 

Total returns for the Portfolio reflect fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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 May 31, 2007

(5)

 

For comparative purposes, cumulative 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.

 

The Systematic Large Cap Core Active Extension Portfolio (the “Portfolio”) seeks long-term capital appreciation by investing primarily in equity securities of large capitalization companies. The Adviser seeks to construct a diversified portfolio of large capitalization equity securities using a quantitative security selection model. The Portfolio primarily invests in common stocks but may also invest in preferred stocks, convertible securities and warrants. In addition to purchasing equity securities (i.e., taking long positions), the Adviser attempts to identify stocks in the Adviser’s large capitalization universe that it believes will underperform

 

135


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

Systematic Large Cap Core Active Extension Portfolio

 

relative to the average stock in the universe and will sell these securities short on behalf of the Portfolio.

 

Short sales expose the Portfolio to the risk that it will be required to cover its short positions at a time when securities have appreciated in value, thus resulting in loss to the portfolio. Leverage may cause the Portfolio’s net asset value to be more volatile than if it had not been leveraged because leverage tends to magnify the effect of any increases or decreases in the value of Portfolio’s securities. The Portfolio cannot assure you that the use of leverage will result in a higher return on your investment.

 

Performance

 

For the period from May 31, 2007 (commencement of operations) to December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of -4.09%, net of fees, for Class A shares and -4.20%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares underperformed against its benchmark, the S&P 500®Index (the “Index”) which returned -3.01% for the same period.

 

Factors Affecting Performance

 

·                  For the seven-month period ended December 31, 2007, the broad market finished lower after exhibiting considerable volatility. In June and July, evidence mounted that the subprime mortgage market’s troubles had spilled into the credit market and the broader economy. A tightening in credit standards, mortgage lender bankruptcies and hedge fund implosions were followed by multi-billion dollar losses reported at several large financial institutions in the fourth quarter. At the same time, a cross current of unfavorable data buffeted the market, indicating a languishing housing market, declining consumer spending, rising oil prices and negative year-over-year corporate profit growth. Although the market rallied each time the Federal Reserve (the “Fed”) reduced the target federal funds rate, skepticism quickly returned as investors worried that the Fed’s ability to steer the economy away from recession would be limited by rising inflation pressures. Fourth quarter corporate earnings expectations were dismal, with only the largest multi-national companies expected to generate growth. In this environment, large-cap equities outperformed small-caps, and growth beat value for the seven-month period.

 

·                  On a sector basis, the technology sector had the highest total return in the Portfolio and was also the top contributing sector to the Portfolio’s overall absolute return. Within the sector, the Portfolio benefited from both long and short positions, although short positions were particularly additive to performance. In fact, six of the top 10 performing technology positions were short positions.

 

·                  Conversely, the financial sector had the lowest return among market sectors and was also the largest detractor from the Portfolio’s overall absolute return. Weak performance came from a wide range of holdings, due to their exposure to capital markets, mortgage lending or mortgage loan insurance, and/or investments in subprime mortgage backed securities.

 

·                  In aggregate, short positions were additive to performance during the period, while long positions detracted from performance.

 

·                  Relative to the Index, the Portfolio’s underperformance was driven primarily by the financials sector. However, the consumer discretionary sector was a positive contributor on a relative basis.

 

Management Strategies

 

·                  We employ a quantitative approach to stock selection utilizing a proprietary quantitative model. The model is driven by rigorous quantitative and fundamental research that screens a universe of large capitalization companies based on the following primary inputs: earnings expectations, price trends and relative valuations. Individual securities and industries are ranked within each sector by the most effective combination of these disciplines based on the current phase of the economic cycle. We then decide whether to buy, sell or hold a security based on its fundamental analysis and the results of this model-driven approach. Using this quantitative security selection methodology, we will purchase (i.e., take long positions) in equity securities of companies that we believe offer attractive return potential and sell short securities that we believe will underperform.

 

·                  Accordingly, our process yielded relative overweights in the consumer discretionary, health care and technology sectors; neutral weights in the consumer staples, energy, industrials and materials sectors; and underweights in the financials, utilities and telecommunication services sectors.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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

 

136


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

Systematic Large Cap Core Active Extension 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, 2007 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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning
Account Value
July 1, 2007

 

Ending
Account Value
December 31,
2007

 

Expenses Paid
During Period*
July 1, 2007 —
December 31,
2007

Class A

 

 

 

 

 

 

Actual

 

$1,000.00

 

$   970.80

 

$  9.39

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,015.68

 

9.60

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

Actual

 

1,000.00

 

969.60

 

10.57

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,014.47

 

10.82

* Expenses are equal to Class A and Class B annualized net expense ratios of 1.89% and 2.13%, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

* Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

137


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments

 

Systematic Large Cap Core Active Extension Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Long Positions (128.9%)

 

 

 

 

Common Stocks (128.7%)

 

 

 

 

Aerospace & Defense (5.1%)

 

 

 

 

BE Aerospace, Inc.

 

(a)1,112

 

$     59

Boeing Co.

 

(q)559

 

49

DRS Technologies, Inc.

 

640

 

35

General Dynamics Corp.

 

(q)853

 

76

Honeywell International, Inc.

 

(q)823

 

50

L-3 Communications Holdings, Inc.

 

(q)420

 

44

Lockheed Martin Corp.

 

(q)615

 

65

Northrop Grumman Corp.

 

(q)976

 

77

Raytheon Co.

 

(q)565

 

34

 

 

 

 

489

Airlines (0.5%)

 

 

 

 

AMR Corp.

 

(a)1,398

 

20

Mesa Air Group, Inc.

 

(a)(q)3,711

 

11

US Airways Group, Inc.

 

(a)1,316

 

19

 

 

 

 

50

Auto Components (0.9%)

 

 

 

 

ArvinMeritor, Inc.

 

(q)1,603

 

19

Autoliv, Inc.

 

589

 

31

BorgWarner, Inc.

 

(q)706

 

34

 

 

 

 

84

Beverages (1.7%)

 

 

 

 

Molson Coors Brewing Co., Class B

 

835

 

43

Pepsi Bottling Group, Inc.

 

(q)1,089

 

43

PepsiAmericas, Inc.

 

(q)2,361

 

79

 

 

 

 

165

Biotechnology (2.7%)

 

 

 

 

Amgen, Inc.

 

(a)(q)532

 

25

Charles River Laboratories International, Inc.

 

(a)740

 

49

Genzyme Corp.

 

(a)(q)863

 

64

Gilead Sciences, Inc.

 

(a)(q)1,979

 

91

Invitrogen Corp.

 

(a)(q)371

 

34

 

 

 

 

263

Capital Markets (4.4%)

 

 

 

 

Bear Stearns Cos, Inc. (The)

 

226

 

20

E*Trade Financial Corp.

 

(a)(q)4,096

 

15

Goldman Sachs Group, Inc. (The)

 

(q)763

 

164

Investment Technology Group, Inc.

 

(a)(q)743

 

35

Lehman Brothers Holdings, Inc.

 

(q)1,592

 

104

Merrill Lynch & Co., Inc.

 

(q)1,328

 

71

Piper Jaffray Co.

 

(a)(q)448

 

21

 

 

 

 

430

Chemicals (1.7%)

 

 

 

 

FMC Corp.

 

(q)799

 

43

Monsanto Co.

 

(q)732

 

82

OM Group, Inc.

 

(a)(q)643

 

37

 

 

 

 

162

Commercial Banks (1.2%)

 

 

 

 

Bank of America Corp.

 

1,654

 

68

Cascade Bancorp

 

(q)1,337

 

19

Wells Fargo & Co.

 

(q)964

 

$    29

 

 

 

 

116

Commercial Services & Supplies (1.1%)

 

 

 

 

Kelly Services, Inc., Class A

 

(q)907

 

17

Monster Worldwide, Inc.

 

(a)597

 

19

School Specialty, Inc.

 

(a)1,360

 

47

United Stationers, Inc.

 

(a)(q)508

 

24

 

 

 

 

107

Communications Equipment (3.3%)

 

 

 

 

Arris Group, Inc.

 

(a)(q)2,483

 

25

Ciena Corp.

 

(a)995

 

34

Cisco Systems, Inc.

 

(a)(q)2,480

 

67

F5 Networks, Inc.

 

(a)677

 

19

Garmin Ltd.

 

195

 

19

Harris Corp.

 

774

 

48

JDS Uniphase Corp.

 

(a)(q)3,058

 

41

NII Holdings, Inc.

 

(a)410

 

20

QLogic Corp.

 

(a)1,394

 

20

Qualcomm, Inc.

 

(q)696

 

27

 

 

 

 

320

Computers & Peripherals (7.3%)

 

 

 

 

Apple, Inc.

 

(a)(q)805

 

159

Cognizant Technology Solutions Corp., Class A

 

(a)568

 

19

Dell, Inc.

 

(a)(q)1,840

 

45

Diebold, Inc.

 

678

 

20

Hewlett-Packard Co.

 

(q)4,229

 

214

International Business Machines Corp.

 

(q)1,589

 

172

Network Appliance, Inc.

 

(a)777

 

19

Western Digital Corp.

 

(a)1,808

 

55

 

 

 

 

703

Construction & Engineering (1.2%)

 

 

 

 

Jacobs Engineering Group, Inc.

 

(a)549

 

52

Shaw Group, Inc. (The)

 

(a)(q)472

 

29

URS Corp.

 

(a)(q)675

 

37

 

 

 

 

118

Consumer Finance (0.8%)

 

 

 

 

American Express Co.

 

(q)654

 

34

AmeriCredit Corp.

 

(a)1,529

 

20

First Marblehead Corp (The)

 

1,266

 

19

 

 

 

 

73

Diversified Financial Services (2.4%)

 

 

 

 

CIT Group, Inc.

 

(q)1,433

 

35

Citigroup, Inc.

 

(q)3,578

 

105

JPMorgan Chase & Co.

 

(q)1,239

 

54

Nasdaq Stock Market, Inc. (The)

 

(a)(q)872

 

43

 

 

 

 

237

Diversified Telecommunication Services (2.9%)

 

 

 

 

American Tower Corp., Class A

 

(a)465

 

20

AT&T, Inc.

 

(q)4,386

 

182

Verizon Communications, Inc.

 

(q)1,691

 

74

 

 

 

 

276

Electric Utilities (1.2%)

 

 

 

 

Exelon Corp.

 

(q)966

 

79

 

138

The accompanying notes are an integral part of the financial statements.

 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Systematic Large Cap Core Active Extension Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Electric Utilities (cont’d)

 

 

 

 

Sierra Pacific Resources

 

(q)2,145

 

$    36

 

 

 

 

115

Electrical Equipment (0.3%)

 

 

 

 

General Cable Corp.

 

(a)(q)448

 

33

Electronic Equipment & Instruments (2.7%)

 

 

 

 

Amphenol Corp., Class A

 

849

 

40

Arrow Electronics, Inc.

 

(a)(q)995

 

39

Benchmark Electronics, Inc.

 

(a)(q)1,361

 

24

Circuit City Stores, Inc.

 

4,539

 

19

Gamestop Corp., Class A

 

(a)313

 

20

Jabil Circuit, Inc.

 

1,321

 

20

LoJack Corp.

 

(a)(q)1,803

 

30

Plexus Corp.

 

(a)(q)1,719

 

45

Vishay Intertechnology, Inc.

 

(a)(q)2,286

 

26

 

 

 

 

263

Energy Equipment & Services (3.4%)

 

 

 

 

Energen Corp.

 

567

 

36

Halliburton Co.

 

656

 

25

National Oilwell Varco, Inc.

 

(a)(q)855

 

63

Pride International, Inc.

 

(a)(q)1,587

 

54

Sunpower Corp., Class A

 

(a)145

 

19

Superior Energy Services

 

(a)(q)1,802

 

62

Transocean, Inc.

 

(q)498

 

71

 

 

 

 

330

Food & Staples Retailing (2.4%)

 

 

 

 

Costco Wholesale Corp.

 

863

 

60

CVS Caremark Corp.

 

(q)3,517

 

140

Longs Drug Stores Corp.

 

(q)798

 

37

 

 

 

 

237

Food Products (1.1%)

 

 

 

 

Archer-Daniels-Midland Co.

 

847

 

39

NutriSystem, Inc.

 

(a)692

 

19

Ralcorp Holdings, Inc.

 

(a)765

 

47

 

 

 

 

105

Gas Utilities (0.5%)

 

 

 

 

Questar Corp.

 

811

 

44

Health Care Equipment & Supplies (2.0%)

 

 

 

 

Conmed Corp.

 

(a)(q)1,034

 

24

Dionex Corp.

 

(a)(q)563

 

47

HLTH Corp.

 

(a)1,432

 

19

Hologic, Inc.

 

(a)(q)449

 

31

Millipore Corp.

 

(a)580

 

42

Varian, Inc.

 

(a)(q)512

 

33

 

 

 

 

196

Health Care Providers & Services (7.3%)

 

 

 

 

Aetna, Inc.

 

(q)1,533

 

88

Centene Corp.

 

(a)(q)1,316

 

36

Community Health Systems, Inc.

 

(a)(q)741

 

27

Covance, Inc.

 

(a)557

 

48

DaVita, Inc.

 

(a)613

 

35

Express Scripts, Inc.

 

(a)(q)984

 

72

Humana, Inc.

 

(a)(q)701

 

53

LifePoint Hospitals, Inc.

 

(a)(q)753

 

22

McKesson Corp.

 

(q)948

 

$    62

Medco Health Solutions, Inc.

 

(a)(q)479

 

49

Molina Healthcare, Inc.

 

(a)1,182

 

46

Quest Diagnostics, Inc.

 

(q)1,404

 

74

Universal Health Services, Inc., Class B

 

(q)477

 

24

WebMD Health Corp., Class A

 

(a)476

 

20

Wellpoint, Inc.

 

(a)(q)603

 

53

 

 

 

 

709

Hotels Restaurants & Leisure (4.0%)

 

 

 

 

Burger King Holdings, Inc.

 

(q)1,392

 

40

Darden Restaurants, Inc.

 

(q)1,107

 

31

Harrah’s Entertainment, Inc.

 

(q)389

 

34

Las Vegas Sands Corp.

 

(a)184

 

19

McDonald’s Corp.

 

(q)2,377

 

140

Monarch Casino & Resort, Inc.

 

(a)(q)1,781

 

43

Red Robin Gourmet Burgers, Inc.

 

(a)(q)1,294

 

41

Starbucks Corp.

 

(a)970

 

20

Wynn Resorts Ltd.

 

170

 

19

 

 

 

 

387

Household Durables (1.2%)

 

 

 

 

Furniture Brands International, Inc.

 

1,601

 

16

La-Z-Boy, Inc.

 

(q)2,049

 

16

Lennar Corp., Class A

 

1,145

 

21

Pulte Homes, Inc.

 

1,906

 

20

Tempur-Pedic International, Inc.

 

(q)1,818

 

47

 

 

 

 

120

Household Products (1.4%)

 

 

 

 

Church & Dwight Co., Inc.

 

697

 

38

Energizer Holdings, Inc.

 

(a)(q)361

 

40

Kimberly-Clark Corp.

 

791

 

55

 

 

 

 

133

Independent Power Producers & Energy Traders (0.3%)

 

 

 

 

AES Corp. (The)

 

(a)(q)1,545

 

33

Industrial Conglomerates (1.4%)

 

 

 

 

General Electric Co.

 

(q)3,061

 

114

UTi Worldwide, Inc.

 

992

 

19

 

 

 

 

133

Information Technology Services (1.4%)

 

 

 

 

BMC Software, Inc.

 

(a)1,485

 

53

Global Payments, Inc.

 

773

 

36

Wright Express Corp.

 

(a)1,204

 

43

 

 

 

 

132

Insurance (8.4%)

 

 

 

 

ACE Ltd.

 

(q)976

 

60

AMBAC Financial Group, Inc.

 

(q)1,485

 

38

American Financial Group, Inc.

 

(q)1,204

 

35

American International Group, Inc.

 

(q)1,186

 

69

Chubb Corp.

 

(q)1,077

 

59

CNA Financial Corp.

 

(q)1,727

 

58

Delphi Financial Group, Inc.

 

(q)708

 

25

Hartford Financial Services Group, Inc.

 

(q)942

 

82

HCC Insurance Holdings, Inc.

 

(q)1,834

 

53

Loews Corp.

 

(q)1,370

 

69

MBIA, Inc.

 

1,026

 

19

 

The accompanying notes are an integral part of the financial statements.

139

 


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Systematic Large Cap Core Active Extension Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Insurance (cont’d)

 

 

 

 

MetLife, Inc.

 

(q)1,089

 

$    67

Philadelphia Consolidated Holding Co.

 

(a)(q)888

 

35

Prudential Financial, Inc.

 

(q)508

 

47

Unum Group

 

(q)2,309

 

55

XL Capital Ltd., Class A

 

(q)743

 

38

 

 

 

 

809

Internet & Catalog Retail (0.9%)

 

 

 

 

Amazon.com, Inc.

 

(a)207

 

19

Coldwater Creek, Inc.

 

(a)2,875

 

19

Expedia, Inc.

 

(a)(q)1,410

 

45

 

 

 

 

83

Internet Software & Services (3.3%)

 

 

 

 

Akamai Technologies, Inc.

 

(a)551

 

19

eBay, Inc.

 

(a)(q)1,745

 

58

Google, Inc., Class A

 

(a)132

 

91

McAfee, Inc.

 

(a)(q)2,106

 

79

MIVA, Inc.

 

(a)(q)7,173

 

14

Salesforce.com, Inc.

 

(a)975

 

61

 

 

 

 

322

Machinery (3.5%)

 

 

 

 

AGCO Corp.

 

(a)(q)738

 

50

Briggs & Stratton Corp.

 

(q)995

 

22

Deere & Co.

 

(q)1,324

 

123

Joy Global, Inc.

 

(q)921

 

61

Manitowoc Co., Inc. (The)

 

396

 

19

Parker Hannifin Corp.

 

371

 

28

Timken Co.

 

(q)993

 

33

 

 

 

 

336

Manufacturing (0.5%)

 

 

 

 

Matthews International Corp.

 

1,107

 

52

Media (1.3%)

 

 

 

 

DIRECTV Group, Inc. (The)

 

(a)(q)1,792

 

41

Viacom, Inc., Class B

 

(a)699

 

31

Walt Disney Co. (The)

 

(q)1,102

 

35

Warner Music Group Corp.

 

3,233

 

20

 

 

 

 

127

Metals & Mining (2.5%)

 

 

 

 

Alcoa, Inc.

 

(q)484

 

18

Commercial Metals Co.

 

(q)1,064

 

31

Freeport-McMoRan Copper & Gold, Inc.

 

(q)317

 

32

Rio Tinto plc ADR

 

125

 

53

Southern Copper Corp.

 

(q)494

 

52

United States Steel Corp.

 

(q)458

 

55

 

 

 

 

241

Multi-Utilities (0.5%)

 

 

 

 

Public Service Enterprise Group, Inc.

 

(q)459

 

45

Multiline Retail (0.5%)

 

 

 

 

J.C. Penney Co., Inc.

 

458

 

20

Saks, Inc.

 

(a)(q)1,482

 

31

 

 

 

 

51

Oil, Gas & Consumable Fuels (11.9%)

 

 

 

 

Anadarko Petroleum Corp.

 

(q)518

 

$    34

Chevron Corp.

 

(q)1,376

 

128

Cimarex Energy Co.

 

(q)804

 

34

ConocoPhillips

 

(q)2,165

 

191

ENSCO International, Inc.

 

326

 

20

Exxon Mobil Corp.

 

(q)3,248

 

304

Forest Oil Corp.

 

(a)(q)907

 

46

Frontier Oil Corp.

 

472

 

19

Helix Energy Solutions Group, Inc.

 

(a)472

 

20

Hess Corp.

 

(q)539

 

54

Marathon Oil Corp.

 

(q)1,473

 

90

Oneok, Inc.

 

(q)755

 

34

Overseas Shipholding Group

 

(q)874

 

65

Spectra Energy Corp.

 

718

 

19

Valero Energy Corp.

 

(q)1,376

 

96

 

 

 

 

1,154

Personal Products (0.2%)

 

 

 

 

Bare Escentuals, Inc.

 

(a)810

 

20

Pharmaceuticals (5.6%)

 

 

 

 

APP Pharmaceuticals, Inc.

 

(a)1,900

 

20

Johnson & Johnson

 

(q)821

 

55

Merck & Co., Inc.

 

(q)2,722

 

158

Par Pharmaceutical Co., Inc.

 

(a)(q)1,171

 

28

Perrigo Co.

 

1,566

 

55

PharmaNet Development Group, Inc.

 

(a)(q)1,183

 

46

Sepracor, Inc.

 

(a)736

 

19

Teva Pharmaceutical Industries Ltd. ADR

 

(q)1,172

 

55

Thermo Fisher Scientific, Inc.

 

(a)(q)1,225

 

71

Watson Pharmaceuticals, Inc.

 

(a)(q)1,300

 

35

 

 

 

 

542

Real Estate (0.4%)

 

 

 

 

Jones Lang LaSalle, Inc.

 

(q)524

 

37

Road & Rail (1.8%)

 

 

 

 

Avis Budget Group, Inc.

 

(a)1,538

 

20

Burlington Northern Santa Fe Corp.

 

(q)585

 

49

CSX Corp.

 

(q)1,031

 

45

Union Pacific Corp.

 

(q)512

 

64

 

 

 

 

178

Semiconductors & Semiconductor Equipment (4.4%)

 

 

 

 

Cypress Semiconductor Corp.

 

(a)1,565

 

56

Integrated Device Technology, Inc.

 

(a)1,727

 

20

Intel Corp.

 

(q)4,140

 

110

International Rectifier Corp.

 

(a)(q)1,128

 

38

LSI Corp.

 

(a)3,723

 

20

MEMC Electronic Materials, Inc.

 

(a)(q)1,549

 

137

Micron Technology, Inc.

 

(a)2,716

 

20

Texas Instruments, Inc.

 

(q)731

 

25

 

 

 

 

426

Software (3.6%)

 

 

 

 

Electronic Arts, Inc.

 

(a)336

 

20

Microsoft Corp.

 

(q)4,122

 

147

Oracle Corp.

 

(a)(q)6,195

 

140

Symantec Corp.

 

(a)1,203

 

19

 

140

The accompanying notes are an integral part of the financial statements.

 


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Systematic Large Cap Core Active Extension Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Software (cont’d)

 

 

 

 

VMware, Inc., Class A

 

(a)236

 

$     20

 

 

 

 

346

Specialty Retail (2.1%)

 

 

 

 

Aeropostale, Inc.

 

(a)(q)1,640

 

43

Chico’s FAS, Inc.

 

(a)2,162

 

20

Foot Locker, Inc.

 

(q)1,384

 

19

Jo-Ann Stores, Inc.

 

(a)(q)1,185

 

15

Office Depot, Inc.

 

(a)1,428

 

20

Officemax, Inc.

 

(q)1,624

 

34

Sherwin-Williams Co. (The)

 

(q)823

 

48

 

 

 

 

199

Textiles, Apparel & Luxury Goods (2.2%)

 

 

 

 

Coach, Inc.

 

(a)645

 

20

CROCS, Inc.

 

(a)514

 

19

Guess?, Inc.

 

494

 

19

Jones Apparel Group, Inc.

 

1,205

 

19

Kellwood Co.

 

(q)909

 

15

Liz Claiborne, Inc.

 

961

 

19

Nike, Inc., Class B

 

(q)922

 

59

Polo Ralph Lauren Corp.

 

(q)351

 

22

Urban Outfitters, Inc.

 

(a)727

 

20

 

 

 

 

212

Thrifts & Mortgage Finance (2.3%)

 

 

 

 

Countrywide Financial Corp.

 

(q)3,959

 

35

Fannie Mae

 

512

 

21

Freddie Mac

 

600

 

21

MGIC Investment Corp.

 

2,202

 

49

PMI Group, Inc. (The)

 

1,495

 

20

Radian Group, Inc.

 

(q)4,329

 

51

Sovereign Bancorp, Inc.

 

1,760

 

20

Washington Mutual, Inc.

 

(q)692

 

9

 

 

 

 

226

Tobacco (3.7%)

 

 

 

 

Altria Group, Inc.

 

(q)2,942

 

223

Loews Corp. - Carolina Group

 

(q)1,622

 

138

 

 

 

 

361

Trading Companies & Distributors (1.0%)

 

 

 

 

Applied Industrial Technologies, Inc.

 

(q)1,167

 

34

Kaman Corp.

 

(q)1,206

 

44

United Rentals, Inc.

 

(a)(q)1,026

 

19

 

 

 

 

97

Wireless Telecommunication Services (0.3%)

 

 

 

 

Telephone & Data Systems, Inc.

 

495

 

31

Total Common Stocks (Cost $12,759)

 

 

 

12,458

Short-Term Investment (0.2%)

 

 

 

 

Investment Company (0.2%)

 

 

 

 

Morgan Stanley Institutional Liquidity

 

 

 

 

Money Market Portfolio

 

 

 

 

— Institutional Class (Cost $20)

 

(o)19,645

 

$       20

Total Investments (128.9%) (Cost $12,779)

 

 

 

12,478

Liabilities in Excess of Other Assets (-28.9%)

 

 

 

(2,800)

Net Assets (100%)

 

 

 

$  9,678

Short Positions (29.2%)*

 

 

 

 

Common Stocks (29.2%)

 

 

 

 

Advertising (0.3%)

 

 

 

 

Harte-Hanks, Inc.

 

1,759

 

30

Air Freight & Logistics (0.7%)

 

 

 

 

Expeditors International Washington, Inc.

 

621

 

28

Forward Air Corp.

 

1,157

 

36

 

 

 

 

64

Airlines (0.4%)

 

 

 

 

JetBlue Airways Corp.

 

(a)6,859

 

40

Biotechnology (1.2%)

 

 

 

 

Affymetrix, Inc.

 

(a)2,325

 

54

Vertex Pharmaceuticals, Inc.

 

(a)2,527

 

59

 

 

 

 

113

Commercial Banks (2.1%)

 

 

 

 

First Midwest Bancorp, Inc.

 

756

 

23

Glacier Bancorp, Inc.

 

2,332

 

44

PrivateBancorp, Inc.

 

1,238

 

40

Sterling Bancorp

 

2,428

 

33

United Bankshares, Inc.

 

783

 

22

Westamerica Bancorporation

 

580

 

26

Wilshire Bancorp, Inc.

 

1,659

 

13

 

 

 

 

201

Commercial Services & Supplies (0.2%)

 

 

 

 

Corporate Executive Board Co.

 

366

 

22

Computers & Peripherals (0.4%)

 

 

 

 

Sun Microsystems, Inc.

 

(a)1,990

 

36

Construction & Engineering (0.3%)

 

 

 

 

Insituform Technologies, Inc.

 

(a)1,872

 

28

Construction Materials (0.3%)

 

 

 

 

Headwaters, Inc.

 

(a)2,062

 

24

Containers & Packaging (0.3%)

 

 

 

 

Bemis Co., Inc.

 

1,210

 

33

Diversified Consumer Services (0.6%)

 

 

 

 

Coinstar, Inc.

 

(a)1,614

 

45

CPI Corp.

 

544

 

13

 

 

 

 

58

Electric Utilities (0.4%)

 

 

 

 

Hawaiian Electric Industries, Inc.

 

1,649

 

38

Electronic Equipment & Instruments (1.2%)

 

 

 

 

Agilysys, Inc.

 

2,831

 

43

Coherent, Inc.

 

(a)1,312

 

32

Itron, Inc.

 

(a)443

 

43

 

 

 

 

118

 

The accompanying notes are an integral part of the financial statements.

141

 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

Systematic Large Cap Core Active Extension Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Energy Equipment & Services (0.4%)

 

 

 

 

Dril-Quip, Inc.

 

(a)746

 

$    42

Food & Staples Retailing (0.5%)

 

 

 

 

United Natural Foods, Inc.

 

1,465

 

47

Food Products (1.5%)

 

 

 

 

Hershey Co. (The)

 

1,210

 

48

J&J Snack Foods Corp.

 

(a)1,158

 

36

Tootsie Roll Industries, Inc.

 

2,127

 

58

 

 

 

 

142

Gas Utilities (1.2%)

 

 

 

 

AGL Resources, Inc.

 

1,287

 

48

Equitable Resources, Inc.

 

658

 

35

Piedmont Natural Gas Co.

 

1,103

 

29

 

 

 

 

112

Health Care Equipment & Supplies (1.8%)

 

 

 

 

ICU Medical, Inc.

 

(a)1,001

 

36

Integra LifeScience Holdings Corp.

 

(a)1,137

 

48

Kensey Nash Corp.

 

(a)1,612

 

48

Palomar Medical Technologies, Inc.

 

(a)2,541

 

39

 

 

 

 

171

Health Care Providers & Services (1.6%)

 

 

 

 

Allscripts Healthcare Solutions, Inc.

 

(a)2,711

 

53

Cardinal Health, Inc.

 

653

 

38

Cross Country Healthcare, Inc.

 

(a)2,289

 

32

Tenet Healthcare Corp.

 

(a)5,781

 

29

 

 

 

 

152

Hotels Restaurants & Leisure (0.2%)

 

 

 

 

Ihop Corp.

 

503

 

18

Information Technology Services (0.4%)

 

 

 

 

Fidelity National Information Services, Inc.

 

1,022

 

43

Insurance (1.1%)

 

 

 

 

Brown & Brown, Inc.

 

991

 

23

Marsh & McClennan Cos., Inc.

 

1,216

 

32

Stewart Information Services Corp.

 

1,794

 

47

 

 

 

 

102

Internet & Catalog Retail (0.4%)

 

 

 

 

IAC/InterActiveCorp.

 

(a)1,449

 

39

Internet Software & Services (0.2%)

 

 

 

 

Websense, Inc.

 

(a)1,222

 

21

Leisure Equipment & Products (1.0%)

 

 

 

 

Arctic Cat, Inc.

 

4,054

 

48

Eastman Kodak Co.

 

1,998

 

44

 

 

 

 

92

Machinery (0.3%)

 

 

 

 

Federal Signal Corp.

 

2,522

 

28

Media (0.6%)

 

 

 

 

Entercom Communications Corp., Class A

 

1,888

 

26

Interpublic Group of Cos., Inc.

 

(a)4,287

 

35

 

 

 

 

61

Multi-Utilities (0.3%)

 

 

 

 

OGE Energy Corp.

 

742

 

27

Office Electronics (0.2%)

 

 

 

 

Zebra Technologies Corp.

 

(a)701

 

24

Oil, Gas & Consumable Fuels (0.8%)

 

 

 

 

Penn Virginia Corp.

 

1,018

 

$    44

Plains Exploration & Production Co.

 

(a)619

 

34

 

 

 

 

78

Paper & Forest Products (0.9%)

 

 

 

 

Glatfelter

 

2,965

 

45

Louisiana-Pacific Corp.

 

3,362

 

46

 

 

 

 

91

Pharmaceuticals (0.8%)

 

 

 

 

Allergan, Inc.

 

646

 

41

Mylan, Inc.

 

2,749

 

39

 

 

 

 

80

Real Estate (2.1%)

 

 

 

 

AvalonBay Communities, Inc. REIT

 

309

 

29

Developers Diversified Realty Corp. REIT

 

764

 

29

Essex Property Trust, Inc. REIT

 

215

 

21

Highwoods Properties, Inc. REIT

 

1,609

 

47

Inland Real Estate Corp. REIT

 

1,481

 

21

PS Business Parks, Inc. REIT

 

627

 

33

UDR, Inc. REIT

 

1,334

 

27

 

 

 

 

207

Road & Rail (1.0%)

 

 

 

 

Heartland Express, Inc.

 

2,368

 

34

Knight Transportation, Inc.

 

2,174

 

32

Landstar System, Inc.

 

828

 

35

 

 

 

 

101

Semiconductors & Semiconductor Equipment (1.7%)

 

 

 

 

Altera Corp.

 

2,044

 

39

Axcelis Technologies, Inc.

 

(a)6,351

 

29

Broadcom Corp., Class A

 

(a)1,320

 

35

Lattice Semiconductor Corp.

 

(a)7,630

 

25

Linear Technology Corp.

 

1,254

 

40

 

 

 

 

168

Software (0.5%)

 

 

 

 

ACI Worldwide, Inc.

 

(a)864

 

16

Sonic Solutions, Inc.

 

(a)3,165

 

33

 

 

 

 

49

Specialty Retail (0.7%)

 

 

 

 

Hibbett Sports, Inc.

 

(a)3,443

 

69

Textiles, Apparel & Luxury Goods (0.6%)

 

 

 

 

K-Swiss, Inc., Class A

 

(a)3,346

 

61

Total Short Positions (Proceeds $3,077)

 

 

 

$   2,830

 

*

 

Percentages are based on Net Assets.

(a)

 

Non-income producing security.

(o)

 

See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Money   Market Portfolio — Institutional Class.

(q)

 

Securities are pledged with a broker as collateral for short sales.

ADR

 

American Depositary Receipt

REIT

 

Real Estate Investment Trust

 

142

The accompanying notes are an integral part of the financial statements.

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Investment Overview (unaudited)

 

U.S. Large Cap Growth Portfolio

 

 

 

* Minimum Investment

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares based upon its different inception date and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the Russell 1000® Growth Index(1) and the Lipper Large-Cap Growth Funds Index(2)

 

 

 

Total Returns(3)

 

 

 

 

 

Average Annual

 

 

 

One

 

Five

 

Ten

 

Since

 

 

 

Year

 

Years

 

Years

 

Inception(6)

 

Portfolio – Class A (4)

 

22.29

%

14.94

% 

6.13

%

11.17

%

Russell 1000® Growth Index

 

11.81

 

12.11

 

3.83

 

8.92

 

Lipper Large-Cap Growth Funds Index

 

14.97

 

12.06

 

3.64

 

8.68

 

 

 

 

 

 

 

 

 

 

 

Portfolio – Class B (5)

 

21.93

 

14.65

 

5.87

 

9.62

 

Russell 1000® Growth Index

 

11.81

 

12.11

 

3.83

 

7.27

 

Lipper Large-Cap Growth Funds Index

 

14.97

 

12.06

 

3.64

 

6.77

 

 

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 www.morganstanley.com/msim. 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.

 

(1)

The Russell 1000® Growth Index measures the performance of those Russell 1000® Index companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000® Index. The Russell 3000® Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)

The Lipper 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.

(3)

Total returns for the Portfolio reflect fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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 April 2, 1991

(5)

Commenced operations 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.

 

143


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (cont’d)

 

U.S. Large Cap Growth Portfolio

 

The U.S. Large Cap Growth Portfolio (the “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, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of 22.29%, net of fees, for Class A shares and 21.93%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares outperformed against its benchmark, the Russell 1000® Growth Index (the “Index”) which returned 11.81%.

 

Factors Affecting Performance

 

·                  The broad equity market made a modest gain for the 12-month period ended December 31, 2007, despite experiencing a decline in the second half of the year. During the summer, the subprime mortgage market suffered a complete collapse under the weight of rising loan defaults and home foreclosures. As a result, credit significantly tightened as liquidity decreased, and consumers became far more cautious in their expenditures, particularly as gasoline prices once again surged upward.

 

·                  In response to this rising volatility, the Federal Reserve began a series of cuts to the target federal funds rate and the discount rate. Although each announced rate reduction temporarily boosted investor sentiment, the broad market declined in the fourth quarter, reflecting investors’ concerns about the health of the financial markets in the coming year.

 

·                  In this environment, the market demonstrated a preference for growth equities over value equities, as well as for large- and mid-capitalization stocks.

 

·                  For the 12-month period, the Portfolio’s outperformance was driven by stock selection, while sector allocations modestly detracted. Sector allocations are a result of bottom-up stock selection and are not intentional top-down decisions; thus the major contributors to performance on a sector basis were primarily driven by stock selection.

 

·                  The technology sector had the largest positive impact on performance for the period. Here, stock selection in the communications technology and computer technology sectors greatly added to relative returns, which offset the negative effect caused by an underweight allocation.

 

·                  In the materials and processing sector, an overweight allocation together with a single holding in an agricultural fishing and ranching company significantly helped performance. Additionally, security selection in the consumer discretionary sector was advantageous. Favorable investment in retail, consumer electronics, and hotel/motel companies more than made up for the negative influence of a large sector overweight.

 

·                  In contrast, the financial services sector had the most unfavorable impact on performance due to security selection, particularly in financial information services companies.

 

·                  In the consumer staples sector, an underweight allocation greatly overshadowed gains made through good stock picking. Furthermore, the Portfolio’s lack of investment in the integrated oils sector considerably dampened relative returns.

 

Management Strategies

 

·                  It is our goal to hold a portfolio of high quality growth stocks we believe will perform well regardless of the market environment. We continue to favor companies that have some uniqueness or dynamic competitive advantage in their business model, with a high quality stream of cash flow and the ability to redeploy capital at a high rate of return.

 

·                  At the close of the period, consumer discretionary represented the largest sector weight and overweight in the Portfolio, followed by the financial services and materials and processing sectors. The financial services sector was modestly underweight versus the Index, and the materials and processing sector was overweight in relation to the Index.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 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),

 

144


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Investment Overview (cont’d)

 

U.S. Large Cap Growth Portfolio

 

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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning
Account Value

 

Ending Account
Value
December 31,

 

Expenses Paid
During Period*
July 1, 2007 —
 December 31,

 

 

 

July 1, 2007

 

2007

 

2007

 

Class A

 

 

 

 

 

 

 

Actual

 

$1,000.00

 

$1,113.70

 

$3.25

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,022.13

 

3.11

 

 

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

 

Actual

 

1,000.00

 

1,111.70

 

4.58

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,020.87

 

4.38

 

* Expenses are equal to Class A and Class B annualized net expense ratios of 0.61% and 0.86%, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

* Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

145


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Portfolio of Investments

 

U.S. Large Cap Growth Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Common Stocks (94.4 %)

 

 

 

 

Advertising Agencies (0.9%)

 

 

 

 

Monster Worldwide, Inc.

 

(a)441,085

 

$    14,291

Air Transport (1.3%)

 

 

 

 

Expeditors International Washington, Inc.

 

469,440

 

20,974

Biotechnology Research & Production (0.8%)

 

 

 

 

Illumina, Inc.

 

(a)213,976

 

12,680

Building: Cement (3.3%)

 

 

 

 

Cemex S.A.B de C.V. ADR

 

(a)1,102,216

 

28,492

Martin Marietta Materials, Inc.

 

173,020

 

22,943

 

 

 

 

51,435

Casinos & Gambling (3.3%)

 

 

 

 

Wynn Resorts Ltd.

 

457,289

 

51,276

Chemicals (7.1%)

 

 

 

 

Monsanto Co.

 

1,007,786

 

112,560

Communications Technology (10.0%)

 

 

 

 

America Movil S.A.B. de C.V., Class L ADR

 

733,897

 

45,054

China Mobile Ltd. ADR

 

248,385

 

21,577

Cisco Systems, Inc.

 

(a)1,092,089

 

29,563

Research In Motion Ltd.

 

(a)540,026

 

61,239

 

 

 

 

157,433

Computer Services Software & Systems (14.8%)

 

 

 

 

Baidu.com ADR

 

(a)71,579

 

27,944

Google, Inc., Class A

 

(a)166,656

 

115,239

Mastercard Inc., Class A

 

116,078

 

24,980

Tencent Holdings Ltd.

 

2,648,400

 

19,725

VMware, Inc., Class A

 

(a)255,988

 

21,757

Yahoo!, Inc.

 

(a)970,164

 

22,566

 

 

 

 

232,211

Computer Technology (3.1%)

 

 

 

 

Apple, Inc.

 

(a)245,013

 

48,532

Seagate Technology, Inc.

 

(d)(l)186,100

 

@—

 

 

 

 

48,532

Diversified Financial Services(2.1%)

 

 

 

 

CME Group, Inc.

 

49,317

 

33,831

Drugs & Pharmaceuticals (0.6%)

 

 

 

 

Gen-Probe, Inc.

 

(a)162,989

 

10,257

Energy — Miscellaneous (6.4%)

 

 

 

 

Southwestern Energy Co.

 

(a)414,520

 

23,097

Ultra Petroleum Corp.

 

(a)1,094,586

 

78,263

 

 

 

 

101,360

Financial — Miscellaneous (5.3%)

 

 

 

 

American Express Co.

 

785,102

 

40,841

Berkshire Hathaway, Inc., Class B

 

(a)8,964

 

42,453

 

 

 

 

83,294

Health Care Services (0.9%)

 

 

 

 

Stericycle, Inc.

 

(a)226,833

 

13,474

Insurance: Multi-Line (2.6%)

 

 

 

 

Loews Corp.

 

805,798

 

40,564

Investment Management Companies (1.1%)

 

 

 

 

Franklin Resources, Inc.

 

148,131

 

16,951

Real Estate Investment Trusts (REIT) (4.5%)

 

 

 

 

Brookfield Asset Management, Inc., Class A

 

1,994,956

 

$    71,160

Restaurants (2.3%)

 

 

 

 

Starbucks Corp.

 

(a)1,747,383

 

35,769

Retail (10.2%)

 

 

 

 

Abercrombie & Fitch Co.

 

365,480

 

29,227

Amazon.com, Inc.

 

(a)917,979

 

85,042

Costco Wholesale Corp.

 

326,577

 

22,782

Sears Holdings Corp.

 

(a)225,637

 

23,026

 

 

 

 

160,077

Services: Commercial (6.8%)

 

 

 

 

China Merchants Holdings International Co., Ltd.

 

3,464,000

 

21,139

Corporate Executive Board Co.

 

361,836

 

21,746

eBay, Inc.

 

(a)1,936,198

 

64,262

 

 

 

 

107,147

Shipping (1.8%)

 

 

 

 

C.H. Robinson Worldwide, Inc.

 

531,349

 

28,757

Steel (1.0%)

 

 

 

 

Nucor Corp.

 

254,234

 

15,056

Textile Apparel Manufacturers(1.5)%

 

 

 

 

Coach, Inc.

 

(a)752,708

 

23,018

Utilities: Water (0.9%)

 

 

 

 

Veolia Environnement ADR

 

160,943

 

14,643

Wholesalers (1.8%)

 

 

 

 

Li & Fung Ltd.

 

7,096,000

 

28,356

Total Common Stocks (Cost $1,167,363)

 

 

 

1,485,106

Investment Company (1.5%)

 

 

 

 

Aeroplan Income Fund (Cost $23,018)

 

989,701

 

23,766

Short-Term Investment (1.6%)

 

 

 

 

Investment Company (1.6%)

 

 

 

 

Morgan Stanley Institutional Liquidity

 

 

 

 

Money Market Portfolio

 

 

 

 

— Institutional Class (Cost $24,808)

 

(o)24,808,335

 

24,808

Total Investments (97.5%) (Cost $1,215,189)

 

(v)1,533,680

Other Assets in Excess of Liabilities (2.5%)

 

 

 

39,903

Net Assets (100%)

 

 

 

$1,573,583

 

(a)                                  Non-income producing security.

(d)                                 Security was valued at fair value — At December 31, 2007, the Portfolio held a fair valued security, valued at less than $500, representing less than 0.05% of net assets.

(l)                                     Security has been deemed illiquid at December 31, 2007.

(o)                                 See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class.

(v)                                 The approximate market value and percentage of the investments, $69,220,000 and 4.5%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note A within the Notes to Financial Statements.

@                                    Value is less than $500.

ADR                     American Depositary Receipt

 

146

The accompanying notes are an integral part of the financial statements.

 

 


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (unaudited)

 

U.S. Real Estate Portfolio

 

 

 

*      Minimum Investment

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares based upon its different inception date and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the FTSE NAREIT Equity REIT Index(1), the S&P 500® Index(2) and the Lipper Real Estate Funds Index(3)

 

 

 

Total Returns(4)

 

 

 

 

Average Annual

 

 

 

One

 

Five 

 

Ten 

 

Since

 

 

 

Year

 

Years

 

Years

 

Inception(7)

 

 

 

 

 

 

 

 

 

 

 

Portfolio – Class A (5)

 

(16.63

)%

20.81

%

12.18

%

16.09

%

FTSE NAREIT Equity REIT Index

 

(15.69

)

18.17

 

10.49

 

13.47

 

S&P 500® Index

 

5.49

 

12.83

 

5.91

 

10.85

 

Lipper Real Estate Funds Index

 

(13.50

)

18.27

 

10.24

 

—

 

 

 

 

 

 

 

 

 

 

 

Portfolio – Class B (6)

 

(16.80

)

20.51

 

11.89

 

15.10

 

FTSE NAREIT Equity REIT Index

 

(15.69

)

18.17

 

10.49

 

13.17

 

S&P 500® Index

 

5.49

 

12.83

 

5.91

 

9.25

 

Lipper Real Estate Funds Index

 

(13.50

)

18.27

 

10.24

 

12.73

 

 

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 www.morganstanley.com/msim. 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.

 

(1)        The FTSE NAREIT Equity REIT 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. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)        The 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. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(3)        The Lipper 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.

(4)        Total returns for the Portfolio reflect fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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 February 24, 1995

(6)        Commenced operations 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.

 

The U.S. Real Estate Portfolio (the “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

 

147


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

U.S. Real Estate Portfolio

 

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. In addition to the general risks associated with real-estate investment, REIT investing entails other risks, such as credit and interest-rate risk.

 

Performance

 

For the year ended December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of -16.63%, net of fees, for Class A shares and -16.80%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares underperformed against its benchmarks, the FTSE NAREIT Equity REIT Index (the “Index”) which returned -15.69% and the S&P 500 ®Index which returned 5.49%.

 

Factors Affecting Performance

 

•                  This was a highly volatile year for the real estate investment trust (REIT) sector. REITs rallied strongly in January and through mid-February, peaking with a gain of more than 13%, primarily due to transactional evidence of continued strong underlying asset value growth, take-private activity and related speculation for additional take-private activity. The sector subsequently posted modest declines and then suffered significant weakness in the May to July period as the credit crisis emerged and it became clear that asset values had peaked and that financing for take-private and other highly leveraged transactions was no longer available. Given a lack of transaction activity, declines in REIT share prices appeared to reflect an attempt by the public markets to predict the magnitude of the prospective declines in underlying asset values. REITs rallied briefly from mid-August to mid-October, but reversed course in the final months of the year as the credit crisis continued to worsen and investors began to adjust their expectations for asset values downward.

 

•                  The period featured significant dispersion of returns. The key theme appeared to be investors estimating the impact on growth in cash flows of the various real estate sectors as a result of a weaker economy and a change in the financing environment. Generally, this resulted in sectors with assets with shorter-term leases underperforming those sectors with assets with longer- term leases that were viewed as more defensive on a relative basis. Among the three major sectors, the apartment stocks significantly underperformed, office stocks underperformed and retail stocks performed in-line with the Index.

 

•                  The apartment sector suffered large declines due to continued concerns with regard to the weakness in the economy. As the sector features short-term leases, investors expect this sector to be the first of the major sectors to be impacted by a slowdown in demand. In addition, investors were concerned with regard to the new competitive rental supply from homes and condominiums. In contrast, advocates for the sector noted the incremental benefit to demand from a dramatically lower propensity to purchase homes versus renting and pointed to the significant discounted share prices relative to underlying values for the majority of the stocks.

 

•                  The office sector underperformed despite the longer- term nature of their leases. Investors were concerned that the impact of the subprime crisis on finance and mortgage related firms could negatively impact tenant demand. There was also some concern that property prices could face the most significant declines in this sector as property values appeared to be bolstered to the greatest degree by activity from highly leveraged investors. The mixed office-industrial REITs posted the weakest performance of any sector over the period as these companies have significant exposure to suburban office markets and investors appear to be concerned that they will not be able to post earnings growth due to projections for a stagnation of rental growth in these markets.

 

•                  The retail sector performed in-line with the Index despite concerns with regard to a slowdown in consumer spending. The malls performed in-line and the strip shopping centers modestly underperformed the Index, with the shopping centers modestly underperforming the malls as the companies disappointed investors with weaker than expected earnings growth projections for 2008, primarily due to their external activities.

 

•                  Among the smaller sectors, the lodging and storage REITs significantly underperformed and the health care and industrial REITs significantly outperformed the Index.

 

•                  The Portfolio underperformed the Index for the period. Bottom-up stock selection was favorable but sector allocation detracted from performance. Stock selection was especially strong in the hotel, mall, shopping center and apartment sectors; this was partially offset by stock selection in the office sector. From a top-down perspective, the Portfolio benefited from the underweight to the mixed office-industrial sector; this was offset by the underweight to the health care and industrial sectors and the overweight to the hotel sector.

 

148


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

U.S. Real Estate Portfolio

 

Management Strategies

 

•                  We have maintained our core investment philosophy as a real estate value investor. This results in the ownership of stocks whose share prices in our view provide real estate exposure at the best valuation relative to their underlying real estate values. Given the continued shift in investor sentiment toward sectors perceived as more defensive, we believe that valuations for a number of stocks in sectors perceived as less defensive have become even more attractive on a relative basis versus other sectors as well as versus underlying asset values, as share prices for these stocks appear to have more than priced in any prospective decline in underlying fundamentals and asset values. Our company specific research leads us to an overweighting in the Portfolio to a group of companies that are focused in the ownership of upscale urban hotels, apartments, and office properties and an underweighting to companies concentrated in the ownership of strip shopping centers, industrial properties and health care assets.

 

•                  We believe that over the medium and long-term, the best indicator for REIT valuations is private real estate values, although there may be periods when the performance of the equity or debt markets may influence short-term funds flows to the sector. While it is likely that investors may increase the required return and risk premium on real estate investments, we believe that longer-term investors will remain committed to maintaining a strategic allocation to the sector due to its potential returns and the diversification benefits from its lack of meaningful correlation to other asset classes.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning Account Value
July 1, 2007

 

Ending Account
Value
December 31,
2007

 

Expenses Paid
During Period *
July 1, 2007 —
December 31,
2007

 

Class A

 

 

 

 

 

 

 

Actual

 

$1,000.00

 

$   859.20

 

$4.41

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,020.47

 

4.79

 

 

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

 

Actual

 

1,000.00

 

858.60

 

5.57

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,019.21

 

6.06

 

*            Expenses are equal to Class A and Class B annualized net expense ratios of 0.94% and 1.19%, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

149


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

U.S. Real Estate Portfolio

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

*            Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

150


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments

 

U.S. Real Estate Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Common Stocks (98.8%)

 

 

 

 

Diversified (5.1%)

 

 

 

 

Forest City Enterprises, Inc., Class A

 

(c)336,771

 

$      14,966

Vornado Realty Trust REIT

 

457,260

 

40,216

 

 

 

 

55,182

Health Care (5.7%)

 

 

 

 

Assisted Living Concepts, Inc., Class A

 

(a)(c)1,134,750

 

8,511

Cogdell Spencer, Inc. REIT

 

135,380

 

2,156

Healthcare Realty Trust, Inc. REIT

 

(c)948,560

 

24,084

Senior Housing Properties Trust REIT

 

(c)1,076,809

 

24,422

Universal Health Reality Income Trust REIT

 

(c)85,468

 

3,029

 

 

 

 

62,202

Industrial (4.3%)

 

 

 

 

AMB Property Corp. REIT

 

260,202

 

14,977

Cabot Industrial Value Fund, LP

 

(d)(i)(l)6,667

 

3,334

DCT Industrial Trust, Inc. REIT

 

291,540

 

2,714

Exeter Industrial Value Fund LP

 

850,000

 

850

Keystone Industrial Fund, LP

 

(d)(i)(l)6,000,000

 

5,703

Prologis REIT

 

(c)302,398

 

19,166

 

 

 

 

46,744

Land (0.1%)

 

 

 

 

Plum Creek Timber Co., Inc. REIT

 

(c)13,359

 

615

Lodging/Resorts (16.6%)

 

 

 

 

Hersha Hospitality Trust REIT

 

(c)837,365

 

7,955

Host Hotels & Resorts, Inc. REIT

 

(c)4,239,302

 

72,238

Millennium & Copthorne Hotels plc

 

847,650

 

6,842

Morgans Hotel Group Co.

 

(a)(c)745,614

 

14,375

Starwood Hotels & Resorts Worldwide, Inc.

 

1,130,632

 

49,782

Strategic Hotels & Resorts, Inc. REIT

 

(c)1,700,989

 

28,457

 

 

 

 

179,649

Office (17.8%)

 

 

 

 

Beacon Capital Partners, Inc.

 

(a)(d)(i)(l)335,100

 

79

Boston Properties, Inc. REIT

 

(c)692,881

 

63,614

Brandywine Realty Trust REIT

 

1,152,649

 

20,667

BRCP REIT I, LLC

 

(a)(d)(i)(l)5,934,197

 

3,275

BRCP REIT II, LLC

 

(a)(d)(i)(l)5,586,430

 

5,586

Brookfield Properties Corp.

 

2,966,312

 

57,102

Mack-Cali Realty Corp. REIT

 

(c)960,568

 

32,659

Parkway Properties, Inc. REIT

 

(c)13,304

 

492

SL Green Realty Corp. REIT

 

(c)101,043

 

9,443

 

 

 

 

192,917

Office/Industrial (4.0%)

 

 

 

 

Duke Realty Corp. REIT

 

(c)680,306

 

17,742

Liberty Property Trust REIT

 

(c)761,360

 

21,935

PS Business Parks, Inc. REIT

 

(c)59,372

 

3,120

 

 

 

 

42,797

Residential Apartments (18.7%)

 

 

 

 

Atlantic Gulf Communities Corp.

 

(a(d)(i)(l)140,284

 

—

AvalonBay Communities, Inc. REIT

 

(c)539,966

 

50,832

BRE Properties, Inc. REIT

 

(c)147,933

 

5,996

Camden Property Trust REIT

 

(c)367,971

 

17,718

Equity Residential Properties Trust REIT

 

2,322,766

 

$      84,711

Essex Property Trust, Inc. REIT

 

(c)176,240

 

17,182

GMH Communities Trust REIT

 

(c)475,205

 

2,623

Post Properties, Inc. REIT

 

(c)667,382

 

23,439

 

 

 

 

202,501

Residential Manufactured Homes (1.7%)

 

 

 

 

Equity Lifestyle Properties, Inc. REIT

 

(c)406,109

 

18,547

Retail Regional Malls (14.7%)

 

 

 

 

General Growth Properties, Inc. REIT

 

259,045

 

10,667

Macerich Co. (The) REIT

 

(c)560,382

 

39,821

Simon Property Group, Inc. REIT

 

(c)1,179,054

 

102,413

Taubman Centers, Inc. REIT

 

(c)136,728

 

6,726

 

 

 

 

159,627

Retail Strip Centers (6.8%)

 

 

 

 

Acadia Realty Trust REIT

 

(c)333,423

 

8,539

BPP Liquidating Trust REIT

 

(a)(d)(l)113,290

 

6

Cedar Shopping Centers, Inc. REIT

 

(c)236,944

 

2,424

Developers Diversified Realty Corp. REIT

 

(c)115,940

 

4,439

Equity One, Inc. REIT

 

(c)22,217

 

512

Federal Realty Investment Trust REIT

 

(c)158,428

 

13,015

Ramco-Gershenson Properties Trust REIT

 

(c)134,955

 

2,884

Regency Centers Corp. REIT

 

(c)641,282

 

41,356

Weingarten Realty Investors REIT

 

(c)13,050

 

410

 

 

 

 

73,585

Self Storage (3.3%)

 

 

 

 

Public Storage, Inc. REIT

 

338,918

 

24,880

Sovran Self Storage, Inc. REIT

 

(c)258,902

 

10,382

U-Store-It Trust REIT

 

(c)87,010

 

797

 

 

 

 

36,059

Total Common Stocks (Cost $1,029,405)

 

 

 

1,070,425

Preferred Stocks (0.0%)

 

 

 

 

Residential Apartments (0.0%)

 

 

 

 

Atlantic Gulf Communities Corp., Series B

 

(a)(d)(i)(l)107,021

 

—

Atlantic Gulf Communities Corp., Series B (Convertible)

 

(a)(d)(i)(l)75,765

 

—

Total Preferred Stocks (Cost $1,828)

 

 

 

—

 

 

Face

 

 

 

 

Amount

 

 

 

 

(000)

 

 

Short-Term Investments (14.4%)

 

 

Short-Term Debt Securities held as Collateral on Loaned Securities (14.4%)

 

 

Alliance & Leicester plc,

 

 

 

 

5.26%, 9/2/08

 

$

(h)4,674

 

4,674

Bancaja,

 

 

 

 

5.35%, 8/12/08

 

2,337

 

2,337

Bank of New York Co., Inc.,

 

 

 

 

5.24%, 8/8/08

 

(h)2,337

 

2,337

BASF AG,

 

 

 

 

5.18%, 8/19/08

 

(h)2,337

 

2,337

BNP Paribas plc,

 

 

 

 

4.90%, 5/19/08

 

(h)4,674

 

4,674

CAM US Finance S.A. Unipersonal,

 

 

 

 

5.24%, 7/25/08

 

(h)9,348

 

9,348

 

 

The accompanying notes are an integral part of the financial statements.

151

 


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

U.S. Real Estate Portfolio

 

 

 

Face

 

 

 

 

Amount

 

Value

 

 

(000)

 

(000)

Short-Term Debt Securities held as Collateral on Loaned Securities (cont’d)

 

 

Canadian Imperial Bank of Commerce, New York,

 

 

 

 

4.42%, 7/28/08

 

$

(h)4,674

 

$

4,674

CC USA, Inc.,

 

 

 

 

3.89%, 1/28/08

 

(h)2,336

 

2,336

CIT Group Holdings,

 

 

 

 

5.23%, 6/18/08

 

(h)8,413

 

8,413

Citigroup Global Markets Holdings, Inc.,

 

 

 

 

4.51%, 1/2/08

 

31,861

 

31,861

Credit Suisse First Boston, New York,

 

 

 

 

4.32%, 3/14/08

 

(h)4,674

 

4,674

First Tennessee Bank,

 

 

 

 

5.05%, 8/15/08

 

(h)2,337

 

2,337

5.06%, 8/15/08

 

(h)9,347

 

9,347

Goldman Sachs Group, Inc.,

 

 

 

 

4.62%, 2/13/09

 

(h)4,393

 

4,393

5.10%, 9/12/08

 

(h)2,337

 

2,337

HSBC Finance Corp.,

 

 

 

 

5.26%, 8/5/08

 

(h)2,337

 

2,337

IBM Corp.,

 

 

 

 

5.27%, 9/8/08

 

(h)9,348

 

9,348

Lehman Brothers, Inc.,

 

 

 

 

4.49%, 1/2/08

 

3,986

 

3,986

Macquarie Bank Ltd.,

 

 

 

 

4.95%, 8/20/08

 

(h)4,674

 

4,674

Metropolitan Life Global Funding,

 

 

 

 

4.89%, 8/21/08

 

(h)7,011

 

7,011

National Bank of Canada,

 

 

 

 

5.21%, 4/2/08

 

(h)9,347

 

9,347

National Rural Utilities Cooperative Finance Corp.,

 

 

 

 

5.24%, 9/2/08

 

(h)9,348

 

9,348

Nationwide Building Society,

 

 

 

 

4.92%, 7/28/08

 

(h)5,421

 

5,421

Unicredito Italiano Bank (Ireland) plc,

 

 

 

 

5.04%, 8/14/08

 

(h)5,141

 

5,141

5.26%, 8/8/08

 

(h)3,272

 

3,272

Total Short-Term Investments (Cost $155,964)

 

 

 

155,964

Total Investments (113.2%) (Cost $1,187,197) —

 

 

 

 

including $153,417 of Securities Loaned

 

 

 

(v)   1,226,389

Liabilities in Excess of Other Assets (-13.2%)

 

 

 

(142,992)

Net Assets (100%)

 

 

 

$1,083,397

 

(a)

Non-income producing security.

(c)

All or a portion of security on loan at December 31, 2007.

(d)

Security was valued at fair value — At December 31, 2007, the Portfolio held approximately $17,983,000 of fair valued securities, representing 1.7% of net assets.

(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, 2007.

(i)

Restricted security valued at fair value and not registered under the Securities Act of 1933. Atlantic Gulf Communities Corp. was acquired 6/97 and has a current cost basis of $790,000. Atlantic Gulf Communities Corp., Series B Preferred was acquired 2/00 and has a current cost basis of $758,000. Atlantic Gulf Communities Corp., Series B Preferred was acquired 6/97 and has a current cost basis of $1,070,000. Beacon Capital Partners, Inc. was acquired 3/98 and has a current cost basis of $1,010,000. BRCP REIT I, LLC was acquired 5/03 - 11/06 and has a current cost basis of $3,987,000. BRCP REIT II, LLC was acquired 10/06 - 6/07 and has a current cost basis of $4,875,000. Cabot Industrial Value Fund, LP was acquired 11/05 - 6/07 and has a current cost basis of 2,501,000. Keystone Industries Fund, LP was acquired 10/05 - 5/07 and has a current cost basis of $4,694,000. At December 31, 2007, these securities had an aggregate market value of $16,610,000 representing 1.6% of net assets.

(l)

Security has been deemed illiquid at December 31, 2007.

(v)

The approximate market value and percentage of the investments, $6,842,000 and 0.6%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note A within the Notes to Financial Statements.

@

Value is less than $500.

REIT

Real Estate Investment Trust

 

152

The accompanying notes are an integral part of the financial statements.

 

 


 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (unaudited)

 

U.S. Small/Mid Cap Value Portfolio

 

 

 

 

 

*    Minimum Investment

* * Commenced operations on September 27, 2007

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the Russell 2500® Value Index(1) and the Lipper Mid-Cap Value Funds Index(2)

 

 

 

Total Returns(3)

 

 

Cumulative

 

 

Since

 

 

Inception(5)

 

 

 

 

Portfolio – Class A (4)

 

(5.21

)%

Russell 2500® Value Index

 

(7.58

)

Lipper Mid-Cap Value Funds Index

 

(4.45

)

 

 

 

 

Portfolio – Class B (4)

 

(5.31

)

Russell 2500® Value Index

 

(7.58

)

Lipper Mid-Cap Value Funds Index

 

(4.45

)

 

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 www.morganstanley.com/msim. 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.

 

(1)             The Russell 2500® Value Index measures the performance of those companies in the Russell 2500® Index with lower price-to-book ratios and lower forecasted growth values. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)             The Lipper Mid-Cap Value Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Mid-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 Mid-Cap Value Funds classification.

(3)             Total returns for the Portfolio reflect fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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 27, 2007

(5)             For comparative purposes, cumulative 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.

 

U.S. Small/Mid Cap Value Portfolio (the “Portfolio”) seeks long-term capital appreciation by investing primarily in common stocks and other equity securities, including convertible securities, of small- and mid-size companies that the Adviser believes are undervalued relative to the marketplace or to similar companies. Stocks of small and medium-sized companies entail special risks, such as limited product lines, markets, and financial resources, and greater market volatility than securities of larger, more-established companies. In addition to the risks associated with common stocks, investments in convertible securities are subject to the risks associated with fixed-income securities, namely credit, price and interest-rate risks.

 

153


 

2007 Annual Report

 

 

December 31, 2007

 

Investment Overview (cont’d)

 

U.S. Small/Mid Cap Value Portfolio

 

Performance

 

For the period from September 27, 2007 (commencement of operations) to December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per share of -5.21%, net of fees, for Class A shares and -5.31%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares outperformed against its benchmark, the Russell 2500® Value Index (the “Index”) which returned -7.58% for the same period.

 

Factors Affecting Performance

 

·                 During the period from inception through December 31, 2007, U.S. equities experienced significant volatility, ending the period lower. Although the S&P 500® Index hit a record high early in the fourth quarter, stocks subsequently came under considerable pressure. Third-quarter Gross Domestic Product was better than expected, and later revised higher, yet consumer confidence and spending data fell, the housing market continued to weaken, oil prices reached record highs, and many commodity prices rose. Revived inflation concerns caused some speculation that the Federal Reserve’s hands could be tied in terms of potential future rate cuts. Moreover, a number of large financial institutions reported significant write-downs related to mortgages and other debt obligations. Broadly speaking, third-quarter corporate earnings declined, with many analysts pessimistic about the outlook for fourth-quarter earnings. With credit markets remaining tight and the dollar continuing to weaken, investor fears of a possible recession seemed to intensify.

 

·                 In this period, small cap stocks lagged the broad market averages, although absolute returns were negative for indexes across the capitalization spectrum. Value stocks also underperformed growth stocks during the period. The Index’s performance was driven by the energy, health care and utilities sectors. The consumer discretionary, autos and transportation, financial services, and technology sectors had the largest declines in the Index.

 

·                 In terms of the Portfolio’s performance, stock selection within the financial services sector was among the largest positive contributors to relative performance. Strong performance from holdings in insurance stocks and a financial data processing services and systems stock - combined with minimal exposure to banks, real estate investment trusts (REITs), and savings and loans -drove gains.

 

·                 Strong stock selection in the materials and processing sector and the technology sector also added value.

 

·                 Along with positive stock selection, an underweight in the financial services sector was favorable for relative performance, as was an overweight in the producer durables sector.

 

·                 The leading detractors from relative returns during the period included stock selection in the health care sector, in which holdings of health care services related stocks performed poorly. An underweight in the utilities sector and an overweight in the consumer discretionary sector further hampered relative gains.

 

Management Strategies

 

·                 Our bottom-up, value-driven stock selection process resulted in significant underweights in the utilities sector and the financial services sector, especially banks and REITs (though insurance and reinsurance represented overweights), along with no exposure to the autos and transportation sector. The largest relative overweights in the Portfolio included the producer durables sector, mainly in aerospace, office supplies, and telecom equipment; and the consumer discretionary sector, especially business services and commercial printing. At the Portfolio’s inception our stock selection yielded a slightly overweight position in the technology sector, which we gradually increased by the close of the period.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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, 2007 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.

 

154


 

 

2007 Annual Report

 

December 31, 2007

 

Investment Overview (cont’d)

 

U.S. Small/Mid Cap Value Portfolio

 

Please note that both classes within the Portfolio commenced operations on September 27, 2007, however, expenses did not begin accruing until September 28, 2007; therefore, ‘‘Actual Expenses Paid During Period” reflect activity from September 28, 2007 through December 31, 2007.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that while the Portfolio commenced operations on September 27, 2007, the “Hypothetical Expenses Paid During the Period” reflect projected activity for the full six month period for the purposes of comparability. This projection assumes that the annualized expense ratio for the period was in effect during the period from July 1, 2007 through December 31, 2007.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

 

Beginning
Account Value*

 

Ending
Account Value
December 31,
2007

 

Expenses Paid
During Period*
September 28,
2007 —
December 31,
 2007

 

Class A

 

 

 

 

 

 

 

Actual

 

$1,000.00

 

$    947.90

 

$3.30

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,018.65

 

6.61

 

 

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

 

Actual

 

1,000.00

 

946.90

 

3.93

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,017.39

 

7.88

 

 

*  Expenses are equal to Class A and Class B annualized net expense ratios of 1.30% and 1.55%, respectively, multiplied by the average account value over the period, multiplied by 95/365 (to reflect the actual days in the period for the actual example) and multiplied by 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

*  Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

155


 

2007 Annual Report

 

 

December 31, 2007

 

Portfolio of Investments

 

U.S. Small/Mid Cap Value Portfolio

 

 

 

 

 

Value

 

 

Shares

 

(000)

Common Stocks (92.7%)

 

 

 

 

Aerospace & Defense (7.4%)

 

 

 

 

Alliant Techsystems, Inc.

 

(a)4,000

 

$   455

DRS Technologies, Inc.

 

5,600

 

304

Goodrich Corp.

 

5,700

 

403

Spirit Aerosystems Holdings, Inc., Class A

 

(a)9,800

 

338

 

 

 

 

1,500

Beverages (1.7%)

 

 

 

 

Molson Coors Brewing Co., Class B

 

6,800

 

351

Chemicals (3.9%)

 

 

 

 

Agrium, Inc.

 

4,000

 

289

Cytec Industries, Inc.

 

4,800

 

295

Scotts Miracle-Gro Co. (The), Class A

 

5,400

 

202

 

 

 

 

786

Commercial Services & Supplies (8.6%)

 

 

 

 

ACCO Brands Corp.

 

(a)32,900

 

527

Brink’s Co. (The)

 

8,500

 

508

Cenveo, Inc.

 

(a)20,200

 

353

RR Donnelley & Sons Co.

 

9,300

 

351

 

 

 

 

1,739

Computers & Peripherals (5.4%)

 

 

 

 

Electronics for Imaging

 

(a)18,100

 

407

MSC.Software Corp.

 

(a)24,300

 

315

Teradata Corp.

 

(a)13,600

 

373

 

 

 

 

1,095

Containers & Packaging (5.7%)

 

 

 

 

Owens-Illinois, Inc.

 

(a)6,100

 

302

Pactiv Corp.

 

(a)15,300

 

407

Smurfit-Stone Container Corp.

 

(a)42,400

 

448

 

 

 

 

1,157

Diversified Telecommunication Services (1.6%)

 

 

 

 

CenturyTel, Inc.

 

7,600

 

315

Electric Utilities (0.5%)

 

 

 

 

PNM Resources, Inc.

 

4,600

 

99

Electrical Equipment (4.7%)

 

 

 

 

Acuity Brands, Inc.

 

4,600

 

207

Belden, Inc.

 

11,700

 

521

General Cable Corp.

 

(a)2,900

 

212

 

 

 

 

940

Energy Equipment & Services (2.4%)

 

 

 

 

Exterran Holdings, Inc.

 

(a)3,800

 

311

Superior Energy Services

 

(a)5,200

 

179

 

 

 

 

490

Food Products (2.7%)

 

 

 

 

Corn Products International, Inc.

 

15,100

 

555

Gas Utilities (1.7%)

 

 

 

 

UGI Corp.

 

12,900

 

352

Health Care Providers & Services (4.0%)

 

 

 

 

Apria Healthcare Group, Inc.

 

(a)8,700

 

188

IMS Health, Inc.

 

13,900

 

320

PerkinElmer, Inc.

 

11,700

 

304

 

 

 

 

812

Hotels Restaurants & Leisure (1.0%)

 

 

 

 

AFC Enterprises

 

(a)17,200

 

$

195

Household Durables (2.2%)

 

 

 

 

Snap-On, Inc.

 

9,000

 

434

Information Technology Services (8.5%)

 

 

 

 

Broadridge Financial Solutions, Inc.

 

25,100

 

563

Computer Sciences Corp.

 

(a)6,100

 

302

MAXIMUS, Inc.

 

22,200

 

857

Metavante Technologies, Inc.

 

(a)1

 

@—

 

 

 

 

1,722

Insurance (14.6%)

 

 

 

 

Assurant, Inc.

 

10,000

 

669

Conseco, Inc.

 

(a)41,600

 

523

Everest Re Group Ltd.

 

3,500

 

351

Hanover Insurance Group, Inc. (The)

 

9,659

 

442

Markel Corp.

 

(a)800

 

393

Reinsurance Group of America, Inc.

 

5,900

 

310

White Mountains Insurance Group Ltd.

 

500

 

257

 

 

 

 

2,945

Machinery (1.2%)

 

 

 

 

Kennametal, Inc.

 

6,200

 

235

Media (0.7%)

 

 

 

 

Sinclair Broadcast Group, Inc., Class A

 

17,500

 

144

Office Electronics (1.8%)

 

 

 

 

Zebra Technologies Corp.

 

(a)10,400

 

361

Oil, Gas & Consumable Fuels (1.6%)

 

 

 

 

Pioneer Natural Resources Co.

 

6,800

 

332

Paper & Forest Products (1.4%)

 

 

 

 

MeadWestvaco Corp.

 

9,200

 

288

Pharmaceuticals (1.6%)

 

 

 

 

Barr Laboratories, Inc.

 

(a)6,000

)

319

Real Estate (1.5%)

 

 

 

 

Host Hotels & Resorts, Inc. REIT

 

17,400

 

296

Road & Rail (1.0%)

 

 

 

 

Avis Budget Group, Inc.

 

(a)15,500

 

202

Software (1.6%)

 

 

 

 

Amdocs Ltd.

 

(a)9,500

 

327

Specialty Retail (1.1%)

 

 

 

 

PetSmart, Inc.

 

9,700

 

228

Textiles, Apparel & Luxury Goods (2.1%)

 

 

 

 

Hanesbrands, Inc.

 

(a)15,200

 

413

Thrifts & Mortgage Finance (0.5%)

 

 

 

 

TFS Financial Corp.

 

(a)8,600

 

103

Total Common Stocks (Cost $19,831)

 

 

 

18,735

 

 

 

 

 

 

 

Face

 

 

 

 

Amount

 

 

 

 

(000)

 

 

Fixed Income Security (1.8%)

 

 

 

 

Industrials (1.8%)

 

 

 

 

Invitrogen Corp. (Convertible),

 

 

 

 

1.50%, 2/15/24

 

 

 

 

(Cost $329)

 

$

333

 

353

 

156

The accompanying notes are an integral part of the financial statements.

 


 

2007 Annual Report

 

December 31, 2007

 

Portfolio of Investments (cont’d)

 

U.S. Small/Mid Cap Value Portfolio

 

 

 

 

 

 

 

Value

 

 

Shares

 

(000)

Short-Term Investment (6.3%)

 

 

 

 

Investment Company (6.3%)

 

 

 

 

Morgan Stanley Institutional Liquidity

 

 

 

 

Money Market Portfolio

 

 

 

 

— Institutional Class (Cost $1,278)

 

(o)1,278,267

 

$

1,278

Total Investments (100.8%) (Cost $21,438)

 

 

 

20,366

Liabilities in Excess of Other Assets (-0.8%)

 

 

 

(159)

Net Assets (100%)

 

 

 

$

20,207

 

(a)

Non-income producing security.

(o)

See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class.

@

Value is less than $500.

REIT

Real Estate Investment Trust

 

The accompanying notes are an integral part of the financial statements.

157

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (unaudited)

 

Emerging Markets Debt Portfolio

 

 

 

* Minimum Investment

 

In accordance with SEC regulations, Portfolio’s performance shown assumes that all recurring fees (including management fees) were deducted and all dividends and distributions were reinvested. The performance of Class B shares will vary from the Class A shares based upon its different inception date and will be negatively impacted by additional fees assessed to this class.

 

Performance Compared to the J.P. Morgan EMBI Global Bond Index/J.P. Morgan GBI-EM Diversified Bond Index(1) , J.P. Morgan Emerging Markets Bond Global Index(2) and the Lipper Emerging Markets Debt Funds Index(3)

 

 

 

Total Returns(4)

 

 

 

 

Average Annual

 

 

One
Year

 

Five
Years

 

Ten
Years

 

Since
Inception

(7)

Portfolio – Class A (5)

 

4.68

%

 

13.22

%

 

7.92

%

10.85

%

 

J.P. Morgan EMBI Global Bond Index/

 

 

 

 

 

 

 

 

 

 

 

 

J.P. Morgan GBI-EM Diversified Bond Index

 

6.84

 

 

12.79

 

 

10.15

 

10.62

 

 

J.P. Morgan Emerging Markets Bond Global Index

 

6.28

 

 

12.67

 

 

10.09

 

10.58

 

 

Lipper Emerging Markets Debt Funds Index

 

5.88

 

 

15.04

 

 

10.01

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Portfolio – Class B (6)

 

4.29

 

 

12.89

 

 

7.64

 

11.42

 

 

J.P. Morgan EMBI Global Bond Index/

 

 

 

 

 

 

 

 

 

 

 

 

J.P. Morgan GBI-EM Diversified Bond Index

 

6.84

 

 

12.79

 

 

10.15

 

12.09

 

 

J.P. Morgan Emerging Markets Bond Global Index

 

6.28

 

 

12.67

 

 

10.09

 

12.05

 

 

Lipper Emerging Markets Debt Funds Index

 

5.88

 

 

15.04

 

 

10.01

 

12.53

 

 

 

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 www.morganstanley.com/msim. 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.

 

(1)

J.P. Morgan EMBI Global Bond Index/J.P. Morgan GBI-EM Diversified Bond Index is a custom index represented by performance of the J.P. Morgan EMBI Global Bond Index (which tracks the performance U.S. dollar - denominated debt instruments issued by emerging markets) for periods from the Portfolio’s inception to September 30, 2007 and the J.P. Morgan GBI-EM Diversified Bond Index (which tracks local currency government bonds issued by emerging markets) for periods thereafter. The J.P. Morgan EMBI Global Bond Index was changed to the J.P. Morgan GBI-EM Diversified Bond Index on October 1, 2007 to more accurately reflect the Portfolio’s amended investible universe effective October 1, 2007 to invest in emerging market debt securities that are denominated in local currencies. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(2)

The J.P. Morgan Emerging Markets Bond Global Index (“J.P. Morgan EMBI Global Bond 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. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.

(3)

The Lipper 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

 

158


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Investment Overview (cont’d)

 

Emerging Markets Debt Portfolio

 

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.

(4)     Total returns for the Portfolio reflect fees waived and expenses reimbursed, if applicable, by the Adviser. Without such waivers and reimbursements, total returns would have been lower. Fee waivers and/or expense 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 February 1, 1994

(6)     Commenced operations 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.

 

The Emerging Markets Debt Portfolio (the “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. In addition, investing in emerging markets may involve a relatively higher degree of volatility. Fixed income securities are subject to credit and interest-rate risk. Credit risk refers to the ability of an issuer to make timely payments of interest and principal. Interest-rate risk refers to fluctuations in the value of a fixed-income security resulting from changes in the general level of interest rates. In a declining interest-rate environment, the portfolio may generate less income. In a rising interest-rate environment, bond prices fall.

 

Performance

 

For the year ended December 31, 2007, the Portfolio had a total return based on net asset value and reinvestment of distributions per

share of 4.68%, net of fees, for Class A shares and 4.29%, net of fees, for Class B shares. The Portfolio’s Class A and Class B shares underperformed against its benchmarks, the J.P. Morgan EMBI Global Bond Index/J.P. Morgan GBI-EM Diversified Bond Index, which returned 6.84%, and the J.P. Morgan Emerging Markets Bond Global Index, which returned 6.28%.

 

Factors Affecting Performance

 

·                  Although emerging market economies were generally insulated from the credit and liquidity crisis emanating from the U.S., yield spreads of U.S. dollar denominated emerging market bonds moved wider, ending the period 84 basis points higher than at the start of the year. Nonetheless, emerging market debt (“EMD”) performed quite strongly for the one-year period, with performance of local currency far outpacing that of external debt in emerging economies.

 

·                  Economic growth across the EMD universe remained strong, with growth rates exceeding 7%. Emerging market currencies rallied against the U.S. dollar as the prospect of slower economic growth and lower interest rates in the U.S. put considerable pressure on the dollar. As a result, local currency denominated debt enjoyed strong returns.

 

·                  An emphasis on local currency denominated securities in the Portfolio was additive to performance. An underweight in Pakistani debt was also beneficial as ongoing political strife in the country hurt bond performance. Security selection in Venezuela also helped boost returns.

 

·                  Detractors from performance in the Portfolio included overweights in Russian quasi-sovereign bonds and Argentine domestic bonds.

 

Management Strategies

 

·                  The Portfolio favored local currency denominated securities in Brazil, Mexico, Turkey, and a few other smaller countries. We saw significant value in local currency denominated EMD securities relative to U.S. dollar denominated debt.

 

·                  Later in the year, we focused on countries with strong liquidity positions or countries less dependent on international capital markets for financing.

 

·                  Effective the fourth quarter of 2007, the Portfolio’s investment focus shifted from external (U.S. dollar denominated) debt to local currency debt. In our view, the local currency market offers greater relative value for a variety of reasons. Unlike in the external debt market, valuations in local currency debt have generally lagged fundamental macroeconomic improvements in the emerging market countries. Local EMD markets also offer the potential for currency gains as well as greater relative diversification due to their low correlation with equity and other fixed income asset classes. Local emerging market returns are more subject to local macroeconomic and policy outcomes and therefore, are less prone to contagion. To reflect the Portfolio’s change in focus, its benchmark has changed to the J.P. Morgan GBI-EM Global Diversified Bond Index.

 

Expense Examples

 

As a shareholder of the Portfolio, you may incur two types of costs: (1) transactional costs, including redemption fees; (2) ongoing costs, including management fees, shareholder servicing 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

 

159


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Investment Overview (cont’d)

 

Emerging Markets Debt 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, 2007 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.

 

Please note that “Expenses Paid During Period” are grossed up to reflect Portfolio expenses prior to the effect of Expense Offset (See Note E in the Notes to Financial Statements). Therefore, the annualized net expense ratios may differ from the ratio of the expenses to average net assets shown in the Financial Highlights.

 

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.

 

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

 

 

Beginning
Account Value
July 1, 2007

 

 

Ending
Account Value
December 31,
2007

 

 

Expenses Paid
During Period*
July 1, 2007 —
December 31,
2007

 

 

Class A

 

 

 

 

 

 

 

Actual

 

$1,000.00

 

$1,018.70

 

$4.83

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,020.42

 

4.84

 

 

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

 

Actual

 

1,000.00

 

1,018.00

 

6.21

 

Hypothetical (5% average annual return before expenses)

 

1,000.00

 

1,019.06

 

6.21

 

 

 

*

Expenses are equal to Class A and Class B annualized net expense ratios of 0.95% and 1.22%, respectively, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).

 

Graphic Presentation of Portfolio Holdings

 

The following graph depicts the Portfolio’s holdings by industry and/or security type, as a percentage of total investments.

 

 

*

Industries which do not appear in the above graph, as well as those which represent less than 5% of total investments, if applicable, are included in the category labeled “Other”.

 

160


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Portfolio of Investments

 

Emerging Markets Debt Portfolio

 

 

 

 

Face

 

 

 

 

 

 

Amount

 

Value

 

 

 

 

(000)

 

(000)

 

Debt Instruments (93.8%)

 

 

 

 

 

 

 

Argentina (5.6%)

 

 

 

 

 

 

 

Sovereign (5.6%)

 

 

 

 

 

 

 

Republic of Argentina,

 

 

 

 

 

 

 

1.32%, 12/15/35

 

$

(d)(h) 298

 

$          34

 

 

1.38%, 12/15/35

 

ARS

(h)16,231

 

458

 

 

5.83%, 12/31/33

 

$

5,000

 

1,874

 

 

8.28%, 12/31/33

 

 

(d)119

 

114

 

 

Republic of Argentina (Linked Variable Rate),

 

 

 

 

 

 

 

41.43%, (expired maturity)

 

 

(b)1,120

 

528

 

 

 

 

 

 

 

3,008

 

 

Brazil (16.0%)

 

 

 

 

 

 

 

Corporate (1.0%)

 

 

 

 

 

 

 

Banco ABN Amro Real S.A.,

 

 

 

 

 

 

 

16.20%, 2/22/10

 

BRL

890

 

540

 

 

Sovereign (15.0%)

 

 

 

 

 

 

 

Citigroup, Inc., Nota do Tesouro Nacional

 

 

 

 

 

 

 

Credit Linked Notes,

 

 

 

 

 

 

 

6.00%, 5/18/09

 

 

800

 

1,087

 

 

Federative Republic of Brazil,

 

 

 

 

 

 

 

10.00%, 1/1/14

 

 

11,600

 

6,036

 

 

JPMorgan Chase & Co., Nota do Tesouro

 

 

 

 

 

 

 

Nacional Credit Linked Notes,

 

 

 

 

 

 

 

10.00%, 1/1/12

 

 

1,710

 

922

 

 

 

 

 

 

 

8,045

 

 

 

 

 

 

 

8,585

 

 

Colombia (3.4%)

 

 

 

 

 

 

 

Sovereign (3.4%)

 

 

 

 

 

 

 

Republic of Colombia,

 

 

 

 

 

 

 

12.00%, 10/22/15

 

COP

3,300,000

 

1,832

 

 

Egypt (3.9%)

 

 

 

 

 

 

 

Sovereign (3.9%)

 

 

 

 

 

 

 

Arab Republic of Egypt,

 

 

 

 

 

 

 

8.75%, 7/18/12

 

EGP

(e)11,120

 

2,078

 

 

Hungary (11.9%)

 

 

 

 

 

 

 

Sovereign (11.9%)

 

 

 

 

 

 

 

Republic of Hungary,

 

 

 

 

 

 

 

6.25%, 8/24/10

 

HUF

103,500

 

581

 

 

6.75%, 4/12/10

 

 

445,000

 

2,533

 

 

6.75%, 2/24/17

 

 

110,960

 

626

 

 

7.25%, 6/12/12

 

 

468,000

 

2,689

 

 

 

 

 

 

 

6,429

 

 

Indonesia (13.7%)

 

 

 

 

 

 

 

Sovereign (13.7%)

 

 

 

 

 

 

 

Barclays Bank plc, Republic of Indonesia

 

 

 

 

 

 

 

Government Bonds Credit Linked Notes,

 

 

 

 

 

 

 

10.00%, 7/15/17

 

 IDR

20,000,000

 

2,252

 

 

Citigroup, Inc., Republic of Indonesia

 

 

 

 

 

 

 

Government Bonds Credit Linked Notes,

 

 

 

 

 

 

 

10.00%, 7/15/17

 

$

882

 

831

 

 

Credit Suisse, Republic of Indonesia

 

 

 

 

 

 

 

Government Bonds Credit Linked Notes,

 

 

 

 

 

 

 

10.00%, 7/15/17

 

 IDR

20,000,000

 

$     2,151

 

 

UBS AG, Republic of Indonesia

 

 

 

 

 

 

 

Government Credit Linked Notes,

 

 

 

 

 

 

 

10.00%, 7/15/17

 

$

20,000,000

 

2,151

 

 

 

 

 

 

 

7,385

 

 

Malaysia (1.9%)

 

 

 

 

 

 

 

Sovereign (1.9%)

 

 

 

 

 

 

 

Government of Malaysia,

 

 

 

 

 

 

 

3.76%, 4/28/11

 

MYR

3,437

 

1,045

 

 

Mexico (12.3%)

 

 

 

 

 

 

 

Sovereign (12.3%)

 

 

 

 

 

 

 

Mexican Bonos,

 

 

 

 

 

 

 

8.00%, 12/17/15

 

MXN

43,580

 

3,955

 

 

9.50%, 12/18/14

 

 

19,630

 

1,934

 

 

10.00%, 12/5/24

 

 

7,058

 

753

 

 

 

 

 

 

 

6,642

 

 

Nigeria (1.9%)

 

 

 

 

 

 

 

Corporate (1.9%)

 

 

 

 

 

 

 

Shell Petroleum Development Co.,

 

 

 

 

 

 

 

Credit Linked Notes,

 

 

 

 

 

 

 

Zero Coupon, 2/25/08

 

$

992

 

999

 

 

Peru (3.7%)

 

 

 

 

 

 

 

Sovereign (3.7%)

 

 

 

 

 

 

 

Republic of Peru,

 

 

 

 

 

 

 

12.25%, 8/10/11

 

PEN

4,980

 

1,993

 

 

Russia (1.0%)

 

 

 

 

 

 

 

Corporate (1.0%)

 

 

 

 

 

 

 

JPMorgan Chase & Co.

 

 

 

 

 

 

 

7.00%, 6/28/17

 

RUB

14,000

 

530

 

 

South Africa (9.6%)

 

 

 

 

 

 

 

Corporate (2.4%)

 

 

 

 

 

 

 

International Finance Corp.,

 

 

 

 

 

 

 

11.00%, 7/1/09

 

ZAR

8,760

 

1,280

 

 

Sovereign (7.2%)

 

 

 

 

 

 

 

Republic of South Africa,

 

 

 

 

 

 

 

13.00%, 8/31/10

 

 

(c)24,580

 

3,896

 

 

 

 

 

 

 

5,176

 

 

Turkey (8.9%)

 

 

 

 

 

 

 

Sovereign (8.9%)

 

 

 

 

 

 

 

Republic of Turkey,

 

 

 

 

 

 

 

Zero Coupon, 8/5/09

 

TRY

7,150

 

4,780

 

 

Total Debt Instruments (Cost $51,177)

 

 

 

 

50,482

 

 

 

 

 

No.of

 

 

 

 

 

 

 

Warrants

 

 

 

 

Warrants (0.2%)

 

 

 

 

 

 

 

Venezuela (0.2%)

 

 

 

 

 

 

 

Republic of Venezuela, Oil-Linked

 

 

 

 

 

 

 

Payment Obligation, sexpiring 4/15/20

 

 

(a)(d)2,700

 

101

 

 

Total Warrants (Cost $ —)

 

 

 

 

101

 

 

 

The accompanying notes are an integral part of the financial statements.

161

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Portfolio of Investments (cont’d)

 

Emerging Markets Debt Portfolio

 

 

 

Face

 

 

 

 

 

Amount

 

 

Value

 

 

(000

)

 

(000)

Short-Term Investments (11.3%)

 

 

 

 

 

Short-Term Debt Securities held as Collateral on Loaned Securities (7.8%)

 

 

 

 

 

Alliance & Leicester plc,

 

 

 

 

 

5.26%, 9/2/08

$

(h)125

 

$

125

Bancaja,

 

 

 

 

 

5.35%, 8/12/08

 

63

 

 

63

Bank of New York Co., Inc.,

 

 

 

 

 

5.24%, 8/8/08

 

(h)63

 

 

63

BASF AG,

 

 

 

 

 

5.18%, 8/19/08

 

(h)63

 

 

63

BNP Paribas plc,

 

 

 

 

 

4.90%, 5/19/08

 

(h)125

 

 

125

CAM US Finance S.A. Unipersonal,

 

 

 

 

 

5.24%, 7/25/08

 

(h)251

 

 

251

Canadian Imperial Bank of Commerce, New York,

 

 

 

 

 

4.42%, 7/28/08

 

(h)126

 

 

126

CC USA, Inc.,

 

 

 

 

 

3.89%, 1/28/08

 

(h)63

 

 

63

CIT Group Holdings,

 

 

 

 

 

5.23%, 6/18/08

 

(h)226

 

 

226

Citigroup Global Markets Holdings, Inc.,

 

 

 

 

 

4.51%, 1/2/08

 

856

 

 

856

Credit Suisse First Boston, New York,

 

 

 

 

 

4.32%, 3/14/08

 

(h)126

 

 

126

First Tennessee Bank,

 

 

 

 

 

5.05%, 8/15/08

 

(h)63

 

 

63

5.06%, 8/15/08

 

(h)251

 

 

251

Goldman Sachs Group, Inc.,

 

 

 

 

 

4.62%, 2/13/09

 

(h)118

 

 

118

5.10%, 9/12/08

 

(h)63

 

 

63

HSBC Finance Corp.,

 

 

 

 

 

5.26%, 8/5/08

 

(h)63

 

 

63

IBM Corp.,

 

 

 

 

 

5.27%, 9/8/08

 

(h)251

 

 

251

Lehman Brothers, Inc.,

 

 

 

 

 

4.49%, 1/2/08

 

107

 

 

107

Macquarie Bank Ltd.,

 

 

 

 

 

4.95%, 8/20/08

 

(h)126

 

 

126

Metropolitan Life Global Funding,

 

 

 

 

 

4.89%, 8/21/08

 

(h)188

 

 

188

National Bank of Canada,

 

 

 

 

 

5.21%, 4/2/08

 

(h)251

 

 

251

National Rural Utilities Cooperative Finance Corp.,

 

 

 

 

 

5.24%, 9/2/08

 

(h)251

 

 

251

Nationwide Building Society,

 

 

 

 

 

4.92%, 7/28/08

 

(h)146

 

 

146

Unicredito Italiano Bank (Ireland) plc,

 

 

 

 

 

5.04%, 8/14/08

 

(h)138

 

 

138

5.26%, 8/8/08

 

(h)88

 

 

88

 

 

 

 

 

4,191

 

 

 

 

 

 

 

 

 

 

 

Value

 

 

Shares

 

 

(000)

Investment Company (3.5%)

 

 

 

 

 

Morgan Stanley Institutional Liquidity

 

 

 

 

 

Money Market Portfolio

 

 

 

 

 

— Institutional Class

 

(o)1,887,153

 

$

1,887

Total Short-Term Investments (Cost $6,078)

 

 

 

 

6,078

Total Investments (105.3%) (Cost $57,255)

 

 

 

 

 

— including $4,055 of Securities Loaned

 

 

 

 

56,661

Liabilities in Excess of Other Assets (-5.3%)

 

 

 

 

(2,831)

Net Assets (100%)

 

 

 

$

53,830

 

(a)

Non-income producing security.

(b)

Issuer is in default.

(c)

All or portion of security on loan at December 31, 2007.

(d)

Securities were valued at fair value — At December 31, 2007, the Portfolio held approximately $249,000 of fair valued securities, representing less than 0.5% of net assets.

 

(e)

144A security — Certain conditions for public sale may exist.

(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, 2007.

 

(o)

See Note F within the Notes to Financial Statements regarding investment in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class.

 

ARS

Argentina Peso

BRL

Brazilian Real

COP

Colombian Peso

EGP

Egypt Pound

HUF

Hungarian Forint

IDR

Indonesian Rupiah

MYR

Malaysian Ringgit

MXN

Mexican Peso

PEN

Peruvian Sol

RUB

Russian Ruble

TRY

Turkish Lira

ZAR

South African Rand

 

 

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)

 

USD

1,005

 

 

$1,005

 

 

 

12/01/08

 

 

AED

3,589

 

 

 

$1,000

 

 

 

$  (5)

 

 

USD

4,242

 

 

4,242

 

 

 

6/11/08

 

 

EUR

2,892

 

 

 

4,230

 

 

 

(12)

 

 

USD

4,242

 

 

4,242

 

 

 

6/11/08

 

 

EUR

2,895

 

 

 

4,235

 

 

 

(7)

 

 

 

 

 

$9,489

 

 

 

 

 

 

 

 

 

$9,465

 

 

 

$(24)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AED — United Arab Emirates Dirham

EUR — Euro

USD — United States Dollar

 

162

The accompanying notes are an integral part of the financial statements.

 


 

2007 Annual Report

 

December 31, 2007

 

Statements of Assets and Liabilities

 

 

 

Active
International
Allocation
Portfolio
(000)

 

Emerging
Markets
Portfolio
(000)

 

Global Franchise
Portfolio
(000)

 

Global
Real Estate
Portfolio
(000)

 

Assets:

 

 

 

 

 

 

 

 

 

Investments in Securities of Unaffiliated Issuers, at Cost:

 

$

851,153

 

$

2,637,004

 

$

86,750

 

$

692,325

 

Investment(s) in Securities of Affiliated Issuer(s), at Cost:

 

 

71,488

 

 

38,982

 

 

2,268

 

 

—

 

Total Investments in Securities, at Cost:

 

 

922,641

 

 

2,675,986

 

 

89,018

 

 

692,325

 

Foreign Currency, at Cost:

 

 

2,106

 

 

7,403

 

 

58

 

 

191

 

Investments in Securities of Unaffiliated Issuers, at Value:(1)

 

 

1,105,267

 

 

3,694,161

 

 

113,813

 

 

621,641

 

Investment(s) in Securities of Affiliated Issuer(s), at Value:

 

 

71,488

 

 

63,941

 

 

2,268

 

 

—

 

Total Investments in Securities, at Value:

 

 

1,176,755

 

 

3,758,102

 

 

116,081

 

 

621,641

 

Foreign Currency, at Value:

 

 

2,089

 

 

7,417

 

 

59

 

 

192

 

Cash

 

 

352

 

 

1,784

 

 

—

 

 

—

 

Due from Administrator

 

 

—

 

 

318

 

 

—

 

 

—

 

Due from Broker

 

 

23,386

 

 

—

 

 

—

 

 

—

 

Receivable for Portfolio Shares Sold

 

 

862

 

 

6,955

 

 

—

 

 

21,299

 

Receivable for Investments Sold

 

 

4,031

 

 

31,642

 

 

—

 

 

9,215

 

Unrealized Appreciation on Foreign Currency Exchange Contracts

 

 

1,022

 

 

11

 

 

384

 

 

1

 

Foreign Withholding Tax Reclaim Receivable

 

 

105

 

 

1,141

 

 

86

 

 

51

 

Receivable from Affiliate(s)

 

 

15

 

 

10

 

 

1

 

 

6

 

Dividends Receivable

 

 

951

 

 

2,493

 

 

132

 

 

3,319

 

Interest Receivable

 

 

344

 

 

147

 

 

6

 

 

66

 

Other Assets

 

 

16

 

 

43

 

 

2

 

 

6

 

Total Assets

 

 

1,209,928

 

 

3,810,063

 

 

116,751

 

 

655,796

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateral on Securities Loaned, at Value:

 

 

106,330

 

 

263,443

 

 

—

 

 

2,631

 

Unrealized Depreciation on Foreign Currency Exchange Contracts

 

 

1,599

 

 

137

 

 

—

 

 

20

 

Payable for Investments Purchased

 

 

10

 

 

24,232

 

 

—

 

 

737

 

Payable for Portfolio Shares Redeemed

 

 

363

 

 

2,392

 

 

—

 

 

2,208

 

Payable for Investment Advisory Fees

 

 

1,821

 

 

10,045

 

 

236

 

 

1,376

 

Bank Overdraft

 

 

—

 

 

—

 

 

—

 

 

2,752

 

Payable for Administration Fees

 

 

76

 

 

239

 

 

8

 

 

45

 

Payable for Custodian Fees

 

 

124

 

 

886

 

 

14

 

 

61

 

Payable for Directors’ Fees and Expenses

 

 

15

 

 

61

 

 

@—

 

 

@—

 

Deferred Capital Gain Country Tax

 

 

443

 

 

5,337

 

 

—

 

 

—

 

Payable for Shareholder Servicing Fees — Class B

 

 

1

 

 

38

 

 

1

 

 

3

 

Other Liabilities

 

 

126

 

 

289

 

 

30

 

 

39

 

Total Liabilities

 

 

110,908

 

 

307,099

 

 

289

 

 

9,872

 

Net Assets

 

$

1,099,020

 

$

3,502,964

 

$

116,462

 

$

645,924

 

Net Assets Consist Of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid-in Capital

 

$

812,144

 

$

2,330,258

 

$

87,080

 

$

733,151

 

Undistributed (Distributions in Excess of) Net Investment Income

 

 

(2,542

)

 

(24,956

)

 

525

 

 

(13,261

)

Accumulated Net Realized Gain (Loss)

 

 

34,227

 

 

120,783

 

 

1,396

 

 

(3,296

)

Unrealized Appreciation (Depreciation) on:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

253,674

*

 

1,076,769

*

 

27,063

 

 

(70,684

)

Foreign Currency Exchange Contracts and Translations

 

 

(639

)

 

110

 

 

398

 

 

14

 

Futures Contracts

 

 

2,156

 

 

—

 

 

—

 

 

—

 

Net Assets

 

$

1,099,020

 

$

3,502,964

 

$

116,462

 

$

645,924

 

 

 

The accompanying notes are an integral part of the financial statements.

163

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Statements of Assets and Liabilities

 

 

 

Active
International
Allocation
Portfolio

 

Emerging
Markets
Portfolio

 

Global
Franchise
Portfolio

 

Global
Real Estate
Portfolio

 

 

 

(000)

 

(000)

 

(000)

 

(000)

 

CLASS A:

 

 

 

 

 

 

 

 

 

 

Net Assets

 

$

1,093,735

 

$

3,323,130

 

$

110,135

 

$

632,737

 

Shares Outstanding $0.001 par value shares of beneficial interest (500,000,000 shares authorized) (not in 000’s)

 

 

68,720,141

 

 

97,672,429

 

 

6,628,283

 

 

63,036,988

 

Net Asset Value, Offering and Redemption Price Per Share

 

$

15.92

 

$

34.02

 

$

16.62

 

$

10.04

 

CLASS B:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Assets

 

$

5,285

 

$

179,834

 

$

6,327

 

$

13,187

 

Shares Outstanding $0.001 par value shares of beneficial interest (500,000,000 shares authorized) (not in 000’s)

 

 

326,161

 

 

5,373,836

 

 

384,962

 

 

1,316,749

 

Net Asset Value, Offering and Redemption Price Per Share

 

$

16.20

 

$

33.46

 

$

16.44

 

$

10.02

 

(1) Including:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities on Loan, at Value:

 

$

101,774

 

$

252,057

 

$

—

 

$

2,594

 

@    Amount is less than $500.

*      Net of $440 and $5,347 Deferred Capital Gain Country Tax on unrealized appreciation in Active International Allocation and Emerging Markets, respectively.

 

164

The accompanying notes are an integral part of the financial statements.

 

 


 

2007 Annual Report

 

December 31, 2007

 

Statements of Assets and Liabilities

 

 

 

Global Value
Equity
Portfolio
(000)

 

International
Equity
Portfolio
(000)

 

International
Growth Active Extension
Portfolio
(000)

 

International
Growth Equity
Portfolio
(000)

 

Assets:

 

 

 

 

 

 

 

 

 

Investments in Securities of Unaffiliated Issuers, at Cost:

 

$

73,751

 

 

$

5,289,717

 

$ 

12,988

 

 

$

21,308

 

 

Investment in Security of Affiliated Issuer:

 

 

783

 

 

 

108,256

 

 

43

 

 

 

13,311

 

 

Total Investments in Securities, at Cost:

 

 

74,534

 

 

 

5,397,973

 

 

13,031

 

 

 

34,619

 

 

Foreign Currency, at Cost:

 

 

96

 

 

 

1,878

 

 

21

 

 

 

219

 

 

Investments in Securities of Unaffiliated Issuers, at Value:(1)

 

 

93,959

 

 

 

6,539,165

 

 

13,563

 

 

 

23,157

 

 

Investment in Security of Affiliated Issuer, at Value:

 

 

783

 

 

 

108,256

 

 

43

 

 

 

13,311

 

 

Total Investments in Securities, at Value:

 

 

94,742

 

 

 

6,647,421

 

 

13,606

 

 

 

36,468

 

 

Foreign Currency, at Value:

 

 

98

 

 

 

1,872

 

 

21

 

 

 

219

 

 

Due from Advisor

 

 

—

 

 

 

—

 

 

12

 

 

 

20

 

 

Due from Administrator

 

 

—

 

 

 

155

 

 

—

 

 

 

—

 

 

Receivable for Portfolio Shares Sold

 

 

1

 

 

 

5,558

 

 

—

 

 

 

—

 

 

Receivable for Investments Sold

 

 

9

 

 

 

492

 

 

255

 

 

 

251

 

 

Unrealized Appreciation on Foreign Currency Exchange Contracts

 

 

99

 

 

 

10

 

 

@—

 

 

 

—

 

 

Foreign Withholding Tax Reclaim Receivable

 

 

10

 

 

 

673

 

 

—

 

 

 

5

 

 

Receivable from Affiliate

 

 

@—

 

 

 

38

 

 

@—

 

 

 

@—

 

 

Dividends Receivable

 

 

102

 

 

 

4,050

 

 

5

 

 

 

2

 

 

Interest Receivable

 

 

3

 

 

 

476

 

 

1

 

 

 

8

 

 

Other Assets

 

 

2

 

 

 

109

 

 

@—

 

 

 

1

 

 

Total Assets

 

 

95,066

 

 

 

6,660,854

 

 

13,900

 

 

 

36,974

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateral on Securities Loaned, at Value:

 

 

4,604

 

 

 

468,328

 

 

—

 

 

 

610

 

 

Unrealized Depreciation on Foreign Currency Exchange Contracts

 

 

—

 

 

 

9

 

 

2

 

 

 

1

 

 

Payable for Investments Purchased

 

 

11

 

 

 

—

 

 

83

 

 

 

13,075

 

 

Bank Overdraft

 

 

—

 

 

 

42

 

 

4

 

 

 

203

 

 

Payable for Portfolio Shares Redeemed

 

 

1

 

 

 

51,875

 

 

—

 

 

 

—

 

 

Payable for Investment Advisory Fees

 

 

155

 

 

 

13,191

 

 

—

 

 

 

—

 

 

Payable for Administration Fees

 

 

6

 

 

 

432

 

 

1

 

 

 

1

 

 

Payable for Custodian Fees

 

 

8

 

 

 

494

 

 

5

 

 

 

5

 

 

Payable for Directors’ Fees and Expenses

 

 

8

 

 

 

174

 

 

—

 

 

 

@—

 

 

Payable for Shareholder Servicing Fees — Class B

 

 

5

 

 

 

227

 

 

@—

 

 

 

@—

 

 

Payable for Dividend Income on Short Positions

 

 

—

 

 

 

—

 

 

9

 

 

 

—

 

 

Securities Sold Short, at Value (Proceeds $3,311)

 

 

—

 

 

 

—

 

 

3,125

 

 

 

—

 

 

Deferred Capital Gain Country Tax

 

 

—

 

 

 

—

 

 

—

 

 

 

1

 

 

Other Liabilities

 

 

34

 

 

 

680

 

 

12

 

 

 

24

 

 

Total Liabilities

 

 

4,832

 

 

 

535,452

 

 

3,241

 

 

 

13,920

 

 

Net Assets

 

$

90,234

 

 

 $

6,125,402

 

$ 

10,659

 

 

$ 

23,054

 

 

Net Assets Consist Of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid-in Capital

 

$

70,076

 

 

 $

4,751,752

 

$ 

9,986

 

 

$

20,957

 

 

Undistributed (Distributions in Excess of) Net Investment Income

 

 

58

 

 

 

(3,623

)

 

—

 

 

 

—

 

 

Accumulated Net Investment Loss

 

 

—

 

 

 

—

 

 

(3

)

 

 

—

 

 

Accumulated Net Realized Gain (Loss)

 

 

(209

)

 

 

127,872

 

 

(85

)

 

 

267

 

 

Unrealized Appreciation (Depreciation) on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

20,208

 

 

 

1,249,448

 

 

575

 

 

 

1,849

*

 

Foreign Currency Exchange Contracts and Translations

 

 

101

 

 

 

(47

)

 

@—

 

 

 

(19

)

 

Securities Sold Short

 

 

—

 

 

 

—

 

 

186

 

 

 

—

 

 

Net Assets

 

$

90,234

 

 

 $

6,125,402

 

$ 

10,659

 

 

$ 

23,054

 

 

 

 

The accompanying notes are an integral part of the financial statements.

165

 


 

2007 Annual Report

 

December 31, 2007

 

Statements of Assets and Liabilities

 

 

 

Global Value
Equity
Portfolio
(000)

 

International
Equity
Portfolio
(000)

 

International
Growth Active Extension
Portfolio
(000)

 

International
Growth Equity
Portfolio
(000)

 

CLASS A:

 

 

 

 

 

 

 

 

 

Net Assets

 

$

66,035

 

$

5,105,807

 

$

10,553

 

 

$

22,523

 

 

Shares Outstanding $0.001 par value shares of beneficial interest (500,000,000 shares authorized) (not in 000’s)

 

 

3,730,674

 

 

269,926,698

 

 

990,000

 

 

 

1,636,603

 

 

Net Asset Value, Offering and Redemption Price Per Share

 

$ 

17.70

 

$ 

18.92

 

$ 

10.66

 

 

$ 

13.76

 

 

CLASS B:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Assets

 

$

24,199

 

$

1,019,595

 

$

106

 

 

$

531

 

 

Shares Outstanding $0.001 par value shares of beneficial interest (500,000,000 shares authorized) (not in 000’s)

 

 

1,384,000

 

 

54,447,607

 

 

10,000

 

 

 

38,535

 

 

Net Asset Value, Offering and Redemption Price Per Share

 

$ 

17.48

 

$ 

18.73

 

$ 

10.65

 

 

$ 

13.78

 

 

(1) Including:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities on Loan, at Value:

 

$

4,408

 

$

448,800

 

$

—

 

 

$

580

 

 

@    Amount is less than $500.

 

*      Net of $1 Deferred Capital Gain Country Tax on unrealized depreciation in International Growth Equity.

 

 

166

The accompanying notes are an integral part of the financial statements.

 

 


 

2007 Annual Report

 

December 31, 2007

 

Statements of Assets and Liabilities

 

 

 

International
Magnum
Portfolio
(000)

 

International
Real Estate
Portfolio
(000)

 

International
Small Cap
Portfolio
(000)

 

Disciplined
Large Cap Value
Active Extension
Portfolio
(000)

 

Assets:

 

 

 

 

 

 

 

Investments in Securities of Unaffiliated Issuers, at Cost:

 

$

115,530

 

$

1,328,193

 

$

727,180

 

$

12,491

 

 

Investment in Security of Affiliated Issuer, at Cost:

 

 

6,786

 

 

—

 

 

—

 

 

83

 

 

Total Investments in Securities, at Cost:

 

 

122,316

 

 

1,328,193

 

 

727,180

 

 

12,574

 

 

Foreign Currency, at Cost:

 

 

231

 

 

110

 

 

85

 

 

—

 

 

Investments in Securities of Unaffiliated Issuers, at Value:

 

 

143,721

 

 

1,167,622

 

 

782,661

 

 

11,697

 

 

Investment in Security of Affiliated Issuer, at Value:

 

 

6,786

 

 

—

 

 

—

 

 

83

 

 

Total Investments in Securities, at Value:

 

 

150,507

 

 

1,167,622

 

 

782,661

 

 

11,780

 

 

Foreign Currency, at Value:

 

 

235

 

 

110

 

 

86

 

 

—

 

 

Cash

 

 

—

 

 

—

 

 

—

 

 

150

 

 

Due from Advisor

 

 

—

 

 

—

 

 

—

 

 

10

 

 

Due from Broker

 

 

230

 

 

—

 

 

—

 

 

—

 

 

Receivable for Portfolio Shares Sold

 

 

160

 

 

4,907

 

 

314

 

 

—

 

 

Receivable for Investments Sold

 

 

1,297

 

 

3,186

 

 

41,651

 

 

—

 

 

Unrealized Appreciation on Foreign Currency Exchange Contracts

 

 

142

 

 

—

 

 

93

 

 

—

 

 

Foreign Withholding Tax Reclaim Receivable

 

 

34

 

 

500

 

 

830

 

 

—

 

 

Receivable from Affiliate

 

 

2

 

 

4

 

 

2

 

 

@—

 

 

Dividends Receivable

 

 

63

 

 

2,501

 

 

1,680

 

 

17

 

 

Interest Receivable

 

 

30

 

 

11

 

 

57

 

 

@—

 

 

Other Assets

 

 

2

 

 

24

 

 

20

 

 

—

 

 

Total Assets

 

 

152,702

 

 

1,178,865

 

 

827,394

 

 

11,957

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateral on Securities Loaned, at Value:

 

 

15,980

 

 

—

 

 

—

 

 

—

 

 

Unrealized Depreciation on Foreign Currency Exchange Contracts

 

 

486

 

 

20

 

 

277

 

 

—

 

 

Payable for Investments Purchased

 

 

419

 

 

—

 

 

517

 

 

—

 

 

Payable for Portfolio Shares Redeemed

 

 

18

 

 

12,078

 

 

8,066

 

 

—

 

 

Bank Overdraft

 

 

—

 

 

12,606

 

 

19,706

 

 

—

 

 

Payable for Investment Advisory Fees

 

 

244

 

 

2,964

 

 

2,428

 

 

—

 

 

Payable for Administration Fees

 

 

9

 

 

88

 

 

62

 

 

1

 

 

Payable for Custodian Fees

 

 

23

 

 

136

 

 

127

 

 

4

 

 

Payable for Directors’ Fees and Expenses

 

 

8

 

 

1

 

 

15

 

 

@—

 

 

Payable for Shareholder Servicing Fees — Class B

 

 

@—

 

 

22

 

 

—

 

 

@—

 

 

Deferred Capital Gain Country Tax

 

 

1

 

 

—

 

 

—

 

 

—

 

 

Payable for Dividend Income on Short Positions

 

 

—

 

 

—

 

 

—

 

 

6

 

 

Securities Sold Short, at Value (Proceeds $2,977)

 

 

—

 

 

—

 

 

—

 

 

2,650

 

 

Other Liabilities

 

 

33

 

 

132

 

 

146

 

 

17

 

 

Total Liabilities

 

 

17,221

 

 

28,047

 

 

31,344

 

 

2,678

 

 

Net Assets

 

$

135,481

 

$

1,150,818

 

$

796,050

 

$

9,279

 

 

Net Assets Consist Of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid-in Capital

 

$

105,489

 

$

1,352,072

 

$

715,906

 

$

9,999

 

 

Undistributed (Distributions in Excess of) Net Investment Income

 

 

(237

)

 

(34,483

)

 

(144

)

 

—

 

 

Accumulated Net Realized Gain (Loss)

 

 

2,366

 

 

(6,174

)

 

24,575

 

 

(253

)

 

Unrealized Appreciation (Depreciation) on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

28,191

*

 

(160,571

)

 

55,481

 

 

(794

)

 

Foreign Currency Exchange Contracts and Translations

 

 

(328

)

 

(26

)

 

232

 

 

—

 

 

Securities Sold Short

 

 

—

 

 

—

 

 

—

 

 

327

 

 

Net Assets

 

$

135,481

 

$

1,150,818

 

$

796,050

 

$

9,279

 

 

 

 

The accompanying notes are an integral part of the financial statements.

167

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Statements of Assets and Liabilities

 

 

 

International
Magnum
Portfolio
(000)

 

International
Real Estate
Portfolio
(000)

 

International
Small Cap
Portfolio
(000)

 

Disciplined
Large Cap Value
Active Extension
Portfolio
(000)

 

CLASS A:

 

 

 

 

 

 

 

 

 

Net Assets

 

$

133,077

 

$

1,053,018

 

$

796,050

 

$

9,193

 

 

Shares Outstanding $0.001 par value shares of beneficial interest (500,000,000 shares authorized) (not in 000’s)

 

 

8,950,001

 

 

41,616,700

 

 

46,594,911

 

 

1,071,395

 

 

Net Asset Value, Offering and Redemption Price Per Share

 

$

14.87

 

$

25.30

 

$

17.08

 

$

8.58

 

 

CLASS B:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Assets

 

$

2,404

 

$

97,800

 

$

—

 

$

86

 

 

Shares Outstanding $0.001 par value shares of beneficial interest (500,000,000 shares authorized) (not in 000’s)

 

 

162,230

 

 

3,861,661

 

 

—

 

 

10,000

 

 

Net Asset Value, Offering and Redemption Price Per Share

 

$

14.82

 

$

25.33

 

$

—

 

$

8.58

 

 

(1) Including:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities on Loan, at Value:

 

$

15,270

 

$

—

 

$

—

 

$

—

 

 

@    Amount is less than $500.

 

 

 

 

 

 

 

 

 

*      Net of $@ Deferred Capital Gain Country Tax on unrealized depreciation in International Magnum.

 

 

168

The accompanying notes are an integral part of the financial statements.

 

 


 

2007 Annual Report

 

December 31, 2007

 

Statements of Assets and Liabilities

 

 

 

Focus
Equity
Portfolio
(000)

 

Large Cap
Relative Value
Portfolio
(000)

 

Small
Company
Growth
Portfolio
(000)

 

Systematic
Active Large
Cap Core
Portfolio
(000)

 

Assets:

 

 

 

 

 

 

 

 

Investments in Securities of Unaffiliated Issuers, at Cost:

 

$

12,362

 

$

251,497

 

$

1,563,166

 

$

6,434

 

 

Investment in Security of Affiliated Issuer, at Cost:

 

 

1,147

 

 

4,943

 

 

13,933

 

 

280

 

 

Total Investments in Securities, at Cost:

 

 

13,509

 

 

256,440

 

 

1,577,099

 

 

6,714

 

 

Foreign Currency, at Cost:

 

 

19

 

 

—

 

 

1

 

 

—

 

 

Investments in Securities of Unaffiliated Issuers, at Value:(1)

 

 

15,692

 

 

284,432

 

 

1,829,507

 

 

7,152

 

 

Investment in Security of Affiliated Issuer, at Value:

 

 

1,147

 

 

4,943

 

 

13,933

 

 

280

 

 

Total Investments in Securities, at Value:

 

 

16,839

 

 

289,375

 

 

1,843,440

 

 

7,432

 

 

Foreign Currency, at Value:

 

 

19

 

 

—

 

 

1

 

 

—

 

 

Cash

 

 

18

 

 

@—

 

 

—

 

 

—

 

 

Receivable for Portfolio Shares Sold

 

 

1

 

 

11

 

 

19,279

 

 

—

 

 

Receivable from Affiliate

 

 

@—

 

 

2

 

 

15

 

 

@—

 

 

Dividends Receivable

 

 

2

 

 

324

 

 

1,326

 

 

6

 

 

Interest Receivable

 

 

5

 

 

22

 

 

148

 

 

2

 

 

Other Assets

 

 

@—

 

 

5

 

 

31

 

 

@—

 

 

Total Assets

 

 

16,884

 

 

289,739

 

 

1,864,240

 

 

7,440

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateral on Securities Loaned, at Value:

 

 

—

 

 

—

 

 

—

 

 

743

 

 

Due to Broker

 

 

—

 

 

—

 

 

—

 

 

2

 

 

Payable for Investments Purchased

 

 

69

 

 

215

 

 

—

 

 

—

 

 

Payable for Portfolio Shares Redeemed

 

 

@—

 

 

1,985

 

 

23,299

 

 

—

 

 

Payable for Investment Advisory Fees

 

 

17

 

 

360

 

 

4,253

 

 

36

 

 

Payable for Administration Fees

 

 

1

 

 

20

 

 

127

 

 

1

 

 

Payable for Custodian Fees

 

 

2

 

 

9

 

 

12

 

 

1

 

 

Payable for Directors’ Fees and Expenses

 

 

7

 

 

18

 

 

10

 

 

@—

 

 

Payable for Shareholder Servicing Fees — Class B

 

 

1

 

 

11

 

 

157

 

 

@—

 

 

Other Liabilities

 

 

22

 

 

50

 

 

360

 

 

21

 

 

Total Liabilities

 

 

119

 

 

2,668

 

 

28,218

 

 

804

 

 

Net Assets

 

$

16,765

 

$

287,071

 

$

1,836,022

 

$

6,636

 

 

Net Assets Consist Of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid-in Capital

 

$

29,928

 

$

302,146

 

$

1,585,454

 

$

5,970

 

 

Undistributed (Distributions in Excess of) Net Investment Income

 

 

(9

)

 

(21

)

 

—

 

 

15

 

 

Accumulated Net Investment Loss

 

 

—

 

 

—

 

 

(22

)

 

—

 

 

Accumulated Net Realized Gain (Loss)

 

 

(16,484

)

 

(47,989

)

 

(15,751

)

 

(67

)

 

Unrealized Appreciation (Depreciation) on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

3,330

 

 

32,935

 

 

266,341

 

 

718

 

 

Foreign Currency Exchange Contracts and Translations

 

 

@—

 

 

—

 

 

@—

 

 

—

 

 

Futures Contracts

 

 

—

 

 

—

 

 

—

 

 

@—

 

 

Net Assets

 

$

16,765

 

$

287,071

 

$

1,836,022

 

$

6,636

 

 

 

 

The accompanying notes are an integral part of the financial statements.

169

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Statements of Assets and Liabilities

 

 

 

Focus
Equity
Portfolio
(000)

 

Large Cap
Relative Value
Portfolio
(000)

 

Small
Company
Growth
Portfolio
(000)

 

Systematic
Active Large
Cap Core
Portfolio
(000)

 

CLASS A:

 

 

 

 

 

 

 

 

Net Assets

 

$

13,852

 

$

236,784

 

$

1,137,839

 

$

6,525

 

 

Shares Outstanding $0.001 par value shares of beneficial interest (500,000,000 shares authorized) (not in 000’s)

 

 

736,442

 

 

19,962,716

 

 

86,719,049

 

 

590,000

 

 

Net Asset Value, Offering and Redemption Price Per Share

 

$

18.81

 

$

11.86

 

$

13.12

 

$

11.06

 

 

CLASS B:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Assets

 

$

2,913

 

$

50,287

 

$

698,183

 

$

111

 

 

Shares Outstanding $0.001 par value shares of beneficial interest (500,000,000 shares authorized) (not in 000’s)

 

 

158,974

 

 

4,243,242

 

 

56,355,156

 

 

10,000

 

 

Net Asset Value, Offering and Redemption Price Per Share

 

$

18.32

 

$

11.85

 

$

12.39

 

$

11.06

 

 

(1) Including:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities on Loan, at Value:

 

$

—

 

$

—

 

$

—

 

$

724

 

 

@    Amount is less than $500.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

170

The accompanying notes are an integral part of the financial statements.

 

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Statements of Assets and Liabilities

 

 

 

Systematic
Active Small
Cap Core
Portfolio
(000)

 

Systematic
Active Small
Cap Growth
Portfolio
(000)

 

Systematic
Active Small
Cap Value
Portfolio
(000)

 

Systematic
Large Cap Core
Active Extension
Portfolio
(000)

 

Assets:

 

 

 

 

 

 

 

 

 

 

Investments in Securities of Unaffiliated Issuers, at Cost:

 

$  8,025

 

$  8,358

 

$  8,442

 

$  12,759

 

 

Investment in Security of Affiliated Issuer, at Cost:

 

717

 

870

 

250

 

20

 

 

Total Investment in Securities, at Cost:

 

8,742

 

9,228

 

8,692

 

12,779

 

 

Investments in Securities of Unaffiliated Issuers, at Value:(1)

 

7,176

 

7,943

 

7,111

 

12,458

 

 

Investment in Security of Affiliated Issuer, at Value

 

717

 

870

 

250

 

20

 

 

Total Investments in Securities, at Value:

 

7,893

 

8,813

 

7,361

 

12,478

 

 

Cash

 

54

 

—

 

81

 

35

 

 

Due from Adviser

 

—

 

—

 

—

 

9

 

 

Receivable for Investments Sold

 

1,384

 

1,329

 

1,553

 

1,595

 

 

Receivable from Affiliate

 

@—

 

@—

 

@—

 

@—

 

 

Dividends Receivable

 

15

 

4

 

20

 

10

 

 

Interest Receivable

 

3

 

4

 

2

 

@—

 

 

Other Assets

 

@—

 

@—

 

@—

 

—

 

 

Total Assets

 

9,349

 

10,150

 

9,017

 

14,127

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Collateral on Securities Loaned, at Value:

 

1,919

 

1,974

 

1,911

 

—

 

 

Due to Broker

 

@—

 

1

 

@—

 

—

 

 

Payable for Investments Purchased

 

1,479

 

1,528

 

1,547

 

1,596

 

 

Payable for Investment Advisory Fees

 

37

 

37

 

36

 

—

 

 

Payable for Administration Fees

 

@—

 

@—

 

@—

 

1

 

 

Payable for Custodian Fees

 

2

 

2

 

2

 

3

 

 

Payable for Directors’ Fees and Expenses

 

@—

 

@—

 

@—

 

@—

 

 

Payable for Shareholder Servicing Fees — Class B

 

@—

 

@—

 

@—

 

@—

 

 

Payable for Dividend Income on Short Positions

 

—

 

—

 

—

 

3

 

 

Payable for Securities Sold Short, at Value (Proceeds $3,077)

 

—

 

—

 

—

 

2,830

 

 

Other Liabilities

 

21

 

22

 

21

 

16

 

 

Total Liabilities

 

3,458

 

3,564

 

3,517

 

4,449

 

 

Net Assets

 

$  5,891

 

$  6,586

 

$  5,500

 

$  9,678

 

 

Net Assets Consist Of:

 

 

 

 

 

 

 

 

 

 

Paid-in Capital

 

$  6,605

 

$  6,921

 

$  6,710

 

$  9,999

 

 

Undistributed (Distributions in Excess of) Net Investment Income

 

3

 

—

 

1

 

—

 

 

Accumulated Net Realized Gain (Loss)

 

125

 

70

 

115

 

(267)

 

 

Unrealized Appreciation (Depreciation) on:

 

 

 

 

 

 

 

 

 

 

Investments

 

(849

)

(415

)

(1,331

)

(301)

 

 

Futures Contracts

 

7

 

10

 

5

 

—

 

 

Securities Sold Short

 

—

 

—

 

—

 

247

 

 

Net Assets

 

$  5,891

 

$  6,586

 

$  5,500

 

$  9,678

 

 

 

The accompanying notes are an integral part of the financial statements.

171

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Statements of Assets and Liabilities

 

 

 

Systematic
Active Small
Cap Core
Portfolio
(000)

 

Systematic
Active Small
Cap Growth
Portfolio
(000)

 

Systematic
Active Small
Cap Value
Portfolio
(000)

 

Systematic
Large Cap Core
Active Extension
Portfolio
(000)

 

CLASS A:

 

 

 

 

 

 

 

 

 

 

Net Assets

 

$

5,801

 

$

6,491

 

$

5,418

 

$

9,582

 

 

 

Shares Outstanding $0.001 par value shares of beneficial interest (500,000,000 shares authorized) (not in 000’s)

 

 

650,000

 

 

682,592

 

 

660,000

 

 

998,647

 

 

 

Net Asset Value, Offering and Redemption Price Per Share

 

$

8.93

 

$

9.51

 

$

8.21

 

$

9.59

 

 

 

CLASS B:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Assets

 

$

90

 

$

95

 

$

82

 

$

96

 

 

 

Shares Outstanding $0.001 par value shares of beneficial interest (500,000,000 shares authorized) (not in 000’s)

 

 

10,000

 

 

10,000

 

 

10,000

 

 

10,000

 

 

 

Net Asset Value, Offering and Redemption Price Per Share

 

$

8.93

 

$

9.48

 

$

8.21

 

$

9.58

 

 

 

(1) Including:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities on Loan, at Value:

 

$

1,826

 

$

1,898

 

$

1,802

 

$

—

 

 

 

@ Amount is less than $500.

 

 

 

 

 

 

 

 

 

 

 

172

The accompanying notes are an integral part of the financial statements.

 

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Statements of Assets and Liabilities

 

 

 

U.S. Large
Cap Growth
Portfolio
(000)

 

U.S. Real
Estate
Portfolio
(000)

 

U.S. Small/
Mid Cap Value
Portfolio
(000)

 

Emerging
Markets Debt
Portfolio
(000)

 

Assets:

 

 

 

 

 

 

 

 

 

 

Investments in Securities of Unaffiliated Issuers, at Cost:

 

$  1,190,381

 

$  1,187,197

 

$  20,160

 

$  55,368

 

 

Investments in Security of Affiliated Issuer, at Cost:

 

24,808

 

—

 

1,278

 

1,887

 

 

Total Investments in Securities, at Cost:

 

1,215,189

 

1,187,197

 

21,438

 

57,255

 

 

Foreign Currency, at Cost:

 

3

 

65

 

—

 

13

 

 

Investments in Securities of Unaffiliated Issuers, at Value:(1)

 

1,508,872

 

1,226,389

 

19,088

 

54,774

 

 

Investments in Security of Affiliated Issuer, at Value:

 

24,808

 

—

 

1,278

 

1,887

 

 

Total Investments in Securities, at Value:

 

1,533,680

 

1,226,389

 

20,366

 

56,661

 

 

Foreign Currency, at Value:

 

3

 

66

 

—

 

16

 

 

Cash

 

—

 

—

 

—

 

2

 

 

Due from Broker

 

—

 

—

 

—

 

@—

 

 

Receivable for Portfolio Shares Sold

 

163,479

 

1,572

 

@—

 

—

 

 

Receivable for Investments Sold

 

18,193

 

21,679

 

152

 

—

 

 

Receivable from Affiliate

 

6

 

8

 

@—

 

1

 

 

Dividends Receivable

 

312

 

11,712

 

16

 

—

 

 

Interest Receivable

 

71

 

15

 

8

 

1,224

 

 

Other Assets

 

19

 

30

 

21

 

3

 

 

Total Assets

 

1,715,763

 

1,261,471

 

20,563

 

57,907

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Collateral on Securities Loaned, at Value:

 

—

 

155,964

 

—

 

4,191

 

 

Payable for Investments Purchased

 

139,766

 

2,510

 

307

 

—

 

 

Payable for Portfolio Shares Redeemed

 

375

 

6,256

 

—

 

33

 

 

Unrealized Depreciation on Foreign Currency Exchange Contracts

 

—

 

—

 

—

 

24

 

 

Bank Overdraft

 

—

 

10,436

 

—

 

—

 

 

Payable for Investment Advisory Fees

 

1,717

 

2,533

 

34

 

52

 

 

Payable for Administration Fees

 

96

 

81

 

1

 

4

 

 

Payable for Custodian Fees

 

12

 

16

 

@—

 

4

 

 

Payable for Directors’ Fees and Expenses

 

40

 

18

 

@—

 

6

 

 

Payable for Shareholder Servicing Fees — Class B

 

35

 

38

 

@—

 

@—

 

 

Other Liabilities

 

139

 

222

 

14

 

37

 

 

Total Liabilities

 

142,180

 

178,074

 

356

 

4,351

 

 

Net Assets

 

$  1,573,583

 

$  1,083,397

 

$  20,207

 

$  53,556

 

 

Net Assets Consist Of:

 

 

 

 

 

 

 

 

 

 

Paid-in Capital

 

$  1,254,353

 

$  976,791

 

$  21,308

 

$  55,237

 

 

Undistributed (Distributions in Excess of) Net Investment Income

 

(23

)

1,114

 

6

 

(270

)

 

Accumulated Net Realized Gain (Loss)

 

762

 

66,299

 

(35

)

(801

)

 

Unrealized Appreciation (Depreciation) on:

 

 

 

 

 

 

 

 

 

 

Investments

 

318,491

 

39,192

 

(1,072

)

(594

)

 

Foreign Currency Exchange Contracts and Translations

 

@—

 

1

 

—

 

(16

)

 

Net Assets

 

$  1,573,583

 

$  1,083,397

 

$  20,207

 

$  53,556

 

 

 

The accompanying notes are an integral part of the financial statements.

173

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Statements of Assets and Liabilities

 

 

 

U.S. Large
Cap Growth
Portfolio
(000)

 

U.S. Real
Estate
Portfolio
(000)

 

U.S. Small/
Mid Cap Value
Portfolio
(000)

 

Emerging
Markets Debt
Portfolio
(000)

 

CLASS A:

 

 

 

 

 

 

 

 

 

 

 

Net Assets

 

$

1,406,866

 

$

911,819

 

$

20,112

 

$

52,686

 

 

Shares Outstanding $0.001† par value shares of beneficial interest (500,000,000 shares authorized) (not in 000’s)

 

 

56,989,730

 

 

57,877,384

 

 

2,123,164

 

 

4,592,506

 

 

Net Asset Value, Offering and Redemption Price Per Share

 

$

24.69

 

$

15.75

 

$

9.47

 

$

11.47

 

 

CLASS B:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Assets

 

$

166,717

 

$

171,578

 

$

95

 

$

870

 

 

Shares Outstanding $0.001† par value shares of beneficial interest (500,000,000 shares authorized) (not in 000’s)

 

 

6,870,057

 

 

11,049,932

 

 

10,000

 

 

73,896

 

 

Net Asset Value, Offering and Redemption Price Per Share

 

$

24.27

 

$

15.53

 

$

9.47

 

$

11.77

 

 

(1) Including:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Securities on Loan, at Value:

 

$

—

 

$

153,417

 

$

—

 

$

4,055

 

 

@    Amount is less than $500.

 

 

 

 

 

†      $0.003 par value shares of beneficial interest for Emerging Markets Debt Portfolio.

 

 

 

 

 

174

The accompanying notes are an integral part of the financial statements.

 

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Statements of Operations

 

For the Year Ended December 31, 2007

 

 

 

Active
International
Allocation
Portfolio
(000)

Emerging
Markets
Portfolio
(000)

Global
Franchise
Portfolio
(000)

Global
Real Estate
Portfolio
(000)

 

Global
Value Equity
Portfolio
(000)

 

Investment Income:

 

 

 

 

 

 

 

 

 

 

 

 

Dividends from Securities of Unaffiliated Issuers

 

$  26,064

 

$  46,526

 

$  4,129

 

$  11,452

 

$  2,537

 

 

Dividends from Securities of Affiliated Issuer(s)

 

1,748

 

1,566

 

94

 

618

 

25

 

 

Interest from Securities of Unaffiliated Issuers

 

3,316

 

1,928

 

78

 

145

 

92

 

 

Less: Foreign Taxes Withheld

 

(2,023

)

(2,692

)

(224

)

(624

)

(109

)

 

Total Investment Income

 

29,105

 

47,328

 

4,077

 

11,591

 

2,545

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Investment Advisory Fees (Note B)

 

6,904

 

33,441

 

1,056

 

3,833

 

683

 

 

Administration Fees (Note C)

 

854

 

2,317

 

106

 

361

 

82

 

 

Custodian Fees (Note E)

 

357

 

2,443

 

37

 

155

 

34

 

 

Directors’ Fees and Expenses

 

19

 

51

 

3

 

6

 

4

 

 

Professional Fees

 

73

 

180

 

36

 

85

 

37

 

 

Shareholder Reporting Fees

 

191

 

369

 

10

 

47

 

22

 

 

Shareholder Servicing Fees — Class B
(Note D)

 

10

 

355

 

13

 

16

 

65

 

 

Transfer Agency Fees

 

12

 

27

 

8

 

13

 

9

 

 

Registration Fees

 

41

 

112

 

28

 

93

 

27

 

 

Other Expenses

 

133

 

144

 

15

 

19

 

23

 

 

Expenses Before Bank Overdraft Expense

 

8,594

 

39,439

 

1,312

 

4,628

 

986

 

 

Bank Overdraft Expense

 

1

 

15

 

15

 

4

 

2

 

 

Total Expenses

 

8,595

 

39,454

 

1,327

 

4,632

 

988

 

 

Voluntary Waiver of Investment Advisory Fees (Note B)

 

(42

)

—

 

—

 

—

 

—

 

 

Rebate from Morgan Stanley Affiliated Cash Sweep (Note F)

 

(36

)

(33

)

(2

)

(13

)

(1

)

 

Expense Offset (Note E)

 

(4

)

(25

)

(1

)

(9

)

@—

 

 

Net Expenses

 

8,513

 

39,396

 

1,324

 

4,610

 

987

 

 

Net Investment Income (Loss)

 

20,592

 

7,932

 

2,753

 

6,981

 

1,558

 

 

Realized Gain (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

Investments Sold

 

112,232

*

667,526

*

16,899

 

12,072

 

15,288

 

 

Foreign Currency Transactions

 

9,788

 

(9,286

)

(1,547

)

(77

)

(126

)

 

Futures Contracts

 

2,978

 

—

 

—

 

—

 

—

 

 

Net Realized Gain (Loss)

 

124,998

 

658,240

 

15,352

 

11,995

 

15,162

 

 

Change in Unrealized Appreciation (Depreciation):

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

5,093

**

326,011

**

(7,682

)

(96,792

)

(10,231

)

 

Foreign Currency Exchange Contracts and Translations

 

(2,464

)

2,382

 

1,085

 

21

 

75

 

 

Futures Contracts

 

(128

)

—

 

—

 

—

 

—

 

 

Net Change in Unrealized Appreciation (Depreciation)

 

2,501

 

328,393

 

(6,597

)

(96,771

)

(10,156

)

 

Total Net Realized Gain (Loss) and Change in Unrealized Appreciation (Depreciation)

 

127,499

 

986,633

 

8,755

 

(84,776

)

5,006

 

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

$148,091

 

$994,565

 

$11,508

 

$(77,795

)

$  6,564

 

 

@       Amount is less than $500.

*         Net of Capital Gain Country Tax of $207 and $106 for Active International Allocation and Emerging Markets, respectively.

* *      Net of increase in Deferred Capital Gain Country Tax Accrual on unrealized appreciation of $440 and $4,432 for Active International Allocation and Emerging Markets, respectively.

 

 

The accompanying notes are an integral part of the financial statements.

175

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Statements of Operations

 

For the Year Ended December 31, 2007

 

 

 

International
Equity
Portfolio
(000)

 

International
Growth Active
Extension^
Portfolio
(000)

International
Growth
Equity
Portfolio
(000)

International
Magnum
Portfolio
(000)

International
Real Estate
Portfolio
(000)

 

Investment Income:

 

 

 

  

 

 

 

  

 

 

 

 

Dividends from Securities of Unaffiliated Issuers

 

$  201,500

 

$   73

 

$   160

 

$  2,766

 

$  49,450

 

 

Dividends from Security of Affiliated Issuer

 

4,917

 

4

 

9

 

292

 

1,053

 

 

Interest from Securities of Unaffiliated Issuers

 

10,549

 

@—

 

1

 

153

 

1,187

 

 

Less: Foreign Taxes Withheld

 

(14,961

)

(6

)

(14

)

(234

)

(4,341

)

 

Total Investment Income

 

202,005

 

71

 

156

 

2,977

 

47,349

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Investment Advisory Fees
(Note B)

 

55,758

 

50

 

61

 

1,044

 

12,508

 

 

Administration Fees (Note C)

 

5,576

 

3

 

7

 

104

 

1,251

 

 

Custodian Fees (Note E)

 

1,385

 

10

 

15

 

67

 

417

 

 

Directors’ Fees and Expenses

 

140

 

—

 

@—

 

4

 

23

 

 

Professional Fees

 

313

 

23

 

66

 

34

 

62

 

 

Shareholder Reporting Fees

 

726

 

22

 

6

 

27

 

281

 

 

Shareholder Servicing Fees— Class B (Note D)

 

2,881

 

@—

 

1

 

6

 

280

 

 

Registration Fees

 

111

 

14

 

26

 

32

 

74

 

 

Transfer Agency Fees

 

55

 

3

 

6

 

8

 

1

 

 

Other Expenses

 

676

 

1

 

9

 

26

 

117

 

 

Expenses Before Bank Overdraft Expense, Dividend Expense on Short Positions and Stock Loan Fee

 

67,621

 

126

 

197

 

1,352

 

15,014

 

 

Bank Overdraft Expense

 

1

 

1

 

@—

 

2

 

4

 

 

Dividend Expense on Short Positions

 

—

 

29

 

—

 

—

 

—

 

 

Stock Loan Fee

 

—

 

10

 

—

 

—

 

—

 

 

Total Expenses

 

67,622

 

166

 

197

 

1,354

 

15,018

 

 

Voluntary Waiver of Investment Advisory Fees (Note B)

 

—

 

(50

)

(61

)

(42

)

—

 

 

Expenses Reimbursed by Adviser (Note B)

 

—

 

(21

)

(54

)

—

 

—

 

 

Rebate from Morgan Stanley Affiliated Cash Sweep
(Note F)

 

(103

)

@—

 

@—

 

(6

)

(21

)

 

Expense Offset (Note E)

 

(12

)

(1

)

@—

 

@—

 

(8

)

 

Net Expenses

 

67,507

 

94

 

82

 

1,306

 

14,989

 

 

Net Investment Income (Loss)

 

134,498

 

(23

)

74

 

1,671

 

32,360

 

 

Realized Gain (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

Investments Sold

 

882,153

 

(84

)

541

*

9,641

*

90,374

 

 

Foreign Currency Transactions

 

(10,212

)

5

 

(4

)

1,392

 

351

 

 

Futures Contracts

 

—

 

—

 

—

 

(895

)

—

 

 

Net Realized Gain (Loss)

 

871,941

 

(79

)

537

 

10,138

 

90,725

 

 

Change in Unrealized Appreciation (Depreciation):

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

(348,130

)

575

 

503

**

5,926

**

(433,885

)

 

Foreign Currency Exchange Contracts and Translations

 

7,300

 

@—

 

(19

)

(277

)

(38

)

 

Securities Sold Short

 

—

 

186

 

—

 

—

 

—

 

 

Net Change in Unrealized Appreciation (Depreciation)

 

(340,830

)

761

 

484

 

5,649

 

(433,923

)

 

Total Net Realized Gain (Loss) and Change in Unrealized Appreciation (Depreciation)

 

531,111

 

682

 

1,021

 

15,787

 

(343,198

)

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

$ 665,609

 

$    659

 

$  1,095

 

$  17,458

 

$(310,838

)

 

^

 

For the period from July 31, 2007 (commencement of operations) to December 31, 2007.

@

 

Amount is less than $500.

*

 

Net of Capital Gain Country Tax of $1 and $16 for International Growth Equity and International Magnum, respectively.

* *

 

Net of increase in Deferred Capital Gain Country Tax Accrual on unrealized depreciation of $1 and $@ for International Growth Equity and International Magnum, respectively.

 

176

The accompanying notes are an integral part of the financial statements.

 

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Statements of Operations

 

For the Year Ended December 31, 2007

 

 

 

International
Small Cap
Portfolio
(000)

 

Disciplined
Large Cap Value
Active Extension
Portfolio^
(000)

Focus
Equity
Portfolio
(000)

 

Large Cap
Relative
Value
Portfolio
(000)

 

Small
Company
Growth
Portfolio
(000)

 

Investment Income:

 

 

 

 

 

 

 

 

 

 

 

 

Dividends from Securities of Unaffiliated Issuers

 

$  28,741

 

$  94

 

$  154

 

$  6,541

 

$  10,705

 

 

Dividends from Security of Affiliated Issuer

 

456

 

6

 

20

 

479

 

1,487

 

 

Interest from Securities of Unaffiliated Issuers

 

270

 

2

 

6

 

223

 

436

 

 

Less: Foreign Taxes Withheld

 

(2,538

)

—

 

(8

)

—

 

(22

)

 

Total Investment Income

 

26,929

 

102

 

172

 

7,243

 

12,606

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Investment Advisory Fees (Note B)

 

11,690

 

39

 

74

 

1,416

 

16,828

 

 

Administration Fees (Note C)

 

985

 

3

 

12

 

243

 

1,538

 

 

Custodian Fees (Note E)

 

345

 

8

 

9

 

25

 

49

 

 

Directors’ Fees and Expenses

 

23

 

@—

 

2

 

8

 

31

 

 

Professional Fees

 

91

 

25

 

26

 

34

 

92

 

 

Shareholder Reporting Fees

 

155

 

3

 

8

 

68

 

488

 

 

Shareholder Servicing Fees — Class B (Note D)

 

—

 

@—

 

6

 

157

 

2,077

 

 

Transfer Agency Fees

 

18

 

4

 

9

 

16

 

61

 

 

Registration Fees

 

30

 

14

 

21

 

48

 

90

 

 

Other Expenses

 

99

 

2

 

7

 

186

 

229

 

 

Expenses Before Bank Overdraft Expense, Dividend Expense on Short Positions and Stock Loan Fee

 

13,436

 

98

 

174

 

2,201

 

21,483

 

 

Bank Overdraft Expense

 

12

 

1

 

@—

 

@—

 

14

 

 

Dividend Expense on Short Positions

 

—

 

22

 

—

 

—

 

—

 

 

Stock Loan Fee

 

—

 

5

 

—

 

—

 

—

 

 

Total Expenses

 

13,448

 

126

 

174

 

2,201

 

21,497

 

 

Voluntary Waiver of Investment Advisory Fees (Note B)

 

—

 

(39

)

(19

)

—

 

—

 

 

Expenses Reimbursed by Adviser
(Note B)

 

—

 

(11

)

—

 

—

 

—

 

 

Rebate from Morgan Stanley Affiliated Cash Sweep (Note F)

 

(9

)

@—

 

(1

)

(10

)

(32

)

 

Expense Offset (Note E)

 

(3

)

(1

)

@—

 

@—

 

(8

)

 

Net Expenses

 

13,436

 

75

 

154

 

2,191

 

21,457

 

 

Net Investment Income (Loss)

 

13,493

 

27

 

18

 

5,052

 

(8,851

)

 

Realized Gain (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

Investments Sold

 

225,338

 

(252

)

1,075

 

11,824

 

67,129

 

 

Foreign Currency Transactions

 

897

 

—

 

2

 

—

 

(25

)

 

Futures Contracts

 

—

 

—

 

—

 

—

 

—

 

 

Net Realized Gain (Loss)

 

226,235

 

(252

)

1,077

 

11,824

 

67,104

 

 

Change in Unrealized Appreciation (Depreciation):

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

(254,423

)

(794

)

2,043

 

(9,583

)

(504

)

 

Foreign Currency Exchange Contracts and Translations

 

150

 

—

 

@—

 

—

 

@—

 

 

Securities Sold Short

 

—

 

327

 

—

 

—

 

—

 

 

Net Change in Unrealized Appreciation (Depreciation)

 

(254,273

)

(467

)

2,043

 

(9,583

)

(504

)

 

Total Net Realized Gain (Loss) and Change in Unrealized Appreciation (Depreciation)

 

(28,038

)

(719

)

3,120

 

2,241

 

66,600

 

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

$  (14,545

)

$  (692

)

$3,138

 

$  7,293

 

$57,749

 

 

^      For the period from May 31, 2007 (commencement of operations) to December 31, 2007.

@    Amount is less than $500.

 

The accompanying notes are an integral part of the financial statements.

 

177


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Statements of Operations

 

For the Year Ended December 31, 2007

 

 

 

Systematic
Active Large
Cap Core
Portfolio
(000)

 

Systematic
Active Small
Cap Core
Portfolio
(000)

 

Systematic
Active Small
Cap Growth
Portfolio
(000)

 

Systematic
Active Small
Cap Value
Portfolio
(000)

 

Systematic
Large Cap Core
Active Extension
Portfolio^
(000)

 

Investment Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends from Securities of Unaffiliated Issuers

 

$

   94

 

 

$

    94

 

 

$

  47

 

 

$

    154

 

 

$

    59

 

 

Dividends from Security of Affiliated Issuer

 

17

 

 

18

 

 

26

 

 

15

 

 

6

 

 

Interest from Securities of Unaffiliated Issuers

 

8

 

 

13

 

 

14

 

 

13

 

 

—

 

 

Less: Foreign Taxes Withheld

 

@—

 

 

—

 

 

—

 

 

@—

 

 

@—

 

 

Total Investment Income

 

119

 

 

125

 

 

87

 

 

182

 

 

65

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Advisory Fees (Note B)

 

24

 

 

49

 

 

53

 

 

51

 

 

41

 

 

Administration Fees (Note C)

 

6

 

 

5

 

 

6

 

 

5

 

 

3

 

 

Custodian Fees (Note E)

 

7

 

 

5

 

 

5

 

 

6

 

 

6

 

 

Directors’ Fees and Expenses

 

@—

 

 

@—

 

 

@—

 

 

@—

 

 

@—

 

 

Professional Fees

 

29

 

 

30

 

 

30

 

 

30

 

 

25

 

 

Shareholder Reporting Fees

 

(16

)†

 

(10

)†

 

(9

)†

 

(10

)†

 

2

 

 

Registration Fees

 

24

 

 

24

 

 

24

 

 

24

 

 

14

 

 

Shareholder Servicing Fees — Class B (Note D)

 

@—

 

 

@—

 

 

@—

 

 

@—

 

 

@—

 

 

Transfer Agency Fees

 

6

 

 

6

 

 

6

 

 

6

 

 

5

 

 

Other Expenses

 

6

 

 

6

 

 

6

 

 

6

 

 

1

 

 

Expenses Before Bank Overdraft Expense, Dividend Expense on Short Positions and Stock Loan Fee

 

86

 

 

115

 

 

121

 

 

118

 

 

97

 

 

Bank Overdraft Expense

 

—

 

 

@—

 

 

@—

 

 

@—

 

 

1

 

 

Dividend Expense on Short Positions

 

—

 

 

—

 

 

—

 

 

—

 

 

13

 

 

Stock Loan Fee

 

—

 

 

—

 

 

—

 

 

—

 

 

4

 

 

Total Expenses

 

86

 

 

115

 

 

121

 

 

118

 

 

115

 

 

Voluntary Waiver of Investment Advisory Fees (Note B)

 

(24

)

 

(43

)

 

(42

)

 

(44

)

 

(41

)

 

Expenses Reimbursed by Adviser (Note B)

 

(18

)

 

—

 

 

—

 

 

—

 

 

(7

)

 

Rebate from Morgan Stanley Affiliated Cash Sweep (Note F)

 

@—

 

 

@—

 

 

(1

)

 

@—

 

 

@—

 

 

Expense Offset (Note E)

 

(3

)

 

@—

 

 

@—

 

 

@—

 

 

(1

)

 

Net Expenses

 

41

 

 

72

 

 

78

 

 

74

 

 

66

 

 

Net Investment Income (Loss)

 

78

 

 

53

 

 

9

 

 

108

 

 

(1

)

 

Realized Gain (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments Sold

 

52

 

 

401

 

 

548

 

 

471

 

 

(266

)

 

Futures Contracts

 

(5

)

 

(42

)

 

(59

)

 

(32

)

 

—

 

 

Net Realized Gain (Loss)

 

47

 

 

359

 

 

489

 

 

439

 

 

(266

)

 

Change in Unrealized Appreciation (Depreciation):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

269

 

 

(970

)

 

(448

)

 

(1,581

)

 

(301

)

 

Futures Contracts

 

@—

 

 

8

 

 

10

 

 

5

 

 

—

 

 

Securities Sold Short

 

—

 

 

—

 

 

—

 

 

—

 

 

247

 

 

Net Change in Unrealized Appreciation (Depreciation)

 

269

 

 

(962

)

 

(438

)

 

(1,576

)

 

(54

)

 

Total Net Realized Gain (Loss) and Change in Unrealized Appreciation (Depreciation)

 

316

 

 

(603

)

 

51

 

 

(1,137

)

 

(320

)

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

$

394

 

 

$

(550

)

 

$

  60

 

 

$

(1,029

)

 

$

(321

)

 

 

^

 

For the period from May 31, 2007 (commencement of operations) to December 31, 2007.

@

 

Amount is less than $500.

†

 

The Portfolio commenced operations in 2006. The contra expense amounts are due to a prior year overaccrual. Amounts shown include a true up for year one estimated expenses.

 

178

The accompanying notes are an integral part of the financial statements.

 

 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Statements of Operations

 

For the Year Ended December 31, 2007

 

 

 


U.S. Large
Cap Growth
Portfolio
(000)

 

 

U.S. Real
Estate
Portfolio
(000)

 

U.S. Small/
Mid Cap
Value
Portfolio^
(000)

 

Emerging
Markets Debt
Portfolio
(000)

 

Investment Income:

 

 

 

 

 

 

 

 

 

 

 

Dividends from Securities of Unaffiliated Issuers

 

$  12,871

 

 

$   34,671

 

$      43

 

$     —

 

 

Dividends from Security of Affiliated Issuer

 

550

 

 

770

 

28

 

83

 

 

Interest from Securities of Unaffiliated Issuers

 

297

 

 

900

 

1

 

3,621

 

 

Less: Foreign Taxes Withheld

 

(335

)

 

(165

)

@—

 

—

 

 

Total Investment Income

 

13,383

 

 

36,176

 

72

 

3,704

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Investment Advisory Fees (Note B)

 

6,061

 

 

12,639

 

35

 

414

 

 

Administration Fees (Note C)

 

988

 

 

1,359

 

4

 

44

 

 

Custodian Fees (Note E)

 

38

 

 

50

 

@—

 

17

 

 

Directors’ Fees and Expenses

 

26

 

 

31

 

@—

 

2

 

 

Professional Fees

 

67

 

 

91

 

23

 

43

 

 

Shareholder Reporting Fees

 

291

 

 

525

 

4

 

42

 

 

Shareholder Servicing Fees — Class B (Note D)

 

245

 

 

628

 

@—

 

2

 

 

Registration Fees

 

52

 

 

43

 

@—

 

39

 

 

Transfer Agency Fees

 

18

 

 

52

 

2

 

8

 

 

Country Tax Expense#

 

—

 

 

—

 

—

 

24

 

 

Other Expenses

 

130

 

 

184

 

@—

 

9

 

 

Expenses Before Bank Overdraft and Investment Related Expenses

 

7,916

 

 

15,602

 

68

 

644

 

 

Bank Overdraft Expense

 

4

 

 

61

 

—

 

23

 

 

Investment Related Expenses

 

—

 

 

258

 

—

 

—

 

 

Total Expenses

 

7,920

 

 

15,921

 

68

 

667

 

 

Voluntary Waiver of Investment Advisory Fees (Note B)

 

—

 

 

—

 

—

 

(148

)

 

Expenses Reimbursed by Adviser (Note B)

 

—

 

 

—

 

—

 

—

 

 

Rebate from Morgan Stanley Affiliated Cash Sweep (Note F)

 

(12

)

 

(16

)

(1

)

(2

)

 

Expense Offset (Note E)

 

(5

)

 

(12

)

—

 

(1

)

 

Net Expenses

 

7,903

 

 

15,893

 

67

 

516

 

 

Net Investment Income (Loss)

 

5,480

 

 

20,283

 

5

 

3,188

 

 

Realized Gain (Loss):

 

 

 

 

 

 

 

 

 

 

 

Investments Sold

 

72,084

 

 

420,572

 

(17

)

3,782

 

 

Foreign Currency Transactions

 

(37

)

 

57

 

—

 

322

 

 

Options Written

 

—

 

 

—

 

—

 

332

 

 

Futures Contracts

 

—

 

 

—

 

—

 

1

 

 

Net Realized Gain (Loss)

 

72,047

 

 

420,629

 

(17

)

4,437

 

 

Change in Unrealized Appreciation (Depreciation):

 

 

 

 

 

 

 

 

 

 

 

Investments

 

166,291

 

 

(693,157

)

(1,072

)

(5,701

)

 

Foreign Currency Exchange Contracts and Translations

 

@—

 

 

1

 

—

 

(18

)

 

Futures Contracts

 

—

 

 

—

 

—

 

@—

 

 

Net Change in Unrealized Appreciation (Depreciation)

 

166,291

 

 

(693,156

)

(1,072

)

(5,719

)

 

Total Net Realized Gain (Loss) and Change in Unrealized Appreciation (Depreciation)

 

238,338

 

 

(272,527

)

(1,089

)

(1,282

)

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

$243,818

 

 

$(252,244

)

$(1,084

)

$ 1,906

 

 

 

^

 

For the period from September 27, 2007 (commencement of operations) to December 31, 2007.

@

 

Amount is less than $500.

#

 

CPMF (Provisional Contribution on Financial Transactions) is a Brazilian federal tax imposed on certain banking transactions and account withdrawals. The Tax is charged based on the value of the transaction.

 

 

The accompanying notes are an integral part of the financial statements.

179

 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Statements of Changes in Net Assets

 

 

 

Active
International Allocation
Portfolio

 

Emerging Markets
Portfolio

 

 

 

Year Ended
December 31,
2007
(000)

 

Year Ended
December 31,
2006
(000)

 

Year Ended
December 31,
2007
(000)

 

Year Ended
December 31,
2006
(000)

 

Increase (Decrease) in Net Assets

 

 

 

 

 

 

 

 

 

 

Operations:

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)

 

$

20,592

 

$

17,545

 

$

7,932

 

$

12,943

 

 

Net Realized Gain (Loss)

 

124,998

 

48,028

 

658,240

 

407,354

 

 

Net Change in Unrealized Appreciation (Depreciation)

 

2,501

 

126,792

 

328,393

 

244,555

 

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

148,091

 

192,365

 

994,565

 

664,852

 

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(34,919

)

(22,355

)

(10,445

)

(19,320

)

 

Net Realized Gain

 

(58,076

)

—

 

(571,529

)

(344,280

)

 

Class B:

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(149

)

(70

)

(208

)

(740

)

 

Net Realized Gain

 

(273

)

—

 

(30,744

)

(19,457

)

 

Total Distributions

 

(93,417

)

(22,425

)

(612,926

)

(383,797

)

 

Capital Share Transactions:(1)

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

Subscribed

 

172,124

 

187,571

 

660,992

 

592,680

 

 

Distributions Reinvested

 

77,571

 

18,880

 

569,830

 

352,736

 

 

Redeemed

 

(177,984

)

(200,465

)

(557,714

)

(680,751

)

 

Redemption Fees

 

3

 

3

 

434

 

339

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

Subscribed

 

3,372

 

6,914

 

81,605

 

113,026

 

 

Distributions Reinvested

 

422

 

70

 

30,914

 

20,035

 

 

Redeemed

 

(2,096

)

(6,523

)

(74,740

)

(122,311

)

 

Redemption Fees

 

@—

 

@—

 

19

 

23

 

 

Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions

 

73,412

 

6,450

 

711,340

 

275,777

 

 

Total Increase (Decrease) in Net Assets

 

128,086

 

176,390

 

1,092,979

 

556,832

 

 

Net Assets:

 

 

 

 

 

 

 

 

 

 

Beginning of Period

 

970,934

 

794,544

 

2,409,985

 

1,853,153

 

 

End of Period

 

$

1,099,020

 

$

970,934

 

$

3,502,964

 

$

2,409,985

 

 

Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Assets

 

$

(2,542

)

$

       775

 

$

    (24,956

)

$

    (14,608

)

 

(1)    Capital Share Transactions:

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

10,505

 

13,737

 

19,285

 

20,344

 

 

Shares Issued on Distributions Reinvested

 

5,006

 

1,261

 

17,164

 

12,457

 

 

Shares Redeemed

 

(10,838

)

(14,670

)

(16,736

)

(23,842

)

 

Net Increase (Decrease) in Class A Shares Outstanding

 

4,673

 

328

 

19,713

 

8,959

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

193

 

514

 

2,355

 

3,784

 

 

Shares Issued on Distributions Reinvested

 

27

 

4

 

950

 

717

 

 

Shares Redeemed

 

(126

)

(461

)

(2,305

)

(4,254

)

 

Net Increase (Decrease) in Class B Shares Outstanding

 

94

 

57

 

1,000

 

247

 

 

@  Amount is less than $500.

 

180

The accompanying notes are an integral part of the financial statements.

 

 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Statements of Changes in Net Assets

 

 

 

Global Franchise
Portfolio

 

Global Real Estate
Portfolio

 

 

 

Year Ended
December 31,
2007
(000)

 

Year Ended
December 31,
2006
(000)

 

Year Ended
December 31,
2007
(000)

 

Period Ended
December 31,
2006^
(000)

 

Increase (Decrease) in Net Assets

 

 

 

 

 

 

 

 

 

 

Operations:

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)

 

$   2,753

 

$   2,168

 

$   6,981

 

$   873

 

 

Net Realized Gain (Loss)

 

15,352

 

8,205

 

11,995

 

1,210

 

 

Net Change in Unrealized Appreciation (Depreciation)

 

(6,597

)

13,638

 

(96,771

)

26,101

 

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

11,508

 

24,011

 

(77,795

)

28,184

 

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(870

)

(898

)

(21,830

)

(2,292

)

 

Net Realized Gain

 

(17,250

)

(6,479

)

(12,446

)

(438

)

 

Class B:

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(39

)

(19

)

(398

)

(1

)

 

Net Realized Gain

 

(940

)

(205

)

(256

)

@—

 

 

Total Distributions

 

(19,099

)

(7,601

)

(34,930

)

(2,731

)

 

Capital Share Transactions:(1)

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

Subscribed

 

4,659

 

51,389

 

665,106

 

218,187

 

 

Distributions Reinvested

 

17,953

 

7,255

 

32,111

 

2,728

 

 

Redeemed

 

(33,859

)

(30,984

)

(193,108

)

(7,708

)

 

Redemption Fees

 

—

 

4

 

18

 

3

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

Subscribed

 

3,728

 

453

 

22,603

 

100

 

 

Distributions Reinvested

 

862

 

181

 

638

 

—

 

 

Redeemed

 

(1,859

)

(1,558

)

(7,482

)

—

 

 

Redemption Fees

 

—

 

@—

 

@—

 

@—

 

 

Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions

 

(8,516

)

26,740

 

519,886

 

213,310

 

 

Total Increase (Decrease) in Net Assets

 

(16,107

)

43,150

 

407,161

 

238,763

 

 

Net Assets:

 

 

 

 

 

 

 

 

 

 

Beginning of Period

 

132,569

 

89,419

 

238,763

 

—

 

 

End of Period

 

$116,462

 

$  132,569

 

$  645,924

 

$  238,763

 

 

Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Assets

 

$    525

 

$   228

 

$  (13,261

)

$  (1,309

)

 

(1)    Capital Share Transactions:

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

242

 

3,123

 

55,916

 

21,098

 

 

Shares Issued on Distributions Reinvested

 

1,063

 

409

 

3,196

 

241

 

 

Shares Redeemed

 

(1,821

)

(1,808

)

(16,713

)

(701

)

 

Net Increase (Decrease) in Class A Shares Outstanding

 

(516

)

1,724

 

42,399

 

20,638

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

198

 

26

 

1,903

 

10

 

 

Shares Issued on Distributions Reinvested

 

52

 

10

 

64

 

—

 

 

Shares Redeemed

 

(97

)

(87

)

(660

)

—

 

 

Net Increase (Decrease) in Class B Shares Outstanding

 

153

 

(51

)

1,307

 

10

 

 

 

^

Global Real Estate Portfolio commenced operations on August 30, 2006.

@

Amount is less than $500.

 

 

The accompanying notes are an integral part of the financial statements.

181

 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Statements of Changes in Net Assets

 

 

 

Global Value Equity
Portfolio

 

International Equity
Portfolio

 

 

 

Year Ended
December 31,
2007
(000)

 

Year Ended
December 31,
2006
(000)

 

Year Ended
December 31,
2007
(000)

 

Year Ended
December 31,
2006
(000)

 

Increase (Decrease) in Net Assets

 

 

 

 

 

 

 

 

 

 

Operations:

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)

 

$  1,558

 

$  1,918

 

$   134,498

 

$  212,224

 

 

Net Realized Gain (Loss)

 

15,162

 

6,732

 

871,941

 

1,034,579

 

 

Net Change in Unrealized Appreciation (Depreciation)

 

(10,156

)

14,322

 

(340,830

)

264,694

 

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

6,564

 

22,972

 

665,609

 

1,511,497

 

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(1,044

)

(1,618

)

(105,722

)

(144,056

)

 

Net Realized Gain

 

(10,780

)

(4,953

)

(731,331

)

(917,867

)

 

Class B:

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(322

)

(386

)

(18,724

)

(25,432

)

 

Net Realized Gain

 

(3,997

)

(1,352

)

(149,480

)

(181,273

)

 

Total Distributions

 

(16,143

)

(8,309

)

(1,005,257

)

(1,268,628

)

 

Capital Share Transactions:(1)

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

Subscribed

 

3,698

 

12,229

 

746,973

 

787,978

 

 

Distributions Reinvested

 

11,789

 

6,534

 

780,820

 

967,612

 

 

Redeemed

 

(43,789

)

(15,405

)

(2,044,329

)

(2,767,428

)

 

Redemption Fees

 

6

 

25

 

256

 

266

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

Subscribed

 

4,116

 

4,567

 

321,010

 

365,342

 

 

Distributions Reinvested

 

4,319

 

1,739

 

168,106

 

206,433

 

 

Redeemed

 

(9,264

)

(3,360

)

(561,568

)

(660,276

)

 

Redemption Fees

 

2

 

6

 

54

 

75

 

 

Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions

 

(29,123

)

6,335

 

(588,678

)

(1,099,998

)

 

Total Increase (Decrease) in Net Assets

 

(38,702

)

20,998

 

(928,326

)

(857,129

)

 

Net Assets:

 

 

 

 

 

 

 

 

 

 

Beginning of Period

 

128,936

 

107,938

 

7,053,728

 

7,910,857

 

 

End of Period

 

$   90,234

 

$128,936

 

$6,125,402

 

$ 7,053,728

 

 

Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Assets

 

$      58

 

$    (32

)

$    (3,623

)

$    (4,528

)

 

(1)    Capital Share Transactions:

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

173

 

653

 

34,520

 

35,254

 

 

Shares Issued on Distributions Reinvested

 

671

 

329

 

42,066

 

47,109

 

 

Shares Redeemed

 

(2,112

)

(800

)

(93,380

)

(125,261

)

 

Net Increase (Decrease) in Class A Shares Outstanding

 

(1,268

)

182

 

(16,794

)

(42,898

)

 

Class B:

 

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

194

 

238

 

14,903

 

16,542

 

 

Shares Issued on Distributions Reinvested

 

248

 

89

 

9,151

 

10,139

 

 

Shares Redeemed

 

(445

)

(180

)

(26,119

)

(29,904

)

 

Net Increase (Decrease) in Class B Shares Outstanding

 

(3

)

147

 

(2,065

)

(3,223

)

 

 

182

The accompanying notes are an integral part of the financial statements.

 

 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Statements of Changes in Net Assets

 

 

 

International Growth
Active
Extension Portfolio

 

International Growth Equity
Portfolio

 

 

 

Period Ended
December 31,
2007^
(000)

 

Year Ended
December 31,
2007
(000)

 

Year Ended
December 31,
2006
(000)

 

Increase (Decrease) in Net Assets

 

 

 

 

 

 

 

 

Operations:

 

 

 

 

 

 

 

 

Net Investment Income (Loss)

 

$  (23

)

$  74

 

$  53

 

 

Net Realized Gain (Loss)

 

(79

)

537

 

75

 

 

Net Change in Unrealized Appreciation (Depreciation)

 

761

 

484

 

1,382

 

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

659

 

1,095

 

1,510

 

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

Net Investment Income

 

—

 

(63

)

(49

)

 

Net Realized Gain

 

—

 

(301

)

(32

)

 

Class B:

 

 

 

 

 

 

 

 

Net Investment Income

 

—

 

(3

)

(1

)

 

Net Realized Gain

 

—

 

(20

)

(2

)

 

Total Distributions

 

—

 

(387

)

(84

)

 

Capital Share Transactions:(1)

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

Subscribed

 

—

 

15,122

 

613

 

 

Distributions Reinvested

 

—

 

36

 

8

 

 

Redeemed

 

—

 

(60

)

(30

)

 

Redemption Fees

 

—

 

—

 

—

 

 

Class B:

 

 

 

 

 

 

 

 

Subscribed

 

—

 

153

 

630

 

 

Distributions Reinvested

 

—

 

17

 

2

 

 

Redeemed

 

—

 

—

 

(534

)

 

Redemption Fees

 

—

 

—

 

—

 

 

Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions

 

—

 

15,268

 

689

 

 

Total Increase (Decrease) in Net Assets

 

659

 

15,976

 

2,115

 

 

Net Assets:

 

 

 

 

 

 

 

 

Beginning of Period

 

10,000

 

7,078

 

4,963

 

 

End of Period

 

$  10,659

 

$  23,054

 

$  7,078

 

 

Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Assets

 

$  (3

)

$  —

 

$  (4

)

 

(1)    Capital Share Transactions:

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

Shares Subscribed

 

990

 

1,100

 

50

 

 

Shares Issued on Distributions Reinvested

 

—

 

3

 

1

 

 

Shares Redeemed

 

—

 

(4

)

(2

)

 

Net Increase (Decrease) in Class A Shares Outstanding

 

990

 

1,099

 

49

 

 

Class B:

 

 

 

 

 

 

 

 

Shares Subscribed

 

10

 

12

 

59

 

 

Shares Issued on Distributions Reinvested

 

—

 

1

 

@—

 

 

Shares Redeemed

 

—

 

—

 

(43

)

 

Net Increase (Decrease) in Class B Shares Outstanding

 

10

 

13

 

16

 

 

 

@

Amount is less than 500 shares.

^

   International Growth Active Extension commenced operations on July 31, 2007.

 

 

The accompanying notes are an integral part of the financial statements.

183

 


 

2007 Annual Report

 

December 31, 2007

 

Statements of Changes in Net Assets

2007 Annual Report

 

 

International Magnum
Portfolio

 

International Real Estate
Portfolio

 

 

 

Year Ended
December 31,
2007
(000)

 

Year Ended
December 31,
2006
(000)

 

Year Ended
December 31,
2007
(000)

 

Year Ended
December 31,
2006
(000)

 

Increase (Decrease) in Net Assets

 

 

 

 

 

 

 

 

 

Operations:

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)

 

$

1,671 

 

 

$

1,539 

 

 

$

32,360

 

 

$

  7,224

 

 

Net Realized Gain (Loss)

 

10,138

 

 

20,620

 

 

90,725

 

 

42,502

 

 

Net Change in Unrealized Appreciation (Depreciation)

 

5,649

 

 

4,315

 

 

(433,923

)

 

254,627

 

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

17,458

 

 

26,474

 

 

(310,838

)

 

304,353

 

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(3,494

)

 

(2,641

)

 

(75,854

)

 

(25,151

)

 

Net Realized Gain

 

(6,693

)

 

(13,710

)

 

(67,563

)

 

(31,595

)

 

Class B:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(57

)

 

(36

)

 

(5,828

)

 

(1,958

)

 

Net Realized Gain

 

(121

)

 

(206

)

 

(5,753

)

 

(2,513

)

 

Total Distributions

 

(10,365

)

 

(16,593

)

 

(154,998

)

 

(61,217

)

 

Capital Share Transactions:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscribed

 

23,285

 

 

25,211

 

 

936,214

 

 

680,101

 

 

Distributions Reinvested

 

10,133

 

 

16,307

 

 

97,520

 

 

46,370

 

 

Redeemed

 

(23,786

)

 

(41,092

)

 

(675,327

)

 

(81,039

)

 

Redemption Fees

 

@—

 

 

2

 

 

48

 

 

20

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscribed

 

1,279

 

 

934

 

 

107,694

 

 

85,871

 

 

Distributions Reinvested

 

178

 

 

240

 

 

11,447

 

 

4,408

 

 

Redeemed

 

(921

)

 

(3,266

)

 

(84,467

)

 

(14,534

)

 

Redemption Fees

 

@—

 

 

@—

 

 

5

 

 

2

 

 

Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions

 

10,168

 

 

(1,664

)

 

393,134

 

 

721,199

 

 

Total Increase (Decrease) in Net Assets

 

17,261

 

 

8,217

 

 

(72,702

)

 

964,335

 

 

Net Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of Period

 

118,220

 

 

110,003

 

 

1,223,520

 

 

259,185

 

 

End of Period

 

$

135,481

 

 

$

118,220

 

 

$

1,150,818

 

 

$

1,223,520

 

 

Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Assets

 

$

(237

)

 

$

  123

 

 

$

(34,483

)

 

$

(14,871

)

 

(1)

Capital Share Transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

1,533

 

 

1,768

 

 

27,636

 

 

22,996

 

 

Shares Issued on Distributions Reinvested

 

700

 

 

1,169

 

 

3,730

 

 

1,397

 

 

Shares Redeemed

 

(1,569

)

 

(2,829

)

 

(22,070

)

 

(2,674

)

 

Net Increase (Decrease) in Class A Shares Outstanding

 

664

 

 

108

 

 

9,296

 

 

21,719

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

85

 

 

66

 

 

3,292

 

 

2,783

 

 

Shares Issued on Distributions Reinvested

 

12

 

 

17

 

 

441

 

 

132

 

 

Shares Redeemed

 

(62

)

 

(236

)

 

(2,683

)

 

(469

)

 

Net Increase (Decrease) in Class B Shares Outstanding

 

35

 

 

(153

)

 

1,050

 

 

2,446

 

 

@ Amount is less than $500.

 

184

The accompanying notes are an integral part of the financial statements.

 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Statements of Changes in Net Assets

 

 

 

International Small Cap
Portfolio

 

Disciplined Large Cap
Value Active Extension
Portfolio

 

 

 

Year Ended
December 31,
2007
(000)

 

Year Ended
December 31,
2006
(000)

 

Period Ended
December 31, 2007^
(000)

 

Increase (Decrease) in Net Assets

 

 

 

 

 

 

 

Operations:

 

 

 

 

 

 

 

Net Investment Income (Loss)

 

$     13,493 

 

 

$     17,507 

 

 

$      27

 

 

Net Realized Gain (Loss)

 

226,235

 

 

204,321

 

 

(252

)

 

Net Change in Unrealized Appreciation (Depreciation)

 

(254,273

)

 

22,196

 

 

(467

)

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

(14,545

)

 

244,024

 

 

(692

)

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(10,502

)

 

(20,542

)

 

(29

)

 

Net Realized Gain

 

(223,789

)

 

(229,672

)

 

—

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

—

 

 

—

 

 

@—

 

 

Net Realized Gain

 

—

 

 

—

 

 

—

 

 

Total Distributions

 

(234,291

)

 

(250,214

)

 

(29

)

 

Capital Share Transactions:(1)

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

Subscribed

 

93,078

 

 

154,461

 

 

5,000

 

 

Distributions Reinvested

 

208,756

 

 

228,241

 

 

—

 

 

Redeemed

 

(569,019

)

 

(453,530

)

 

—

 

 

Redemption Fees

 

7

 

 

4

 

 

—

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

Subscribed

 

—

 

 

—

 

 

—

 

 

Distributions Reinvested

 

—

 

 

—

 

 

—

 

 

Redeemed

 

—

 

 

—

 

 

—

 

 

Redemption Fees

 

—

 

 

—

 

 

—

 

 

Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions

 

(267,178

)

 

(70,824

)

 

5,000

 

 

Total Increase (Decrease) in Net Assets

 

(516,014

)

 

(77,014

)

 

4,279

 

 

Net Assets:

 

 

 

 

 

 

 

 

 

 

Beginning of Period

 

1,312,064

 

 

1,389,078

 

 

5,000

 

 

End of Period

 

$   796,050

 

 

$1,312,064

 

 

$  9,279

 

 

Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Assets

 

$         (144

)

 

$      (5,572

)

 

$       —

 

 

(1)

Capital Share Transactions:

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

3,786

 

 

5,989

 

 

1,071

 

 

Shares Issued on Distributions Reinvested

 

12,028

 

 

9,545

 

 

—

 

 

Shares Redeemed

 

(24,536

)

 

(17,759

)

 

—

 

 

Net Increase (Decrease) in Class A Shares Outstanding

 

(8,722

)

 

(2,225

)

 

1,071

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

—

 

 

—

 

 

10

 

 

Shares Issued on Distributions Reinvested

 

—

 

 

—

 

 

—

 

 

Shares Redeemed

 

—

 

 

—

 

 

—

 

 

Net Increase (Decrease) in Class B Shares Outstanding

 

—

 

 

—

 

 

10

 

 

^

Disciplined Large Cap Value Active Extension commenced operations on May 31, 2007.

 

@ Amount is less than $500.

 

 

 

The accompanying notes are an integral part of the financial statements.

185

 

2007 Annual Report

 

December 31, 2007

 

Statements of Changes in Net Assets

 

 

 

Focus Equity
Portfolio

 

Large Cap Relative Value
Portfolio

 

 

 

Year Ended
December 31,
2007
(000)

 

Year Ended
December 31,
2006
(000)

 

Year Ended
December 31,
2007
(000)

 

Year Ended
December 31,
2006
(000)

 

Increase (Decrease) in Net Assets

 

 

 

 

 

 

 

 

 

Operations:

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)

 

$

18

 

 

$

(157

)

 

$

5,052

 

 

$

3,883

 

 

Net Realized Gain (Loss)

 

1,077

 

 

11,170

 

 

11,824

 

 

13,797

 

 

Net Change in Unrealized Appreciation (Depreciation)

 

2,043

 

 

(10,424

)

 

(9,583

)

 

18,703

 

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

3,138

 

 

589

 

 

7,293

 

 

36,383

 

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(22

)

 

—

 

 

(4,158

)

 

(3,061

)

 

Net Realized Gain

 

—

 

 

—

 

 

(9,556

)

 

(8,593

)

 

Class B:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

—

 

 

—

 

 

(891

)

 

(886

)

 

Net Realized Gain

 

—

 

 

—

 

 

(2,283

)

 

(2,670

)

 

Total Distributions

 

(22

)

 

—

 

 

(16,888

)

 

(15,210

)

 

Capital Share Transactions:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscribed

 

2,269

 

 

8,415

 

 

67,425

 

 

94,848

 

 

Issued on Portfolio Merger

 

—

 

 

—

 

 

—

 

 

66,823

 

 

Distributions Reinvested

 

21

 

 

—

 

 

13,663

 

 

11,599

 

 

Redeemed

 

(3,443

)

 

(51,735

)

 

(47,813

)

 

(78,180

)

 

Redemption Fees

 

@—

 

 

@—

 

 

12

 

 

2

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscribed

 

776

 

 

4,977

 

 

8,087

 

 

5,886

 

 

Distributions Reinvested

 

—

 

 

—

 

 

3,161

 

 

3,542

 

 

Redeemed

 

(707

)

 

(14,276

)

 

(23,076

)

 

(54,962

)

 

Redemption Fees

 

@—

 

 

@—

 

 

3

 

 

1

 

 

Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions

 

(1,084

)

 

(52,619

)

 

21,462

 

 

49,559

 

 

Total Increase (Decrease) in Net Assets

 

2,032

 

 

(52,030

)

 

11,867

 

 

70,732

 

 

Net Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of Period

 

14,733

 

 

66,763

 

 

275,204

 

 

204,472

 

 

End of Period

 

$

16,765

 

 

$

14,733

 

 

$

287,071

 

 

$

275,204

 

 

Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Assets

 

$

(9

)

 

$

—

 

 

$

(21

)

 

$

(21

)

 

Accumulated Net Investment Loss Included in End of Period Net Assets

 

—

 

 

(7

)

 

—

 

 

—

 

 

(1)

Capital Share Transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

123

 

 

565

 

 

5,313

 

 

8,191

 

 

Shares Issued on Portfolio Merger

 

—

 

 

—

 

 

—

 

 

5,706

 

 

Shares Issued on Distributions Reinvested

 

1

 

 

—

 

 

1,112

 

 

986

 

 

Shares Redeemed

 

(205

)

 

(3,422

)

 

(3,838

)

 

(6,786

)

 

Net Increase (Decrease) in Class A Shares Outstanding

 

(81

)

 

(2,857

)

 

2,587

 

 

8,097

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

44

 

 

337

 

 

648

 

 

579

 

 

Shares Issued on Distributions Reinvested

 

—

 

 

—

 

 

256

 

 

302

 

 

Shares Redeemed

 

(42

)

 

(1,041

)

 

(1,857

)

 

(4,836

)

 

Net Increase (Decrease) in Class B Shares Outstanding

 

2

 

 

(704

)

 

(953

)

 

(3,955

)

 

@

Amount is less than $500.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

186

The accompanying notes are an integral part of the financial statements.

 

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Statements of Changes in Net Assets

 

 

 


Small Company Growth
Portfolio

 

Systematic Active
Large Cap Core
Portfolio

 

 

 

Year Ended
December 31,
2007
(000)

 

Year Ended
December 31,
2006
(000)

 

Year Ended
December 31,
2007
(000)

 

Period Ended
December 31,
2006^
(000)

 

Increase (Decrease) in Net Assets

 

 

 

 

 

 

 

 

 

Operations:

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)

 

$     (8,851

)

 

$   (12,827

)

 

$    78 

 

 

$    50 

 

 

Net Realized Gain (Loss)

 

67,104

 

 

169,063

 

 

47

 

 

(34

)

 

Net Change in Unrealized Appreciation (Depreciation)

 

(504

)

 

29,319

 

 

269

 

 

449

 

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

57,749

 

 

185,555

 

 

394

 

 

465

 

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

—

 

 

—

 

 

(65

)

 

(50

)

 

Net Realized Gain

 

(48,432

)

 

(79,237

)

 

(91

)

 

—

 

 

Return of Capital

 

—

 

 

—

 

 

(14

)

 

—

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

—

 

 

—

 

 

(1

)

 

(@—

)

 

Net Realized Gain

 

(34,374

)

 

(69,508

)

 

(2

)

 

—

 

 

Return of Capital

 

—

 

 

—

 

 

(@—

)

 

—

 

 

Total Distributions

 

(82,806

)

 

(148,745

)

 

(173

)

 

(50

)

 

Capital Share Transactions:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscribed

 

316,184

 

 

296,952

 

 

@—

 

 

5,900

 

 

Distributions Reinvested

 

46,288

 

 

74,528

 

 

—

 

 

—

 

 

Redeemed

 

(234,892

)

 

(261,098

)

 

(@—

)

 

—

 

 

Redemption Fees

 

67

 

 

55

 

 

—

 

 

—

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscribed

 

122,392

 

 

228,726

 

 

—

 

 

100

 

 

Distributions Reinvested

 

34,371

 

 

69,484

 

 

—

 

 

—

 

 

Redeemed

 

(308,689

)

 

(264,904

)

 

—

 

 

—

 

 

Redemption Fees

 

53

 

 

55

 

 

—

 

 

—

 

 

Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions

 

(24,226

)

 

143,798

 

 

@—

 

 

6,000

 

 

Total Increase (Decrease) in Net Assets

 

(49,283

)

 

180,608

 

 

221

 

 

6,415

 

 

Net Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of Period

 

1,885,305

 

 

1,704,697

 

 

6,415

 

 

—

 

 

End of Period

 

$1,836,022

 

 

$1,885,305

 

 

$6,636

 

 

$6,415

 

 

Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Assets

 

$

—

 

 

$           —

 

 

$    15

 

 

$      2

 

 

Accumulated Net Investment Loss Included in End of Period Net Assets

 

(22

)

 

(14

)

 

—

 

 

—

 

 

(1)

Capital Share Transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

22,899

 

 

21,757

 

 

@—

 

 

590

 

 

Shares Issued on Distributions Reinvested

 

3,507

 

 

5,644

 

 

—

 

 

—

 

 

Shares Redeemed

 

(16,936

)

 

(19,704

)

 

(@—

)

 

—

 

 

Net Increase (Decrease) in Class A Shares Outstanding

 

9,470

 

 

7,697

 

 

@—

 

 

590

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

9,315

 

 

17,495

 

 

—

 

 

10

 

 

Shares Issued on Distributions Reinvested

 

2,751

 

 

5,542

 

 

—

 

 

—

 

 

Shares Redeemed

 

(23,606

)

 

(20,843

)

 

—

 

 

—

 

 

Net Increase (Decrease) in Class B Shares Outstanding

 

(11,540

)

 

2,194

 

 

—

 

 

10

 

 

^

  Systematic Active Large Cap Core Portfolio commenced operations on April 28, 2006.

@ Amount is less than $500 or 500 shares.

 

 

The accompanying notes are an integral part of the financial statements.

187

 


 

2007 Annual Report

 

December 31, 2007

 

Statements of Changes in Net Assets

 

 

 

Systematic Active
Small Cap Core
Portfolio

 

Systematic Active
Small Cap Growth
Portfolio

 

 

 

Year Ended
December 31,
2007
(000)

 

Year Ended
December 31,
2006 ^
(000)

 

Year Ended
December 31,
2007
(000)

 

Period Ended
December 31,
2006 ^
(000)

 

Increase (Decrease) in Net Assets

 

 

 

 

 

 

 

 

 

Operations:

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)

 

$     53

 

 

$     19 

 

 

$      9

 

 

$     (6

)

 

Net Realized Gain (Loss)

 

359

 

 

(166

)

 

489

 

 

(183

)

 

Net Change in Unrealized Appreciation (Depreciation)

 

(962

)

 

120

 

 

(438

)

 

33

 

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

(550

)

 

(27

)

 

60

 

 

(156

)

 

Distributions from and/or in excess of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(35

)

 

(19

)

 

(8

)

 

—

 

 

Net Realized Gain

 

(77

)

 

—

 

 

(233

)

 

—

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(@—

)

 

(@—

)

 

—

 

 

—

 

 

Net Realized Gain

 

(1

)

 

—

 

 

(3

)

 

—

 

 

Total Distributions

 

(113

)

 

(19

)

 

(244

)

 

—

 

 

Capital Share Transactions:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscribed

 

@—

 

 

6,500

 

 

25

 

 

6,800

 

 

Distributions Reinvested

 

—

 

 

—

 

 

1

 

 

—

 

 

Redeemed

 

(@—

)

 

—

 

 

(@—

)

 

—

 

 

Redemption Fees

 

—

 

 

—

 

 

—

 

 

—

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscribed

 

@—

 

 

100

 

 

—

 

 

100

 

 

Distributions Reinvested

 

—

 

 

—

 

 

—

 

 

—

 

 

Redeemed

 

—

 

 

—

 

 

—

 

 

—

 

 

Redemption Fees

 

—

 

 

—

 

 

—

 

 

—

 

 

Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions

 

@—

 

 

6,600

 

 

26

 

 

6,900

 

 

Total Increase (Decrease) in Net Assets

 

(663

)

 

6,554

 

 

(158

)

 

6,744

 

 

Net Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of Period

 

6,554

 

 

—

 

 

6,744

 

 

—

 

 

End of Period

 

$5,891

 

 

$6,554

 

 

$6,586

 

 

$6,744

 

 

Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Assets

 

$      3

 

 

$      2

 

 

$    —

 

 

$    —

 

 

(1)

Capital Share Transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

@—

 

 

650

 

 

3

 

 

680

 

 

Shares Issued on Distributions Reinvested

 

—

 

 

—

 

 

@—

 

 

—

 

 

Shares Redeemed

 

(@—

)

 

—

 

 

(@—

)

 

—

 

 

Net Increase (Decrease) in Class A Shares Outstanding

 

—

 

 

650

 

 

3

 

 

680

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

—

 

 

10

 

 

—

 

 

10

 

 

Shares Issued on Distributions Reinvested

 

—

 

 

—

 

 

—

 

 

—

 

 

Shares Redeemed

 

—

 

 

—

 

 

—

 

 

—

 

 

Net Increase (Decrease) in Class B Shares Outstanding

 

—

 

 

10

 

 

—

 

 

10

 

 

^

Systematic Active Small Cap Core and Systematic Active Small Cap Growth Portfolios commenced operations on April 28, 2006.

 

@ Amount is less than $500 or 500 shares.

 

 

 

 

 

 

 

 

 

 

188

The accompanying notes are an integral part of the financial statements.

 

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Statements of Changes in Net Assets

 

 

 

Systematic Active
Small Cap Value
Portfolio

 

Systematic Large Cap
Core Active Extension
Portfolio

 

 

 

Year Ended
December 31,
2007
(000)

 

Period Ended
December 31,
2006 ^
(000)

 

Period Ended
December 31, 2007^
(000)

 

Increase (Decrease) in Net Assets

 

 

 

 

 

 

 

Operations:

 

 

 

 

 

 

 

Net Investment Income (Loss)

 

$

    108

 

 

$

     40

 

$

      (1

)

 

Net Realized Gain (Loss)

 

439

 

 

(5)

 

(266

)

 

Net Change in Unrealized Appreciation (Depreciation)

 

(1,576)

 

 

250

 

(54

)

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

(1,029)

 

 

285

 

(321

)

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(84

)

 

(39)

 

(1

)

 

Net Realized Gain

 

(326

)

 

—

 

—

 

 

Class B:

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(1

)

 

(1)

 

—

 

 

Net Realized Gain

 

(5

)

 

—

 

—

 

 

Total Distributions

 

(416)

 

 

(40)

 

(1

)

 

Capital Share Transactions:(1)

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

Subscribed

 

@—

 

 

6,600

 

5,000

 

 

Distributions Reinvested

 

—

 

 

—

 

—

 

 

Redeemed

 

(@—

)

 

—

 

—

 

 

Redemption Fees

 

—

 

 

—

 

—

 

 

Class B:

 

 

 

 

 

 

 

 

 

Subscribed

 

@—

 

 

100

 

—

 

 

Distributions Reinvested

 

—

 

 

—

 

—

 

 

Redeemed

 

—

 

 

—

 

—

 

 

Redemption Fees

 

—

 

 

—

 

—

 

 

Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions

 

@—

 

 

6,700

 

5,000

 

 

Total Increase (Decrease) in Net Assets

 

(1,445

)

 

6,945

 

4,678

 

 

Net Assets:

 

 

 

 

 

 

 

 

 

Beginning of Period

 

6,945

 

 

—

 

5,000

 

 

End of Period

 

$

5,500

 

 

$

6,945

 

$

9,678

 

 

Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Assets

 

$

       1

 

 

$

       2

 

$

     —

 

 

(1)

Capital Share Transactions:

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

@—

 

 

660

 

999

 

 

Shares Issued on Distributions Reinvested

 

—

 

 

—

 

—

 

 

Shares Redeemed

 

(@—)

 

 

—

 

—

 

 

Net Increase (Decrease) in Class A Shares Outstanding

 

@—

 

 

660

 

999

 

 

Class B:

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

—

 

 

10

 

10

 

 

Shares Issued on Distributions Reinvested

 

—

 

 

—

 

—

 

 

Shares Redeemed

 

—

 

 

—

 

—

 

 

Net Increase (Decrease) in Class B Shares Outstanding

 

—

 

 

10

 

10

 

 

^

Systematic Active Small Cap Value Portfolio and Systematic Large Cap Core Active Extension Portfolio commenced operations on April 28, 2006 and May 31, 2007, respectively.

@

Amount is less than $500 or 500 shares.

 

 

The accompanying notes are an integral part of the financial statements.

189

 


               

2007 Annual Report

 

December 31, 2007

 

Statements of Changes in Net Assets

 

 

 

U.S. Large Cap Growth
Portfolio

 

U.S. Real Estate
Portfolio

 

 

 

Year Ended
December 31,
2007
(000)

 

Year Ended
December 31,
2006
(000)

 

Year Ended
December 31,
2007
(000)

 

Year Ended
December 31,
2006
(000)

 

Increase (Decrease) in Net Assets

 

 

 

 

 

 

 

 

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)

 

$

    5,480

 

 

$

      160

 

 

$

  20,283

 

 

$

   25,097

 

 

Net Realized Gain (Loss)

 

72,047

 

 

4,322

 

 

420,629

 

 

242,781

 

 

Net Change in Unrealized Appreciation (Depreciation)

 

166,291

 

 

40,881

 

 

(693,156

)

 

266,069

 

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

243,818

 

 

45,363

 

 

(252,244

)

 

533,947

 

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(4,987

)

 

(184

)

 

(24,407

)

 

(25,711

)

 

Net Realized Gain

 

—

 

 

—

 

 

(322,942

)

 

(186,870

)

 

Class B:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(436

)

 

—

 

 

(3,761

)

 

(3,370

)

 

Net Realized Gain

 

—

 

 

—

 

 

(58,276

)

 

(29,839

)

 

Total Distributions

 

(5,423

)

 

(184

) 

 

(409,386

)

 

(245,790

)

 

Capital Share Transactions:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscribed

 

365,245

 

 

333,417

 

 

358,040

 

 

529,570

 

 

Distributions Reinvested

 

4,984

 

 

184

 

 

340,743

 

 

204,975

 

 

Redeemed

 

(196,520

)

 

(234,697

) 

 

(863,055

)

 

(563,233

)

 

Redemption Fees

 

3

 

 

16

 

 

61

 

 

35

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscribed

 

113,572

 

 

38,689

 

 

111,307

 

 

101,776

 

 

Distributions Reinvested

 

435

 

 

—

 

 

62,036

 

 

33,205

 

 

Redeemed

 

(22,637

)

 

(20,266

) 

 

(168,578

)

 

(57,345

)

 

Redemption Fees

 

@—

 

 

1

 

 

10

 

 

5

 

 

Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions

 

265,082

 

 

117,344

 

 

(159,436

)

 

248,988

 

 

Total Increase (Decrease) in Net Assets

 

503,477

 

 

162,523

 

 

(821,066

)

 

537,145

 

 

Net Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of Period

 

1,070,106

 

 

907,583

 

 

1,904,463

 

 

1,367,318

 

 

End of Period

 

$

1,573,583

 

 

$

1,070,106

 

 

$

1,083,397

 

 

$

1,904,463

 

 

Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Assets

 

$

      (23

)

 

$

      (43

) 

 

$

    1,114

 

 

$

   (2,899

)

 

(1)   Capital Share Transactions†:

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

15,536

 

 

17,611

 

 

12,926

 

 

19,517

 

 

Shares Issued on Distributions Reinvested

 

205

 

 

9

 

 

20,310

 

 

7,480

 

 

Shares Redeemed

 

(8,673

)

 

(12,445

)

 

(33,292

)

 

(20,735

)

 

Net Increase (Decrease) in Class A Shares Outstanding

 

7,068

 

 

5,175

 

 

(56

)

 

6,262

 

 

Class B:

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Subscribed

 

4,978

 

 

2,118

 

 

3,955

 

 

3,751

 

 

Shares Issued on Distributions Reinvested

 

18

 

 

—

 

 

3,756

 

 

1,221

 

 

Shares Redeemed

 

(1,018

)

 

(1,083

) 

 

(6,266

)

 

(2,158

)

 

Net Increase (Decrease) in Class B Shares Outstanding

 

3,978

 

 

1,035

 

 

1,445

 

 

2,814

 

 

@ Amount is less than $500.

 

190

The accompanying notes are an integral part of the financial statements.

 


 

2007 Annual Report

 

December 31, 2007

 

Statements of Changes in Net Assets

 

 

 

U.S. Small/Mid Cap Value 
Portfolio

 

Emerging Markets Debt
Portfolio

 

 

 

Year Ended
December 31,^
2007
(000)

 

Year Ended
December 31,
2007
(000)

 

Year Ended
December 31,
2006
(000)

 

Increase (Decrease) in Net Assets

 

 

 

 

 

 

 

Operations:

 

 

 

 

 

 

 

Net Investment Income (Loss)

 

$

     5

 

$

 3,188

 

$

 5,222

 

Net Realized Gain (Loss)

 

(17

)

4,437

 

1,962

 

Net Change in Unrealized Appreciation (Depreciation)

 

(1,072

)

(5,719)

 

1,089

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

(1,084

)

1,906

 

8,273

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

Net Investment Income

 

—

 

(4,215

)

(5,931

)

Net Realized Gain

 

(18

)

—

 

—

 

Class B:

 

 

 

 

 

 

 

Net Investment Income

 

—

 

(68

)

(37

)

Net Realized Gain

 

(@—

)

—

 

—

 

Total Distributions

 

(18

)

(4,283

)

(5,968

)

Capital Share Transactions:(1)

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

Subscribed

 

1,326

 

17,784

 

10,023

 

Distributions Reinvested

 

1

 

4,205

 

3,531

 

Redeemed

 

(18

)

(48,197

)

(26,920

)

Redemption Fees

 

—

 

14

 

1

 

Class B:

 

 

 

 

 

 

 

Subscribed

 

—

 

423

 

19

 

Distributions Reinvested

 

—

 

68

 

37

 

Redeemed

 

—

 

(141

)

(109

)

Redemption Fees

 

—

 

@—

 

@—

 

Net Increase (Decrease) in Net Assets Resulting from Capital Share Transactions

 

1,309

 

(25,844

)

(13,418

)

Total Increase (Decrease) in Net Assets

 

207

 

(28,221

)

(11,113

)

Net Assets:

 

 

 

 

 

 

 

Beginning of Period

 

20,000

 

81,777

 

92,890

 

End of Period

 

$

20,207

 

$

53,556

 

$

81,777

 

Undistributed (Distributions in Excess of) Net Investment Income Included in End of Period Net Assets

 

$

     6

 

$

  (270

)

$

(1,051

)

(1)   Capital Share Transactions†:

 

 

 

 

 

 

 

Class A:

 

 

 

 

 

 

 

Shares Subscribed

 

2,125

 

1,441

 

855

 

Shares Issued on Distributions Reinvested

 

@—

 

371

 

295

 

Shares Redeemed

 

(2

)

(3,993

)

(2,333

)

Net Increase (Decrease) in Class A Shares Outstanding

 

2,123

 

(2,181

)

(1,183

)

Class B:

 

 

 

 

 

 

 

Shares Subscribed

 

10

 

33

 

2

 

Shares Issued on Distributions Reinvested

 

—

 

6

 

3

 

Shares Redeemed

 

—

 

(11

)

(9

)

Net Increase (Decrease) in Class B Shares Outstanding

 

10

 

28

 

(4

)

^                  U.S. Small/Mid Cap Value Portfolio commenced operations on September 27, 2007.

†                  Capital share transactions prior to March 17, 2006 for the Emerging Markets Debt Portfolio have been restated to reflect the effect of a reverse stock split as described in the Notes to Financial Statements.

@            Amount is less than $500 or 500 shares.

 

The accompanying notes are an integral part of the financial statements.

191

 


 

2007 Annual Report

 

December 31, 2007

 

Statements of Cash Flows

 

 

 

International
Growth
Active
Extension
Portfolio†
(000)

 

Disciplined
Large Cap
Value Active
Extension
Portfolio††
(000)

 

Systematic
Large Cap
Core Active
Extension
Portfolio††
(000)

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Proceeds from Sales and Maturities of Investments

 

$   2,365

 

$   3,392

 

$   1,502

 

Purchases of Investments

 

(15,652

)

(16,135

)

(14,535

)

Proceeds from Securities Sold Short

 

4,409

 

5,410

 

3,645

 

Covers of Securities Sold Short

 

(1,098

)

(2,433

)

(568

)

Net (Increase) Decrease in Short-Term Investments

 

(43

)

(83

)

(20

)

Net (Increase) Decrease in Cash Overdrafts

 

4

 

—

 

—

 

Net (Increase) Decrease in Foreign Currency Holdings

 

(21

)

—

 

—

 

Net Realized Gain (Loss) on Foreign Currency Transactions

 

5

 

—

 

—

 

Net Investment Income

 

(23

)

27

 

(1

)

Adjustment to Reconcile Net Investment Income to Net Cash Provided by Operating Activities:

 

 

 

 

 

 

 

Net (Increase) Decrease in Receivables Related to Operations

 

(6

)

(27

)

(10

)

Net Increase (Decrease) in Payables Related to Operations

 

60

 

28

 

23

 

Net Cash Provided (Used) in Operating Activities

 

(10,000

)

(9,821

)

(9,964

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Proceeds from Portfolio Shares Sold

 

10,000

 

10,000

 

10,000

 

Cash Dividends and Distributions Paid

 

—

 

(29

)

(1

)

Net Cash Received (Paid) in Financing Activities

 

10,000

 

9,971

 

9,999

 

Net Increase (Decrease) in Cash

 

—

 

150

 

35

 

Cash at Beginning of Period

 

—

 

—

 

—

 

Cash at End of Period

 

$   —

 

$   150

 

$   35

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

Interest Paid on Short Positions during the Period

 

20

 

16

 

12

 

†      For the Period from July 31, 2007 (commencement of operations) to December 31, 2007.

††    For the Period from May 31, 2007 (commencement of operations) to December 31, 2007.

 

192

The accompanying notes are an integral part of the financial statements.

 


 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

Active International Allocation Portfolio

 

 

 

Class A

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$       15.10

 

$    12.43

 

$    10.96

 

$      9.58

 

$      7.30

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.30

 

0.27

 

0.21

 

0.13

 

0.13

 

Net Realized and Unrealized Gain (Loss) on Investments

 

1.96

 

2.75

 

1.40

 

1.46

 

2.32

 

Total from Investment Operations

 

2.26

 

3.02

 

1.61

 

1.59

 

2.45

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.54

)

(0.35

)

(0.14

)

(0.21

)

(0.17

)

Net Realized Gain

 

(0.90

)

—

 

—

 

—

 

—

 

Total Distributions

 

(1.44

)

(0.35

)

(0.14

)

(0.21

)

(0.17

)

Redemption Fees

 

0.00

‡

0.00

‡ 

0.00

‡ 

—

 

—

 

Net Asset Value, End of Period

 

$       15.92

 

$    15.10

 

$    12.43

 

$    10.96

 

$      9.58

 

Total Return++

 

15.30

%

24.34

%

14.85

%

16.64

%

33.65

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$1,093,735

 

$967,361

 

$792,329

 

$580,851

 

$353,488

 

Ratio of Expenses to Average Net Assets (1)

 

0.80

%+

0.80

%

0.80

%

0.80

%

0.80

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

0.80

%+

0.80

%

0.80

%

0.80

%

0.80

%

Ratio of Net Investment Income (Loss) to Average Net Assets(1)

 

1.93

%+

1.99

%

1.84

%

1.28

%

1.66

%

Portfolio Turnover Rate

 

28

%

16

%

24

%

24

%

55

%

(1) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

0.81

%+

0.82

%

0.83

%

0.91

%

0.96

%

Net Investment Income (Loss) to Average Net Assets

 

1.92

%+

1.97

%

1.81

%

1.18

%

1.50

%

 

 

 

 

 

 

Class B

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$       15.36

 

$    12.64

 

$    11.13

 

$      9.72

 

$      7.41

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.24

 

0.22

 

0.19

 

0.10

 

0.12

 

Net Realized and Unrealized Gain (Loss) on Investments

 

2.01

 

2.81

 

1.43

 

1.35

 

2.33

 

Total from Investment Operations

 

2.25

 

3.03

 

1.62

 

1.45

 

2.45

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.51

)

(0.31

)

(0.11

)

(0.17

)

(0.14

)

Net Realized Gain

 

(0.90

)

—

 

—

 

—

 

—

 

Total Distributions

 

(1.41

)

(0.31

)

(0.11

)

(0.17

)

(0.14

)

Redemption Fees

 

0.00

‡ 

0.00

‡

0.00

‡ 

0.13

 

—

 

Net Asset Value, End of Period

 

$       16.20

 

$    15.36

 

$    12.64

 

$   11.13

 

$      9.72

 

Total Return++

 

14.95

%

23.95

%

14.67

%

16.29

%

33.13

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$       5,285

 

$   3,573

 

$   2,215

 

$  2,623

 

$    5,635

 

Ratio of Expenses to Average Net Assets (2)

 

1.05

%+

1.05

%

1.05

%

1.05

%

1.05

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.05

%+

1.05

%

1.05

%

1.05

%

1.05

%

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

1.52

%+

1.61

%

1.69

%

1.03

%

1.41

%

Portfolio Turnover Rate

 

28

%

16

%

24

%

24

%

55

%

(2) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

1.06

%+

1.07

%

1.08

%

1.16

%

1.21

%

Net Investment Income (Loss) to Average Net Assets

 

1.51

%+

1.59

%

1.66

%

0.92

%

1.25

%

†                  Per share amount is based on average shares outstanding.

‡                  Amount is less than $0.005 per share.

+                 Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++        Calculated based on the net asset value as of the last business day of the period.

 

The accompanying notes are an integral part of the financial statements.

193

 


 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

Emerging Markets Portfolio

 

 

 

Class A

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$     29.29

 

$     25.36

 

$     19.10

 

$    15.52

 

$     10.13

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.10

 

0.18

 

0.25

 

0.19

 

0.14

 

Net Realized and Unrealized Gain (Loss) on Investments

 

11.76

 

9.22

 

6.36

 

3.54

 

5.44

 

Total from Investment Operations

 

11.86

 

9.40

 

6.61

 

3.73

 

5.58

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.13

)

(0.29

)

(0.35

)

(0.15

)

(0.18

)

Net Realized Gain

 

(7.01

)

(5.18

)

—

 

—

 

—

 

Return of Capital

 

—

 

—

 

—

 

—

 

(0.01

)

Total Distributions

 

(7.14

)

(5.47

)

(0.35

)

(0.15

)

(0.19

)

Redemption Fees

 

0.01

 

0.00

‡ 

0.00

‡ 

0.00

‡

0.00

‡ 

Net Asset Value, End of Period

 

$     34.02

 

$     29.29

 

$     25.36

 

$    19.10

 

$     15.52

 

Total Return++

 

41.56

%

38.00

%

34.54

%

24.09

%

55.08

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$3,323,130

 

$2,283,535

 

$1,749,671

 

$1,249,299

 

$1,020,353

 

Ratio of Expenses to Average Net Assets

 

1.35

%+

1.40

%

1.41

%

1.52

%^^

1.64

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.35

%+

1.40

%

1.41

%

1.52

%

1.61

%

Ratio of Net Investment Income (Loss) to Average Net Assets

 

0.28

%+

0.62

%

1.17

%

1.09

%

1.15

%

Portfolio Turnover Rate

 

101

%

82

%

59

%

73

%

92

%

 

 

 

 

 

 

Class B

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$     28.91

 

$     25.07

 

$     18.90

 

$     15.36

 

$      10.06

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.01

 

0.13

 

0.19

 

0.15

 

0.11

 

Net Realized and Unrealized Gain (Loss) on Investments

 

11.60

 

9.09

 

6.26

 

3.49

 

5.35

 

Total from Investment Operations

 

11.61

 

9.22

 

6.45

 

3.64

 

5.46

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.05

)

(0.20

)

(0.29

)

(0.11

)

(0.15

)

Net Realized Gain

 

(7.01

)

(5.18

)

—

 

—

 

—

 

Return of Capital

 

—

 

—

 

—

 

—

 

(0.01

)

Total Distributions

 

(7.06

)

(5.38

)

(0.29

)

(0.11

)

(0.16

)

Redemption Fees

 

0.00

‡ 

0.00

‡

0.01

 

0.01

 

—

 

Net Asset Value, End of Period

 

$     33.46

 

$     28.91

 

$     25.07

 

$      18.90

 

$      15.36

 

Total Return++

 

41.20

%

37.65

%

34.17

%

23.84

%

54.31

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$ 179,834

 

$  126,450

 

$  103,482

 

$   71,254

 

$    42,046

 

Ratio of Expenses to Average Net Assets

 

1.60

%+

1.65

%

1.66

%

1.77

%^^

1.89

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.60

%+

1.65

%

1.66

%

1.77

%

1.86

%

Ratio of Net Investment Income (Loss) to Average Net Assets

 

0.02

%+

0.47

%

0.90

%

0.89

%

0.90

%

Portfolio Turnover Rate

 

101

%

82

%

59

%

73

%

92

%

†

Per share amount is based on average shares outstanding.

‡

Amount is less than $0.005 per share.

+

Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++

Calculated based on the net asset value as of the last business day of the period.

^^

Effective November 1, 2004, the Adviser has voluntarily agreed to limit the ratio of expenses to average net assets to the maximum ratio of 1.65% for Class A and 1.90% for Class B shares. Prior to November 1, 2004, the maximum ratios were 1.75% for Class A and 2.00% for Class B shares.

 

194

The accompanying notes are an integral part of the financial statements.

 


 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

Global Franchise Portfolio

 

 

 

Class A

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$

17.98

 

$

15.69

 

$

15.12

 

$

14.29

 

$

11.29

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.40

 

0.30

 

0.26

 

0.27

 

0.23

 

Net Realized and Unrealized Gain (Loss) on Investments

 

1.30

 

3.07

 

1.52

 

1.66

 

2.91

 

Total from Investment Operations

 

1.70

 

3.37

 

1.78

 

1.93

 

3.14

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.15

)

(0.13

)

(0.31

)

—

 

(0.03

)

Net Realized Gain

 

(2.91

)

(0.95

)

(0.90

)

(1.13

)

(0.11

)

Total Distributions

 

(3.06

)

(1.08

)

(1.21

)

(1.13

)

(0.14

)

Redemption Fees

 

—

 

0.00

‡

0.00

‡

0.03

 

0.00

‡

Net Asset Value, End of Period

 

$

16.62

 

$

17.98

 

$

15.69

 

$

15.12

 

$

14.29

 

Total Return++

 

9.58

%

21.60

%

11.91

%

13.77

%

27.92

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$

110,135

 

$

128,434

 

$

85,018

 

$

58,223

 

$

79,756

 

Ratio of Expenses to Average Net Assets (1)

 

0.99

%+

1.00

%

1.00

%

1.00

%

1.00

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

0.98

%+

1.00

%

1.00

%

N/A

 

N/A

 

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

2.10

%+

1.74

%

1.67

%

1.82

%

1.91

%

Portfolio Turnover Rate

 

22

%

35

%

19

%

21

%

32

%

(1) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

1.01

%

1.07

%

1.16

%

1.23

%

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

1.73

%

1.60

%

1.66

%

1.68

%

 

 

 

 

 

 

Class B

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$

17.82

 

$

15.56

 

$

15.01

 

$

14.22

 

$

11.24

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.30

 

0.24

 

0.24

 

0.22

 

0.22

 

Net Realized and Unrealized Gain (Loss) on Investments

 

1.34

 

3.04

 

1.48

 

1.69

 

2.88

 

Total from Investment Operations

 

1.64

 

3.28

 

1.72

 

1.91

 

3.10

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.11

)

(0.07

)

(0.27

)

—

 

(0.01

)

Net Realized Gain

 

(2.91

)

(0.95

)

(0.90

)

(1.13

)

(0.11

)

Total Distributions

 

(3.02

)

(1.02

)

(1.17

)

(1.13

)

(0.12

)

Redemption Fees

 

—

 

0.00

‡

—

 

0.01

 

—

 

Net Asset Value, End of Period

 

$

16.44

 

$

17.82

 

$

15.56

 

$

15.01

 

$

14.22

 

Total Return++

 

9.26

%

21.31

%

11.53

%

13.56

%

27.62

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$

6,327

 

$

4,135

 

$

4,401

 

$

3,941

 

$

2,682

 

Ratio of Expenses to Average Net Assets (2)

 

1.24

%+

1.25

%

1.25

%

1.25

%

1.25

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.23

%+

1.25

%

1.25

%

N/A

 

N/A

 

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

1.62

%+

1.43

%

1.52

%

1.47

%

1.66

%

Portfolio Turnover Rate

 

22

%

35

%

19

%

21

%

32

%

(2) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

1.26

%

1.32

%

1.41

%

1.48

%

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

1.42

%

1.45

%

1.31

%

1.43

%

†

Per share amount is based on average shares outstanding.

‡

Amount is less than $0.005 per share.

+

Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++

Calculated based on the net asset value as of the last business day of the period.

 

The accompanying notes are an integral part of the financial statements.

195

 


 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

Global Real Estate Portfolio

 

 

 

Class A

 

 

Year Ended

Period from

 

 

December 31,

August 30, 2006^

Selected Per Share Data and Ratios

 

2007

to December 31, 2006

Net Asset Value, Beginning of Period

 

$

11.56

 

$

10.00

 

Income (Loss) from Investment Operations

 

 

 

 

 

Net Investment Income (Loss)†

 

0.18

 

0.06

 

Net Realized and Unrealized Gain (Loss) on Investments

 

(1.09

)

1.66

 

Total from Investment Operations

 

(0.91

)

1.72

 

Distributions from and/or in Excess of:

 

 

 

 

 

Net Investment Income

 

(0.40

)

(0.13

)

Net Realized Gain

 

(0.21

)

(0.03

)

Total Distributions

 

(0.61

)

(0.16

)

Redemption Fees

 

0.00

‡ 

0.00

‡ 

Net Asset Value, End of Period

 

$

10.04

 

$

11.56

 

Total Return++

 

(7.87

)%

17.20

%#

Ratios and Supplemental Data:

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$

632,737

 

$

238,647

 

Ratio of Expenses to Average Net Assets (1)

 

1.02

%+

1.05

%*

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.02

%+

—

 

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

1.55

%+

1.53

%*

Portfolio Turnover Rate

 

39

%

4

%#

(1)Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

1.15

%*

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

1.43

%*

 

 

 

Class B

 

 

Year Ended

 

Period from

 

 

December 31,

 

August 30, 2006^

Selected Per Share Data and Ratios

 

2007

 

to December 31, 2006

Net Asset Value, Beginning of Period

 

$

11.56

 

$

10.00

 

Income (Loss) from Investment Operations

 

 

 

 

 

Net Investment Income (Loss)†

 

0.16

 

0.04

 

Net Realized and Unrealized Gain (Loss) on Investments

 

(1.11

)

1.67

 

Total from Investment Operations

 

(0.95

)

1.71

 

Distributions from and/or in Excess of:

 

 

 

 

 

Net Investment Income

 

(0.38

)

(0.12

)

Net Realized Gain

 

(0.21

)

(0.03

)

Total Distributions

 

(0.59

)

(0.15

)

Redemption Fees

 

0.00

‡ 

0.00

‡ 

Net Asset Value, End of Period

 

$

10.02

 

$

11.56

 

Total Return++

 

(8.15

)%

17.11

%#

Ratios and Supplemental Data:

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$

13,187

 

$

116

 

Ratio of Expenses to Average Net Assets (2)

 

1.27

%+

1.30

%*

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.27

%+

—

 

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

1.39

%+

1.07

%*

Portfolio Turnover Rate

 

39

%

4

%#

(2)Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

1.41

%*

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

0.96

%*

^                    Commencement of Operations

†                    Per share amount is based on average shares outstanding.

‡                    Amount is less than $0.005 per share.

#                   Not Annualized

*                   Annualized

+                   Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++            Calculated based on the net asset value as of the last business day of the period.

 

196

The accompanying notes are an integral part of the financial statements.

 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

Global Value Equity Portfolio

 

 

 

Class A

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$

20.24

 

$

17.85

 

$

17.81

 

$

15.84

 

$

12.46

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.33

 

0.33

 

0.31

 

0.22

 

0.19

 

Net Realized and Unrealized Gain (Loss) on Investments

 

0.96

 

3.44

 

0.72

 

2.02

 

3.42

 

Total from Investment Operations

 

1.29

 

3.77

 

1.03

 

2.24

 

3.61

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.34

)

(0.34

)

(0.31

)

(0.22

)

(0.16

)

Net Realized Gain

 

(3.49

)

(1.05

)

(0.68

)

(0.05

)

(0.08

)

Total Distributions

 

(3.83

)

(1.39

)

(0.99

)

(0.27

)

(0.24

)

Redemption Fees

 

0.00

‡ 

0.01

 

0.00

‡

0.00

‡

0.01

 

Net Asset Value, End of Period

 

$

17.70

 

$

20.24

 

$

17.85

 

$

17.81

 

$

15.84

 

Total Return++

 

6.65

%

21.40

%

5.81

%

14.13

%

29.21

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$

66,035

 

$

101,163

 

$

86,000

 

$

68,505

 

$

55,545

 

Ratio of Expenses to Average Net Assets (1)

 

0.90

%+

0.91

%

0.90

%

1.00

%

1.00

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

0.90

%+

N/A

 

N/A

 

1.00

%

1.00

%

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

1.58

%+

1.71

%

1.74

%

1.31

%

1.44

%

Portfolio Turnover Rate

 

31

%

29

%

29

%

30

%

53

%

(1)Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

N/A

 

N/A

 

1.07

%

1.20

%

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

N/A

 

N/A

 

1.24

%

1.24

%

 

 

 

Class B

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$

20.03

 

$

17.69

 

$

17.64

 

$

15.70

 

$

12.35

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.29

 

0.28

 

0.27

 

0.17

 

0.16

 

Net Realized and Unrealized Gain (Loss) on Investments

 

0.93

 

3.40

 

0.71

 

2.00

 

3.40

 

Total from Investment Operations

 

1.22

 

3.68

 

0.98

 

2.17

 

3.56

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.28

)

(0.29

)

(0.25

)

(0.18

)

(0.13

)

Net Realized Gain

 

(3.49

)

(1.05

)

(0.68

)

(0.05

)

(0.08

)

Total Distributions

 

(3.77

)

(1.34

)

(0.93

)

(0.23

)

(0.21

)

Redemption Fees

 

0.00

‡ 

0.00

‡ 

0.00

‡ 

0.00

‡ 

—

 

Net Asset Value, End of Period

 

$

17.48

 

$

20.03

 

$

17.69

 

$

17.64

 

$

15.70

 

Total Return++

 

6.37

%

21.05

%

5.59

%

13.78

%

28.95

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$

24,199

 

$

27,773

 

$

21,938

 

$

30,598

 

$

32,761

 

Ratio of Expenses to Average Net Assets (2)

 

1.15

%+

1.16

%

1.15

%

1.25

%

1.25

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.15

%+

N/A

 

N/A

 

1.25

%

1.25

%

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

1.36

%+

1.47

%

1.53

%

1.07

%

1.19

%

Portfolio Turnover Rate

 

31

%

29

%

29

%

30

%

53

%

(2)Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

N/A

 

N/A

 

1.32

%

1.45

%

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

N/A

 

N/A

 

0.99

%

0.99

%

 

†                    Per share amount is based on average shares outstanding.

‡                    Amount is less than $0.005 per share.

+                   Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++            Calculated based on the net asset value as of the last business day of the period.

 

The accompanying notes are an integral part of the financial statements.

197

 

2007 Annual Report

 

December 31, 2007

nual Report

Financial Highlights

port

International Equity Portfolio

 

 

 

Class A

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$

20.58

 

$

20.34

 

$

20.99

 

$

19.06

 

$

14.60

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.43

 

0.64

 

0.43

 

0.30

 

0.24

 

Net Realized and Unrealized Gain (Loss) on Investments

 

1.53

 

3.93

 

0.93

 

3.50

 

4.54

 

Total from Investment Operations

 

1.96

 

4.57

 

1.36

 

3.80

 

4.78

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.46

)

(0.59

)

(0.35

)

(0.37

)

(0.32

)

Net Realized Gain

 

(3.16

)

(3.74

)

(1.66

)

(1.50

)

—

 

Total Distributions

 

(3.62

)

(4.33

)

(2.01

)

(1.87

)

(0.32

)

Redemption Fees

 

0.00

‡

0.00

‡

0.00

‡

0.00

‡

0.00

‡

Net Asset Value, End of Period

 

$

18.92

 

$

20.58

 

$

20.34

 

$

20.99

 

$

19.06

 

Total Return++

 

9.84

%

22.50

%

6.45

%

19.96

%

32.82

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$

5,105,807

 

$

5,900,906

 

$

6,704,732

 

$

7,200,606

 

$

5,657,941

 

Ratio of Expenses to Average Net Assets (1)

 

0.93

%+

0.94

%

0.93

%

0.98

%

1.00

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

0.93

%+

0.94

%

0.93

%

N/A

 

N/A

 

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

1.97

%+

2.88

%

2.04

%

1.48

%

1.48

%

Portfolio Turnover Rate

 

31

%

38

%

28

%

41

%

45

%

(1)Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

N/A

 

N/A

 

N/A

 

1.02

%

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

N/A

 

N/A

 

N/A

 

1.46

%

 

 

 

Class B

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$

20.40

 

$

20.19

 

$

20.85

 

$

18.96

 

$

14.53

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.37

 

0.60

 

0.37

 

0.24

 

0.18

 

Net Realized and Unrealized Gain (Loss) on Investments

 

1.52

 

3.87

 

0.93

 

3.47

 

4.54

 

Total from Investment Operations

 

1.89

 

4.47

 

1.30

 

3.71

 

4.72

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.40

)

(0.52

)

(0.30

)

(0.32

)

(0.29

)

Net Realized Gain

 

(3.16

)

(3.74

)

(1.66

)

(1.50

)

—

 

Total Distributions

 

(3.56

)

(4.26

)

(1.96

)

(1.82

)

(0.29

)

Redemption Fees

 

0.00

‡

0.00

‡

0.00

‡

0.00

‡

0.00

‡

Net Asset Value, End of Period

 

$

18.73

 

$

20.40

 

$

20.19

 

$

20.85

 

$

18.96

 

Total Return++

 

9.52

%

22.21

%

6.20

%

19.67

%

32.46

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$

1,019,595

 

$

1,152,822

 

$

1,206,125

 

$

1,073,278

 

$

733,298

 

Ratio of Expenses to Average Net Assets (2)

 

1.18

%+

1.19

%

1.18

%

1.23

%

1.25

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.18

%+

1.19

%

1.18

%

N/A

 

N/A

 

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

1.71

%+

2.71

%

1.77

%

1.21

%

1.23

%

Portfolio Turnover Rate

 

31

%

38

%

28

%

41

%

45

%

(2)Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

N/A

 

N/A

 

N/A

 

1.27

%

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

N/A

 

N/A

 

N/A

 

1.21

%

†                    Per share amount is based on average shares outstanding.

‡                    Amount is less than $0.005 per share.

+                   Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++            Calculated based on the net asset value as of the last business day of the period.

 

198

The accomapanying notes are an integral part of the financial statements.

 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

International Growth Active Extension Portfolio

 

 

 

Class A

 

 

Period from

 

 

July 31, 2007^

Selected Per Share Data and Ratios

 

to December 31, 2007

Net Asset Value, Beginning of Period

 

$

10.00

 

Income (Loss) from Investment Operations

 

 

 

Net Investment Income (Loss)†

 

(0.02

)

Net Realized and Unrealized Gain (Loss) on Investments

 

0.68

 

Total from Investment Operations

 

0.66

 

Distributions from and /or in Excess of:

 

 

 

Net Investment Income

 

—

 

Net Asset Value, End of Period

 

$

10.66

 

Total Return++

 

6.60

%#

Ratios and Supplemental Data:

 

 

 

Net Assets, End of Period (Thousands)

 

$

10,553

 

Ratio of Expenses to Average Net Assets (1)

 

2.17

%*+

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense, Dividend Expense on Short Positions and Stock Loan Fee

 

1.25

%*+

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

(0.52

)%*+

Portfolio Turnover Rate

 

20

%#

(1)Supplemental Information on the Ratios to Average Net Assets:

 

 

 

Ratios before expense limitation:

 

 

 

Expenses to Average Net Assets

 

3.84

%*+

Net Investment Income (Loss) to Average Net Assets

 

(2.19

)%*+

 

 

 

 

 

 

Class B

 

 

Period from

 

 

July 31, 2007^

Selected Per Share Data and Ratios

 

to December 31, 2007

Net Asset Value, Beginning of Period

 

$

10.00

 

Income (Loss) from Investment Operations

 

 

 

Net Investment Income (Loss)†

 

(0.03

)

Net Realized and Unrealized Gain (Loss) on Investments

 

0.68

 

Total from Investment Operations

 

0.65

 

Distributions from and /or in Excess of:

 

 

 

Net Investment Income

 

—

 

Net Asset Value, End of Period

 

$

10.65

 

Total Return++

 

6.50

%#

Ratios and Supplemental Data:

 

 

 

Net Assets, End of Period (Thousands)

 

$

106

 

Ratio of Expenses to Average Net Assets (2)

 

2.42

%*+

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense, Dividend Expense on Short Positions and Stock Loan Fee

 

1.50

%*+

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

(0.77

)%*+

Portfolio Turnover Rate

 

20

%#

(2)Supplemental Information on the Ratios to Average Net Assets:

 

 

 

Ratios before expense limitation:

 

 

 

Expenses to Average Net Assets

 

4.09

%*+

Net Investment Income (Loss) to Average Net Assets

 

(2.44

)%*+

^                         Commencement of Operations

†                         Per share amount is based on average shares outstanding.

#                        Not Annualized

*                        Annualized

+                        Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++                 Calculated based on the net asset value as of the last business day of the period.

 

The accompanying notes are an integral part of the financial statements.

199

 


 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

International Growth Equity Portfolio

 

 

 

Class A

 

 

 

 

 

 

Period from
December 27, 2005^

 

 

Year Ended December 31,

Selected Per Share Data and Ratios

 

2007

 

2006

 

to December 31, 2005

Net Asset Value, Beginning of Period

 

$

12.55

 

$

9.93

 

$

10.00

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.13

 

0.10

 

(0.00

)‡

Net Realized and Unrealized Gain (Loss) on Investments

 

1.75

 

2.67

 

(0.07

)

Total from Investment Operations

 

1.88

 

2.77

 

(0.07

)

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

Net Investment Income

 

(0.12

)

(0.09

)

—

 

Net Realized Gain

 

(0.55

)

(0.06

)

—

 

Total Distributions

 

(0.67

)

(0.15

)

—

 

Net Asset Value, End of Period

 

$

13.76

 

$

12.55

 

$

9.93

 

Total Return++

 

15.22

%

27.92

%

(0.70

)%#

Ratios and Supplemental Data:

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$

22,523

 

$

6,753

 

$

4,864

 

Ratio of Expenses to Average Net Assets (1)

 

1.00

%+

1.01

%

1.00

%*

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.00

%+

1.00

%

—

 

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

0.94

%+

0.89

%

(0.86

)%*

Portfolio Turnover Rate

 

32

%

24

%

4

%#

(1)Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

2.42

%+

2.74

%

31.60

%*

Net Investment Income (Loss) to Average Net Assets

 

(0.48

)%+

(0.84

)%

(31.46

)%*

 

 

 

 

 

 

 

 

 

 

Class B

 

 

 

 

 

 

Period from

 

 

Year Ended December 31,

December 27, 2005^ to December 31, 2005

Selected Per Share Data and Ratios

 

2007

 

2006

 

Net Asset Value, Beginning of Period

 

$

12.56

 

$

9.93

 

$

10.00

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.10

 

0.09

 

(0.00

)‡

Net Realized and Unrealized Gain (Loss) on Investments

 

1.76

 

2.64

 

(0.07

)

Total from Investment Operations

 

1.86

 

2.73

 

(0.07

)

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

Net Investment Income

 

(0.09

)

(0.04

)

—

 

Net Realized Gain

 

(0.55

)

(0.06

)

—

 

Total Distributions

 

(0.64

)

(0.10

)

—

 

Net Asset Value, End of Period

 

$

13.78

 

$

12.56

 

$

9.93

 

Total Return++

 

15.03

%

27.49

%

(0.70

)%#

Ratios and Supplemental Data:

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$

531

 

$

325

 

$

99

 

Ratio of Expenses to Average Net Assets (2)

 

1.25

%+

1.27

%

1.25

%*

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.25

%+

1.25

%

—

 

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

0.70

%+

0.78

%

(1.16

)%*

Portfolio Turnover Rate

 

32

%

24

%

4

%#

(2)Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

2.67

%+

3.07

%

31.85

%*

Net Investment Income (Loss) to Average Net Assets

 

(0.72

)%+

(1.02

)%

(31.76

)%*

^                  Commencement of Operations

†                  Per share amount is based on average shares outstanding.

‡                  Amount is less than $0.005 per share.

#                 Not Annualized

*                 Annualized

+                 Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++          Calculated based on the net asset value as of the last business day of the period.

 

200

The accompanying notes are an integral part of the financial statements.

 


 

 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

International Magnum Portfolio

 

 

 

Class A

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$

14.05

 

$

13.01

 

$

11.83

 

$

10.20

 

$

8.04

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.20

 

0.20

 

0.18

 

0.13

 

0.11

 

Net Realized and Unrealized Gain (Loss) on Investments

 

1.84

 

3.08

 

1.16

 

1.74

 

2.22

 

Total from Investment Operations

 

2.04

 

3.28

 

1.34

 

1.87

 

2.33

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.42

)

(0.36

)

(0.16

)

(0.24

)

(0.17

)

Net Realized Gain

 

(0.80

)

(1.88

)

—

 

—

 

—

 

Total Distributions

 

(1.22

)

(2.24

)

(0.16

)

(0.24

)

(0.17

)

Redemption Fees

 

0.00

‡

0.00

‡

0.00

‡

—

 

—

 

Net Asset Value, End of Period

 

$

14.87

 

$

14.05

 

$

13.01

 

$

11.83

 

$

10.20

 

Total Return++

 

14.77

%

25.39

%

11.35

%

18.45

%

29.07

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$

133,077

 

$

116,443

 

$

106,369

 

$

94,162

 

$

91,087

 

Ratio of Expenses to Average Net Assets (1)

 

1.00

%+

1.00

%

1.00

%

1.00

%

1.00

%

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)

 

1.28

%+

1.37

%

1.51

%

1.20

%

1.25

%

Portfolio Turnover Rate

 

39

%

81

%

32

%

49

%

53

%

(1)Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

1.03

%+

1.11

%

1.12

%

1.23

%

1.29

%

Net Investment Income (Loss) to Average Net Assets

 

1.25

%+

1.26

%

1.39

%

0.96

%

0.96

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class B

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$

14.01

 

$

12.97

 

$

11.80

 

$

10.18

 

$

8.04

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.16

 

0.18

 

0.15

 

0.11

 

0.10

 

Net Realized and Unrealized Gain (Loss) on Investments

 

1.83

 

3.06

 

1.15

 

1.70

 

2.18

 

Total from Investment Operations

 

1.99

 

3.24

 

1.30

 

1.81

 

2.28

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.38

)

(0.32

)

(0.13

)

(0.22

)

(0.14

)

Net Realized Gain

 

(0.80

)

(1.88

)

—

 

—

 

—

 

Total Distributions

 

(1.18

)

(2.20

)

(0.13

)

(0.22

)

(0.14

)

Redemption Fees

 

0.00

‡

0.00

‡

0.00

‡

0.03

 

0.00

‡

Net Asset Value, End of Period

 

$

14.82

 

$

14.01

 

$

12.97

 

$

11.80

 

$

10.18

 

Total Return++

 

14.47

%

25.10

%

11.04

%

18.15

%

28.49

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$

2,404

 

$

1,777

 

$

3,634

 

$

2,605

 

$

2,232

 

Ratio of Expenses to Average Net Assets (2)

 

1.25

%+

1.25

%

1.25

%

1.25

%

1.25

%

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)

 

1.08

%+

1.27

%

1.25

%

1.00

%

1.00

%

Portfolio Turnover Rate

 

39

%

81

%

32

%

49

%

53

%

(2)Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

1.28

%+

1.35

%

1.38

%

1.48

%

1.54

%

Net Investment Income (Loss) to Average Net Assets

 

1.05

%+

1.17

%

1.12

%

0.77

%

0.71

%

†                  Per share amount is based on average shares outstanding.

‡                  Amount is less than $0.005 per share.

+                 Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++          Calculated based on the net asset value as of the last business day of the period.

 

The accompanying notes are an integral part of the financial statements.

201

 


 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

International Real Estate Portfolio

 

 

 

Class A

 

 

Year Ended December 31,

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$       34.82

 

$       23.63

 

$    21.95

 

$  15.13

 

$  10.93

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.69

 

0.35

 

0.43

 

0.36

 

0.27

 

Net Realized and Unrealized Gain (Loss) on Investments

 

(6.79

)

12.78

 

2.96

 

6.82

 

4.35

 

Total from Investment Operations

 

(6.10

)

13.13

 

3.39

 

7.18

 

4.62

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(1.77

)

(0.85

)

(0.35

)

(0.36

)

(0.42

)

Net Realized Gain

 

(1.65

)

(1.09

)

(1.36

)

—

 

—

 

Total Distributions

 

(3.42

)

(1.94

)

(1.71

)

(0.36

)

(0.42

)

Redemption Fees

 

0.00

‡

0.00

‡

0.00

‡

0.00

‡

—

 

Net Asset Value, End of Period

 

$       25.30

 

$       34.82

 

$    23.63

 

$  21.95

 

$  15.13

 

Total Return++

 

(17.59

)%

56.06

%

15.52

%

47.49

%

42.41

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$1,053,018

 

$1,125,569

 

$250,511

 

$50,620

 

$22,184

 

Ratio of Expenses to Average Net Assets (1)

 

0.94

%+

0.95

%

1.00

%

1.00

%

1.00

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

0.94

%+

0.95

%

1.00

%

1.00

%

1.00

%

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

2.10

%+

1.19

%

1.88

%

2.05

%

2.23

%

Portfolio Turnover Rate

 

55

%

36

%

57

%

42

%

47

%

(1) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

N/A

 

1.11

%

1.38

%

1.49

%

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

N/A

 

1.77

%

1.67

%

1.74

%

 

 

 

Class B

 

 

Year Ended December 31,

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$       34.83

 

$       23.68

 

$    22.04

 

$   15.17

 

$  10.96

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.58

 

0.29

 

0.32

 

0.35

 

0.28

 

Net Realized and Unrealized Gain (Loss) on Investments

 

(6.74

)

12.77

 

3.01

 

6.81

 

4.32

 

Total from Investment Operations

 

(6.16

)

13.06

 

3.33

 

7.16

 

4.60

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(1.69

)

(0.82

)

(0.33

)

(0.29

)

(0.39

)

Net Realized Gain

 

(1.65

)

(1.09

)

(1.36

)

—

 

—

 

Total Distributions

 

(3.34

)

(1.91

)

(1.69

)

(0.29

)

(0.39

)

Redemption Fees

 

0.00

‡

0.00

‡

—

 

—

 

—

 

Net Asset Value, End of Period

 

$       25.33

 

$       34.83

 

$    23.68

 

$   22.04

 

$  15.17

 

Total Return++

 

(17.76

)%

55.69

%

15.22

%

47.15

%

42.06

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$     97,800

 

$     97,951

 

$    8,674

 

$      827

 

$    915

 

Ratio of Expenses to Average Net Assets (2)

 

1.19

%+

1.20

%

1.25

%

1.25

%

1.25

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.19

%+

1.20

%

1.25

%

1.25

%

1.25

%

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

1.76

%+

0.94

%

1.34

%

2.03

%

1.98

%

Portfolio Turnover Rate

 

55

%

36

%

57

%

42

%

47

%

(2) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

N/A

 

1.45

%

1.66

%

1.74

%

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

N/A

 

1.14

%

1.62

%

1.49

%

†                  Per share amount is based on average shares outstanding.

‡                  Amount is less than $0.005 per share.

+                 Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++          Calculated based on the net asset value as of the last business day of the period.

 

202

The accompanying notes are an integral part of the financial statements.

 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Financial Highlights

 

International Small Cap Portfolio

 

 

 

Class A

 

 

Year Ended December 31,

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$    23.72

 

$       24.14

 

$       25.11

 

$       20.52

 

$    14.21

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.27

 

0.32

 

0.32

 

0.24

 

0.24

 

Net Realized and Unrealized Gain (Loss) on Investments

 

(1.11

)

4.27

 

2.89

 

6.59

 

6.61

 

Total from Investment Operations

 

(0.84

)

4.59

 

3.21

 

6.83

 

6.85

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.27

)

(0.41

)

(0.47

)

(0.35

)

(0.23

)

Net Realized Gain

 

(5.53

)

(4.60

)

(3.71

)

(1.89

)

(0.31

)

Total Distributions

 

(5.80

)

(5.01

)

(4.18

)

(2.24

)

(0.54

)

Redemption Fees

 

0.00

‡

0.00

‡

0.00

‡

0.00

‡

0.00

‡

Net Asset Value, End of Period

 

$    17.08

 

$       23.72

 

$       24.14

 

$       25.11

 

$    20.52

 

Total Return++

 

(3.22

)%

19.61

%

13.07

%

33.53

%

48.32

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$796,050

 

$1,312,064

 

$1,389,078

 

$1,276,083

 

$899,996

 

Ratio of Expenses to Average Net Assets (1)

 

1.09

%+

1.10

%

1.10

%

1.15

%

1.15

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.09

%+

1.10

%

1.10

%

1.15

%

1.15

%

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

1.10

%+

1.25

%

1.22

%

1.04

%

1.40

%

Portfolio Turnover Rate

 

53

%

40

%

47

%

38

%

38

%

(1) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

N/A

 

N/A

 

1.16

%

1.20

%

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

N/A

 

N/A

 

1.03

%

1.35

%

†                  Per share amount is based on average shares outstanding.

‡                  Amount is less than $0.005 per share.

+                 Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++          Calculated based on the net asset value as of the last business day of the period.

 

The accompanying notes are an integral part of the financial statements.

203

 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

Disciplined Large Cap Value Active Extension Portfolio

 

 

 

Class A

 

 

Period from

 

 

May 31, 2007^

Selected Per Share Data and Ratios

 

to December 31, 2007

Net Asset Value, Beginning of Period

 

$10.00

 

Income (Loss) from Investment Operations

 

 

 

Net Investment Income (Loss)†

 

0.04

 

Net Realized and Unrealized Gain (Loss) on Investments

 

(1.43

)

Total from Investment Operations

 

(1.39

)

Distributions from and /or in Excess of:

 

 

 

Net Investment Income

 

(0.03

)

Net Asset Value, End of Period

 

$  8.58

 

Total Return++

 

(13.93

)%#

Ratios and Supplemental Data:

 

 

 

Net Assets, End of Period (Thousands)

 

$9,193

 

Ratio of Expenses to Average Net Assets (1)

 

2.18

%*+

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense, Dividend Expense on Short Positions and Stock Loan Fee

 

1.35

%*+

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

0.83

%*+

Portfolio Turnover Rate

 

46

%#

(1) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

Ratios before expense limitation:

 

 

 

Expenses to Average Net Assets

 

3.66

%*+

Net Investment Income (Loss) to Average Net Assets

 

(0.65

)%*+

 

 

 

Class B

 

 

Period from

 

 

May 31, 2007^

Selected Per Share Data and Ratios

 

to December 31, 2007

Net Asset Value, Beginning of Period

 

$10.00

 

Income (Loss) from Investment Operations

 

 

 

Net Investment Income (Loss)†

 

0.03

 

Net Realized and Unrealized Gain (Loss) on Investments

 

(1.44

)

Total from Investment Operations

 

(1.41

)

Distributions from and /or in Excess of:

 

 

 

Net Investment Income

 

(0.01

)

Net Asset Value, End of Period

 

$  8.58

 

Total Return++

 

(14.06

)%#

Ratios and Supplemental Data:

 

 

 

Net Assets, End of Period (Thousands)

 

$     86

 

Ratio of Expenses to Average Net Assets (2)

 

2.37

%*+

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense, Dividend Expense on Short Positions and Stock Loan Fee

 

1.60

%*+

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

0.52

%*+

Portfolio Turnover Rate

 

46

%#

(2) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

Ratios before expense limitation:

 

 

 

Expenses to Average Net Assets

 

3.86

%*+

Net Investment Income (Loss) to Average Net Assets

 

(0.97

)%*+

^                  Commencement of operations.

†                  Per share amount is based on average shares outstanding.

#                 Not Annualized

*                 Annualized

+                 Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++          Calculated based on the net asset value as of the last business day of the period.

 

204

The accompanying notes are an integral part of the financial statements.

 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Financial Highlights

 

Focus Equity Portfolio

 

 

 

Class A

 

 

Year Ended December 31,

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$  15.19

 

$  14.78

 

$  12.59

 

$  11.79

 

$    9.02

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.03

 

(0.03

)

(0.03

)

0.04

 

0.02

 

Net Realized and Unrealized Gain (Loss) on Investments

 

3.62

 

0.44

 

2.24

 

0.78

 

2.77

 

Total from Investment Operations

 

3.65

 

0.41

 

2.21

 

0.82

 

2.79

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.03

)

—

 

(0.02

)

(0.02

)

(0.02

)

Redemption Fees

 

0.00

‡

0.00

‡

—

 

—

 

—

 

Net Asset Value, End of Period

 

$  18.81

 

$  15.19

 

$  14.78

 

$  12.59

 

$  11.79

 

Total Return++

 

24.02

%

2.77

%

17.60

%

7.00

%

30.99

%§

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$13,852

 

$12,416

 

$54,321

 

$52,757

 

$61,420

 

Ratio of Expenses to Average Net Assets (1)

 

1.00

%+

0.79

%

0.91

%

1.00

%

1.00

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.00

%+

0.79

%

0.91

%

1.00

%

1.00

%

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

0.16

%

(0.23

)%

(0.27

)%

0.35

%

0.22

%

Portfolio Turnover Rate

 

57

%

76

%

78

%

163

%

160

%

(1) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

1.13

%+

N/A

 

N/A

 

1.11

%

1.14

%

Net Investment Income (Loss) to Average Net Assets

 

0.03

%+

N/A

 

N/A

 

0.24

%

0.08

%

 

 

 

Class B

 

 

Year Ended December 31,

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$  14.81

 

$  14.45

 

$  12.34

 

$  11.57

 

$    8.85

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

(0.01

)

(0.06

)

(0.06

)

0.02

 

(0.00

)‡

Net Realized and Unrealized Gain (Loss) on Investments

 

3.52

 

0.42

 

2.19

 

0.75

 

2.72

 

Total from Investment Operations

 

3.51

 

0.36

 

2.13

 

0.77

 

2.72

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

—

 

—

 

(0.02

)

—

 

—

 

Redemption Fees

 

0.00

‡

0.00

‡

—

 

—

 

—

 

Net Asset Value, End of Period

 

$  18.32

 

$  14.81

 

$  14.45

 

$  12.34

 

$  11.57

 

Total Return++

 

23.70

%

2.49

%

17.30

%

6.75

%

30.62

%§

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$  2,913

 

$  2,317

 

$12,442

 

$  8,559

 

$  8,156

 

Ratio of Expenses to Average Net Assets (2)

 

1.25

%+

1.04

%

1.16

%

1.25

%

1.25

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.25

%+

1.04

%

1.16

%

1.25

%

1.25

%

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

(0.07

)%

(0.45

)%

(0.49

)%

0.18

%

(0.03

)%

Portfolio Turnover Rate

 

57

%

76

%

78

%

163

%

160

%

(2) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

1.38

%+

N/A

 

N/A

 

1.36

%

1.39

%

Net Investment Income (Loss) to Average Net Assets

 

(0.20

)%+

N/A

 

N/A

 

0.07

%

(0.17

)%

†                  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.

+                 Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++          Calculated based on the net asset value as of the last business day of the period.

 

The accompanying notes are an integral part of the financial statements.

205

 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

Large Cap Relative Value Portfolio

 

 

 

Class A

 

 

Year Ended December 31,

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$    12.20

 

$    11.10

 

$    10.52

 

$    9.30

 

$      7.21

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.21

 

0.20

 

0.15

 

0.12

 

0.13

 

Net Realized and Unrealized Gain (Loss) on Investments

 

0.16

 

1.62

 

0.90

 

1.23

 

2.09

 

Total from Investment Operations

 

0.37

 

1.82

 

1.05

 

1.35

 

2.22

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.22

)

(0.20

)

(0.14

)

(0.13

)

(0.13

)

Net Realized Gain

 

(0.49

)

(0.52

)

(0.33

)

—

 

—

 

Total Distributions

 

(0.71

)

(0.72

)

(0.47

)

(0.13

)

(0.13

)

Redemption Fees

 

0.00

‡

0.00

‡

—

 

—

 

—

 

Net Asset Value, End of Period

 

$    11.86

 

$    12.20

 

$    11.10

 

$  10.52

 

$      9.30

 

Total Return++

 

2.90

%

16.74

%

10.07

%

14.56

%

31.05

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$236,784

 

$211,904

 

$102,973

 

$90,938

 

$108,997

 

Ratio of Expenses to Average Net Assets (1)

 

0.67

%+

0.68

%

0.68

%

0.70

%

0.70

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

0.67

%+

0.68

%

0.68

%

N/A

 

N/A

 

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

1.71

%+

1.71

%

1.36

%

1.28

%

1.62

%

Portfolio Turnover Rate

 

31

%

33

%

46

%

84

%

130

%

(1) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

N/A

 

N/A

 

0.74

%

0.77

%

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

N/A

 

N/A

 

1.24

%

1.55

%

 

 

 

Class B

 

 

Year Ended December 31,

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$   12.18

 

$   11.09

 

$     10.51

 

$     9.31

 

$     7.21

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.19

 

0.17

 

0.12

 

0.10

 

0.11

 

Net Realized and Unrealized Gain (Loss) on Investments

 

0.15

 

1.61

 

0.91

 

1.20

 

2.10

 

Total from Investment Operations

 

0.34

 

1.78

 

1.03

 

1.30

 

2.21

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.18

)

(0.17

)

(0.12

)

(0.10

)

(0.11

)

Net Realized Gain

 

(0.49

)

(0.52

)

(0.33

)

—

 

—

 

Total Distributions

 

(0.67

)

(0.69

)

(0.45

)

(0.10

)

(0.11

)

Redemption Fees

 

0.00

‡

0.00

‡

—

 

—

 

—

 

Net Asset Value, End of Period

 

$   11.85

 

$   12.18

 

$     11.09

 

$   10.51

 

$     9.31

 

Total Return++

 

2.72

%

16.38

%

9.81

%

14.07

%

30.86

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$ 50,287

 

$ 63,300

 

$ 101,499

 

$ 75,189

 

$ 72,180

 

Ratio of Expenses to Average Net Assets (2)

 

0.92

%+

0.93

%

0.93

%

0.95

%

0.95

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

0.92

%+

0.93

%

0.93

%

N/A

 

N/A

 

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

1.48

%+

1.44

%

1.10

%

1.05

%

1.37

%

Portfolio Turnover Rate

 

31

%

33

%

46

%

84

%

130

%

(2) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

N/A

 

N/A

 

0.99

%

1.02

%

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

N/A

 

N/A

 

1.01

%

1.30

%

†                  Per share amount is based on average shares outstanding.

‡                  Amount is less than $0.005 per share.

+                 Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++          Calculated based on the net asset value as of the last business day of the period.

 

206

The accompanying notes are an integral part of the financial statements.

 


 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

Small Company Growth Portfolio

 

 

 

Class A

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$       13.31

 

$       12.89

 

$    12.50

 

$    10.81

 

$      7.50

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

(0.05

)

(0.08

)

(0.00

)‡

(0.09

)

(0.09

)

Net Realized and Unrealized Gain (Loss) on Investments

 

0.45

 

1.59

 

1.72

 

2.16

 

3.40

 

Total from Investment Operations

 

0.40

 

1.51

 

1.72

 

2.07

 

3.31

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Realized Gain

 

(0.59

)

(1.09

)

(1.33

)

(0.38

)

—

 

Redemption Fees

 

0.00

‡

0.00

‡

0.00

‡

—

 

—

 

Net Asset Value, End of Period

 

$       13.12

 

$       13.31

 

$    12.89

 

$    12.50

 

$    10.81

 

Total Return++

 

3.04

%

11.90

%

13.55

%

19.17

%

44.13

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$1,137,839

 

$1,028,030

 

$896,204

 

$651,276

 

$299,198

 

Ratio of Expenses to Average Net Assets (1)

 

1.01

%+

1.01

%

1.04

%

1.10

%

1.10

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.01

%+

1.01

%

1.04

%

N/A

 

N/A

 

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

(0.35

)%+

(0.56

)%

(0.04

)%

(0.79

)%

(0.93

)%

Portfolio Turnover Rate

 

50

%

76

%

73

%

111

%

160

%

(1) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

N/A

 

N/A

 

1.16

%

1.26

%

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

N/A

 

N/A

 

(0.85

)%

(1.09

)%

 

 

 

Class B

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$       12.63

 

$       12.31

 

$       12.02

 

$       10.43

 

$        7.26

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

(0.08

)

(0.10

)

(0.03

)

(0.11

)

(0.10

)

Net Realized and Unrealized Gain (Loss) on Investments

 

0.43

 

1.51

 

1.65

 

2.08

 

3.27

 

Total from Investment Operations

 

0.35

 

1.41

 

1.62

 

1.97

 

3.17

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Realized Gain

 

(0.59

)

(1.09

)

(1.33

)

(0.38

)

—

 

Redemption Fees

 

0.00

‡

0.00

‡

—

 

—

 

—

 

Net Asset Value, End of Period

 

$       12.39

 

$       12.63

 

$       12.31

 

$       12.02

 

$      10.43

 

Total Return++

 

2.81

%

11.55

%

13.35

%

18.79

%

43.80

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$   698,183

 

$   857,275

 

$   808,493

 

$   713,733

 

$  484,136

 

Ratio of Expenses to Average Net Assets (2)

 

1.26

%+

1.26

%

1.29

%

1.35

%

1.35

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.26

%+

1.26

%

1.29

%

N/A

 

N/A

 

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

(0.61

)%+

(0.81

)%

(0.24

)%

(1.02

)%

(1.18

)%

Portfolio Turnover Rate

 

50

%

76

%

73

%

111

%

160

%

(2) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

N/A

 

N/A

 

1.41

%

1.51

%

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

N/A

 

N/A

 

(1.09

)%

(1.34

)%

†                  Per share amount is based on average shares outstanding.

‡                  Amount is less than $0.005 per share.

+                 Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++          Calculated based on the net asset value as of the last business day of the period.

 

The accompanying notes are an integral part of the financial statements.

207

 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

Systematic Active Large Cap Core Portfolio

 

 

 

Class A

Selected Per Share Data and Ratios

 

Year Ended
December 31,
2007

Period from
April 28, 2006^ to
December 31, 2006

Net Asset Value, Beginning of Period

 

$  10.69

 

$  10.00

 

Income (Loss) from Investment Operations

 

 

 

 

 

Net Investment Income (Loss)†

 

0.13

 

0.08

 

Net Realized and Unrealized Gain (Loss) on Investments

 

0.52

 

0.69

 

Total from Investment Operations

 

0.65

 

0.77

 

Distributions from and/or in Excess of:

 

 

 

 

 

Net Investment Income

 

(0.11

)

(0.08

)

Net Realized Gain

 

(0.15

)

—

 

Return of Capital

 

(0.02

)

—

 

Total Distributions

 

(0.28

)

(0.08

)

Net Asset Value, End of Period

 

$  11.06

 

$  10.69

 

Total Return++

 

6.07

%

7.85

%#

Ratios and Supplemental Data:

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$  6,525

 

$  6,308

 

Ratio of Expenses to Average Net Assets (1)

 

0.60

%+

0.60

%*

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

1.16

%+

1.25

%*

Portfolio Turnover Rate

 

62

%

55

%#

(1) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

Expenses to Average Net Assets

 

1.26

%+

2.17

%*

Net Investment Income (Loss) to Average Net Assets

 

0.50

%+

(0.32

)%*

 

 

 

 

 

 

Class B

Selected Per Share Data and Ratios

 

Year Ended
December 31,
2007

Period from
April 28, 2006^ to
December 31, 2006

Net Asset Value, Beginning of Period

 

$  10.69

 

$  10.00

 

Income (Loss) from Investment Operations

 

 

 

 

 

Net Investment Income (Loss)†

 

0.10

 

0.07

 

Net Realized and Unrealized Gain (Loss) on Investments

 

0.53

 

0.69

 

Total from Investment Operations

 

0.63

 

0.76

 

Distributions from and/or in Excess of:

 

 

 

 

 

Net Investment Income

 

(0.09

)

(0.07

)

Net Realized Gain

 

(0.15

)

—

 

Return of Capital

 

(0.02

)

—

 

Total Distributions

 

(0.26

)

(0.07

)

Net Asset Value, End of Period

 

$  11.06

 

$  10.69

 

Total Return++

 

5.81

%

7.68

%#

Ratios and Supplemental Data:

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$     111

 

$     107

 

Ratio of Expenses to Average Net Assets (2)

 

0.85

%+

0.85

%*

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

0.91

%+

1.00

%*

Portfolio Turnover Rate

 

62

%

55

%#

(2) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

Expenses to Average Net Assets

 

1.51

%+

2.42

%*

Net Investment Income (Loss) to Average Net Assets

 

0.25

%+

(0.57

)%*

†

 

Per share amount is based on average shares outstanding.

^

 

Commencement of operations

+

 

Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its nets assets were effected by 0.01%.

++

 

Calculated based on the net asset value as of the last business day of the period.

 

208

The accompanying notes are an integral part of the financial statements.

 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

Systematic Active Small Cap Core Portfolio

 

 

 

Class A

Selected Per Share Data and Ratios

 

Year Ended
December 31,
2007

Period from
April 28, 2006^ to
December 31, 2006

Net Asset Value, Beginning of Period

 

$  9.93

 

$10.00

 

Income (Loss) from Investment Operations

 

 

 

 

 

Net Investment Income (Loss)†

 

0.08

 

0.03

 

Net Realized and Unrealized Gain (Loss) on Investments

 

(0.91

)

(0.07

)

Total from Investment Operations

 

(0.83

)

(0.04

)

Distributions from and/or in Excess of:

 

 

 

 

 

Net Investment Income

 

(0.05

)

(0.03

)

Net Realized Gain

 

(0.12

)

—

 

Total Distributions

 

(0.17

)

(0.03

)

Net Asset Value, End of Period

 

$  8.93

 

$  9.93

 

Total Return++

 

(8.35

)%

(0.41

)%#

Ratios and Supplemental Data:

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$5,801

 

$6,455

 

Ratio of Expenses to Average Net Assets (1)

 

1.10

%+

1.10

%*

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.10

%+

N/A

 

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

0.81

%+

0.45

%*

Portfolio Turnover Rate

 

59

%

60

%#

(1) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

Expenses to Average Net Assets

 

1.76

%+

2.47

%*

Net Investment Income (Loss) to Average Net Assets

 

0.15

%+

(0.92

)%*

 

 

 

 

 

 

 

 

Class B

Selected Per Share Data and Ratios

 

Year Ended
December 31,
2007

Period from
April 28, 2006^ to
December 31, 2006

Net Asset Value, Beginning of Period

 

$  9.93

 

$ 10.00

 

Income (Loss) from Investment Operations

 

 

 

 

 

Net Investment Income (Loss)†

 

0.06

 

0.01

 

Net Realized and Unrealized Gain (Loss) on Investments

 

(0.91

)

(0.07

)

Total from Investment Operations

 

(0.85

)

(0.06

)

Distributions from and/or in Excess of:

 

 

 

 

 

Net Investment Income

 

(0.03

)

(0.01

)

Net Realized Gain

 

(0.12

)

—

 

Total Distributions

 

(0.15

)

(0.01

)

Net Asset Value, End of Period

 

$  8.93

 

$  9.93

 

Total Return++

 

(8.49

)%

(0.57

)%#

Ratios and Supplemental Data:

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$     90

 

$     99

 

Ratio of Expenses to Average Net Assets (2)

 

1.35

%+

1.35

%*

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.35

%+

N/A

 

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

0.56

%+

0.20

%*

Portfolio Turnover Rate

 

59

%

60

%#

(2) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

Expenses to Average Net Assets

 

2.01

%+

2.72

%*

Net Investment Income (Loss) to Average Net Assets

 

(0.10

)%+

(1.17

)%*

 

^

Commencement of Operations

†

Per share amount is based on average shares outstanding.

#

Not Annualized

*

Annualized

+

Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++

Calculated based on the net asset value as of the last business day of the period.

 

The accompanying notes are an integral part of the financial statements.

209

 


 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

Systematic Active Small Cap Growth Portfolio

 

 

 

Class A

Selected Per Share Data and Ratios

Year Ended
December 31,
2007

Period from
April 28, 2006^ to
December 31, 2006

Net Asset Value, Beginning of Period

 

$  9.77

 

$10.00

 

Income (Loss) from Investment Operations

 

 

 

 

 

Net Investment Income (Loss)†

 

0.01

 

(0.01

)

Net Realized and Unrealized Gain (Loss) on Investments

 

0.08

 

(0.22

)

Total from Investment Operations

 

0.09

 

(0.23

)

Distributions from and/or in Excess of:

 

 

 

 

 

Net Investment Income

 

(0.01

)

—

 

Net Realized Gain

 

(0.34

)

—

 

Total Distributions

 

(0.35

)

—

 

Net Asset Value, End of Period

 

$  9.51

 

$  9.77

 

Total Return++

 

0.82

%

(2.20

)%#

Ratios and Supplemental Data:

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$6,491

 

$6,646

 

Ratio of Expenses to Average Net Assets (1)

 

1.09

%+

1.10

%*

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.09

%+

N/A

 

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

0.13

%+

(0.13

)%*

Portfolio Turnover Rate

 

56

%

76

%#

(1) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

Expenses to Average Net Assets

 

1.69

%+

2.46

%*

Net Investment Income (Loss) to Average Net Assets

 

(0.47

)%+

(1.49

)%*

 

 

 

 

 

 

 

 

Class B

Selected Per Share Data and Ratios

 

Year Ended
December 31,
2007

Period from
April 28, 2006^ to
December 31, 2006

Net Asset Value, Beginning of Period

 

$  9.76

 

$10.00

 

Income (Loss) from Investment Operations

 

 

 

 

 

Net Investment Income (Loss)†

 

(0.01

)

(0.02

)

Net Realized and Unrealized Gain (Loss) on Investments

 

0.07

 

(0.22

)

Total from Investment Operations

 

0.06

 

(0.24

)

Distributions from and/or in Excess of:

 

 

 

 

 

Net Investment Income

 

—

 

—

 

Net Realized Gain

 

(0.34

)

—

 

Total Distributions

 

(0.34

)

—

 

Net Asset Value, End of Period

 

$  9.48

 

$  9.76

 

Total Return++

 

0.50

%

(2.30

)%#

Ratios and Supplemental Data:

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$     95

 

$     98

 

Ratio of Expenses to Average Net Assets (2)

 

1.34

%+

1.35

%*

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.34

%+

N/A

 

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

(0.12

)%+

(0.38

)%*

Portfolio Turnover Rate

 

56

%

76

%#

(2) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

Expenses to Average Net Assets

 

1.94

%+

2.71

%*

Net Investment Income (Loss) to Average Net Assets

 

(0.72

)%+

(1.74

)%*

 

†

Per share amount is based on average shares outstanding.

^

Commencement of Operations

#

Not Annualized

*

Annualized

+

Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++

Calculated based on the net asset value as of the last business day of the period.

 

210

The accompanying notes are an integral part of the financial statements.

 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

Systematic Active Small Cap Value Portfolio

 

 

 

Class A

Selected Per Share Data and Ratios

 

Year Ended
December 31, 2007

Period from
April 28, 2006^
to December 31, 2006

Net Asset Value, Beginning of Period

 

$ 10.37

 

$10.00

 

Income (Loss) from Investment Operations

 

 

 

 

 

Net Investment Income (Loss)†

 

0.16

 

0.06

 

Net Realized and Unrealized Gain (Loss) on Investments

 

(1.70

)

0.37

 

Total from Investment Operations

 

(1.54

)

0.43

 

Distributions from and/or in Excess of:

 

 

 

 

 

Net Investment Income

 

(0.13

)

(0.06

)

Net Realized Gain

 

(0.49

)

—

 

Total Distributions

 

(0.62

)

(0.06

)

Net Asset Value, End of Period

 

$   8.21

 

$10.37

 

Total Return++

 

(14.78

)%

4.30

%#

Ratios and Supplemental Data:

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$ 5,418

 

$6,841

 

Ratio of Expenses to Average Net Assets (1)

 

1.10

%+

1.10

%*

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.10

%+

N/A

 

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

1.60

%+

0.92

%*

Portfolio Turnover Rate

 

48

%

77

%#

(1) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

Expenses to Average Net Assets

 

1.75

%+

2.37

%*

Net Investment Income (Loss) to Average Net Assets

 

0.95

%+

(0.35

)%*

 

 

 

 

 

 

 

 

Class B

Selected Per Share Data and Ratios

 

Year Ended
December 31, 2007

Period from
April 28, 2006^
to December 31, 2006

Net Asset Value, Beginning of Period

 

$ 10.36

 

$10.00

 

Income (Loss) from Investment Operations

 

 

 

 

 

Net Investment Income (Loss)†

 

0.14

 

0.04

 

Net Realized and Unrealized Gain (Loss) on Investments

 

(1.70

)

0.36

 

Total from Investment Operations

 

(1.56

)

0.40

 

Distributions from and/or in Excess of:

 

 

 

 

 

Net Investment Income

 

(0.10

)

(0.04

)

Net Realized Gain

 

(0.49

)

—

 

Total Distributions

 

(0.59

)

(0.04

)

Net Asset Value, End of Period

 

$   8.21

 

$10.36

 

Total Return++

 

(15.03

)%

4.14

%#

Ratios and Supplemental Data:

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$     82

 

$   104

 

Ratio of Expenses to Average Net Assets (2)

 

1.35

%+

1.35

%*

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

1.35

%+

N/A

 

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

1.35

%+

0.67

%*

Portfolio Turnover Rate

 

48

%

77

%#

(2) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

Expenses to Average Net Assets

 

2.00

%+

2.62

%*

Net Investment Income (Loss) to Average Net Assets

 

0.70

%+

(0.60

)%*

^

 

Commencement of Operations

†

 

Per share amount is based on average shares outstanding.

#

 

Not Annualized

+

 

Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional lass during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++

 

Calculated based on the net asset value as of the last business day of the period.

*

 

Annualized

 

The accompanying notes are an integral part of the financial statements.

211

 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

Systematic Large Cap Core Active Extension Portfolio

 

 

 

Class A

 

 

Period from

 

 

May 31, 2007^

Selected Per Share Data and Ratios

 

to December 31, 2007

Net Asset Value, Beginning of Period

 

$10.00

 

Income (Loss) from Investment Operations

 

 

 

Net Investment Income (Loss)†

 

0.00

‡

Net Realized and Unrealized Gain (Loss) on Investments

 

(0.41

)

Total from Investment Operations

 

(0.41

)

Net Asset Value, End of Period

 

$  9.59

 

Total Return++

 

(4.09

)%#

Ratios and Supplemental Data:

 

 

 

Net Assets, End of Period (Thousands)

 

$9,582

 

Ratio of Expenses to Average Net Assets (1)

 

1.84

%*+

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense, Dividend Expense on Short

 

 

 

Positions and Stock Loan Fee

 

1.35

%*+

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

(0.02

)%*+

Portfolio Turnover Rate

 

40

%#

(1) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

Ratios before expense limitation:

 

 

 

Expenses to Average Net Assets

 

3.21

%*+

Net Investment Income (Loss) to Average Net Assets

 

(1.39

)%*+

 

 

 

 

 

Class B

 

 

Period from

 

 

May 31, 2007^

Selected Per Share Data and Ratios

 

to December 31, 2007

Net Asset Value, Beginning of Period

 

$10.00

 

Income (Loss) from Investment Operations

 

 

 

Net Investment Income (Loss)†

 

(0.02

)

Net Realized and Unrealized Gain (Loss) on Investments

 

(0.40

)

Total from Investment Operations

 

(0.42

)

Net Asset Value, End of Period

 

$9.58

 

Total Return++

 

(4.20

)%#

Ratios and Supplemental Data:

 

 

 

Net Assets, End of Period (Thousands)

 

$     96

 

Ratio of Expenses to Average Net Assets (2)

 

2.07

%*+

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense, Dividend Expense on Short Positions and Stock Loan Fee

 

1.60

%*+

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

(0.29

)%*+

Portfolio Turnover Rate

 

40

%#

(2) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

Ratios before expense limitation:

 

 

 

Expenses to Average Net Assets

 

3.43

%*+

Net Investment Income (Loss) to Average Net Assets

 

(1.65

)%*+

 

^

Commencement of Operations

†

Per share amount is based on average shares outstanding.

‡

Amount is less than $0.005 per share.

#

Not Annualized

*

Annualized

+

Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++

Calculated based on the net asset value as of the last business day of the period.

 

212

The accompanying notes are an integral part of the financial statements.

 


 

 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

U.S. Large Cap Growth Portfolio

 

 

 

Class A

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$       20.28

 

$       19.49

 

$    16.88

 

$   15.74

 

$    12.49

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.10

 

0.01

 

0.02

 

0.09

 

0.05

 

Net Realized and Unrealized Gain (Loss) on Investments

 

4.41

 

0.78

 

2.63

 

1.13

 

3.25

 

Total from Investment Operations

 

4.51

 

0.79

 

2.65

 

1.22

 

3.30

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.10

)

(0.00

)‡

(0.04

)

(0.08

)

(0.05

)

Redemption Fees

 

0.00

‡

0.00

‡

—

 

—

 

—

 

Net Asset Value, End of Period

 

$       24.69

 

$       20.28

 

$    19.49

 

$   16.88

 

$    15.74

 

Total Return++

 

22.29

%

4.07

%

15.72

%

7.75

%

26.41

%§

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$1,406,866

 

$1,012,417

 

$871,905

 

$554,097

 

$589,698

 

Ratio of Expenses to Average Net Assets (1)

 

0.62

%+

0.63

%

0.65

%

0.77

%

0.80

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

0.62

%+

0.63

%

0.65

%

N/A

 

N/A

 

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

0.46

%+

0.03

%

0.13

%

0.58

%

0.34

%

Portfolio Turnover Rate

 

50

%

59

%

106

%

179

%

131

%

(1) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

N/A

 

N/A

 

N/A

 

0.82

%

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

N/A

 

N/A

 

N/A

 

0.32

%

 

 

 

Class B

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$       19.95

 

$       19.21

 

$    16.67

 

$   15.55

 

$     12.34

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.05

 

(0.04

)

(0.03

)

0.05

 

0.01

 

Net Realized and Unrealized Gain (Loss) on Investments

 

4.33

 

0.78

 

2.60

 

1.11

 

3.21

 

Total from Investment Operations

 

4.38

 

0.74

 

2.57

 

1.16

 

3.22

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.06

)

—

 

(0.03

)

(0.04

)

(0.01

)

Redemption Fees

 

0.00

‡

0.00

‡

—

 

—

 

—

 

Net Asset Value, End of Period

 

$       24.27

 

$       19.95

 

$    19.21

 

$   16.67

 

$     15.55

 

Total Return++

 

21.93

%

3.85

%

15.41

%

7.45

%

26.13

%§

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$   166,717

 

$     57,689

 

$  35,678

 

$202,893

 

$199,591

 

Ratio of Expenses to Average Net Assets (2)

 

0.87

%+

0.88

%

0.90

%

1.02

%

1.05

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense

 

0.87

%+

0.88

%

0.90

%

N/A

 

N/A

 

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

0.24

%+

(0.23

)%

(0.17

)%

0.33

%

0.09

%

Portfolio Turnover Rate

 

50

%

59

%

106

%

179

%

131

%

(2) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

N/A

 

N/A

 

N/A

 

1.07

%

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

N/A

 

N/A

 

N/A

 

0.07

%

†                  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.

+                 Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++          Calculated based on the net asset value as of the last business day of the period.

 

 

The accompanying notes are an integral part of the financial statements.

213

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Financial Highlights

 

U.S. Real Estate Portfolio

 

 

 

Class A

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$    28.24

 

$       23.41

 

$       23.21

 

$       17.92

 

$   13.55

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.33

 

0.42

 

0.45

 

0.40

 

0.48

 

Net Realized and Unrealized Gain (Loss) on Investments

 

(4.87

)

8.44

 

3.58

 

6.17

 

4.55

 

Total from Investment Operations

 

(4.54

)

8.86

 

4.03

 

6.57

 

5.03

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.50

)

(0.49

)

(0.44

)

(0.42

)

(0.48

)

Net Realized Gain

 

(7.45

)

(3.54

)

(3.39

)

(0.86

)

(0.18

)

Total Distributions

 

(7.95

)

(4.03

)

(3.83

)

(1.28

)

(0.66

)

Redemption Fees

 

0.00

‡

0.00

‡

—

 

—

 

—

 

Net Asset Value, End of Period

 

$    15.75

 

$       28.24

 

$       23.41

 

$       23.21

 

$   17.92

 

Total Return++

 

(16.63

)%

38.85

%

17.66

%

37.28

%

37.61

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$911,819

 

$1,635,926

 

$1,209,668

 

$1,097,718

 

$897,551

 

Ratio of Expenses to Average Net Assets (1)

 

0.90

%+

0.87

%

0.89

%

0.97

%

1.00

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft and Investment Related Expenses

 

0.88

%+

0.87

%

0.89

%

N/A

 

N/A

 

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

1.23

%+

1.55

%

1.87

%

2.02

%

3.08

%

Portfolio Turnover Rate

 

38

%

36

%

33

%

21

%

17

%

(1) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

N/A

 

N/A

 

N/A

 

1.01

%

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

N/A

 

N/A

 

N/A

 

3.07

%

†                  Per share amount is based on average shares outstanding.

‡                  Amount is less than $0.005 per share.

+                 Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++          Calculated based on the net asset value as of the last business day of the period.

 

214

The accompanying notes are an integral part of the financial statements.

 

 


 

 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

U.S. Real Estate Portfolio

 

 

 

Class B

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$       27.96

 

$       23.21

 

$       23.04

 

$       17.80

 

$    13.47

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income (Loss)†

 

0.27

 

0.37

 

0.38

 

0.35

 

0.45

 

Net Realized and Unrealized Gain (Loss) on Investments

 

(4.82

)

8.34

 

3.56

 

6.13

 

4.50

 

Total from Investment Operations

 

(4.55

)

8.71

 

3.94

 

6.48

 

4.95

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.43

)

(0.42

)

(0.38

)

(0.38

)

(0.44

)

Net Realized Gain

 

(7.45

)

(3.54

)

(3.39

)

(0.86

)

(0.18

)

Total Distributions

 

(7.88

)

(3.96

)

(3.77

)

(1.24

)

(0.62

)

Redemption Fees

 

0.00

‡

0.00

‡

—

 

—

 

—

 

Net Asset Value, End of Period

 

$       15.53

 

$       27.96

 

$       23.21

 

$       23.04

 

$    17.80

 

Total Return++

 

(16.80

)%

38.52

%

17.37

%

36.95

%

37.23

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$   171,578

 

$   268,537

 

$   157,650

 

$   149,180

 

$  70,146

 

Ratio of Expenses to Average Net Assets (2)

 

1.15

%+

1.12

%

1.14

%

1.22

%

1.25

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft and Investment Related Expenses

 

1.13

%+

1.12

%

1.14

%

N/A

 

N/A

 

Ratio of Net Investment Income (Loss) to Average Net
Assets (2)

 

1.02

%+

1.37

%

1.60

%

1.76

%

2.83

%

Portfolio Turnover Rate

 

38

%

36

%

33

%

21

%

17

%

(2) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

N/A

 

N/A

 

N/A

 

N/A

 

1.26

%

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

N/A

 

N/A

 

N/A

 

2.82

%

†                  Per share amount is based on average shares outstanding.

‡                  Amount is less than $0.005 per share.

+                 Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++          Calculated based on the net asset value as of the last business day of the period.

 

 

The accompanying notes are an integral part of the financial statements.

215

 


 

2007 Annual Report

 

 

 

December 31, 2007

 

 

Financial Highlights

 

U.S. Small/Mid Cap Value Portfolio

 

 

 

Class A

 

 

Period from

 

 

September 27, 2007^

Selected Per Share Data and Ratios

 

to December 31, 2007

Net Asset Value, Beginning of Period

 

$

10.00

 

Income (Loss) from Investment Operations

 

 

 

Net Investment Income (Loss)†

 

(0.00

)‡

Net Realized and Unrealized Gain (Loss) on Investments

 

(0.52

)

Total from Investment Operations

 

(0.52

)

Distributions from and /or in Excess of:

 

 

 

Net Realized Gain

 

(0.01

)

Net Asset Value, End of Period

 

$

9.47

 

Total Return++

 

(5.21

)%#

Ratios and Supplemental Data:

 

 

 

Net Assets, End of Period (Thousands)

 

$

20,112

 

Ratio of Expenses to Average Net Assets (1)

 

1.30

%*+

Ratio of Net Investment Income (Loss) to Average Net Assets (1)

 

0.09

%*+

Portfolio Turnover Rate

 

38

%#

(1) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

Ratios before expense limitation:

 

 

 

Expenses to Average Net Assets

 

N/A

 

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

 

 

 

Class B

 

 

Period from

 

 

September 27, 2007^

Selected Per Share Data and Ratios

 

to December 31, 2007

Net Asset Value, Beginning of Period

 

$

10.00

 

Income (Loss) from Investment Operations

 

 

 

Net Investment Income (Loss)†

 

(0.00

)‡

Net Realized and Unrealized Gain (Loss) on Investments

 

(0.52

)

Total from Investment Operations

 

(0.52

)

Distributions from and /or in Excess of:

 

 

 

Net Realized Gain

 

(0.01

)

Net Asset Value, End of Period

 

$

9.47

 

Total Return++

 

(5.31

)%#

Ratios and Supplemental Data:

 

 

 

Net Assets, End of Period (Thousands)

 

$

95

 

Ratio of Expenses to Average Net Assets (2)

 

1.55

%*+

Ratio of Net Investment Income (Loss) to Average Net Assets (2)

 

(0.16

)%*+

Portfolio Turnover Rate

 

38

%#

(2) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

Ratios before expense limitation:

 

 

 

Expenses to Average Net Assets

 

N/A

 

Net Investment Income (Loss) to Average Net Assets

 

N/A

 

^                  Commencement of Operations

†                  Per share amount is based on average shares outstanding.

‡                  Amount is less than $0.005 per share.

#                 Not Annualized

*                 Annualized

+                 Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by 0.01%.

++          Calculated based on the net asset value as of the last business day of the period.

 

216

The accompanying notes are an integral part of the financial statements.

 

 


 

 

2007 Annual Report

 

December 31, 2007

 

Financial Highlights

 

Emerging Markets Debt Portfolio

 

 

 

Class A††

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$  11.99

 

$  11.61

 

$  10.92

 

$  10.59

 

$  8.85

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income†

 

0.71

 

0.49

 

0.81

 

0.78

 

0.75

 

Net Realized and Unrealized Gain (Loss) on Investments

 

(0.23

)

0.80

 

0.57

 

0.30

 

1.77

 

Total from Investment Operations

 

0.48

 

1.29

 

1.38

 

1.08

 

2.52

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(1.00

)

(0.91

)

(0.69

)

(0.75

)

(0.78

)

Redemption Fees

 

0.00

‡

0.00

‡

0.00

‡

0.00

‡

—

 

Net Asset Value, End of Period

 

$  11.47

 

$  11.99

 

$  11.61

 

$  10.92

 

$  10.59

 

Total Return++

 

4.68

%

11.08

%

12.78

%

10.07

%

28.46

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$52,686

 

$81,212

 

$92,294

 

$81,109

 

$54,647

 

Ratio of Expenses to Average Net Assets(1)

 

0.93

%#+

0.93

%#

1.01

%

1.04

%#

1.16

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense and Country Tax Expense

 

0.85

%+

0.92

%

1.00

%

1.04

%

1.13

%

Ratio of Net Investment Income to Average Net Assets(1)

 

6.28

%+

6.11

%

7.02

%

7.33

%

7.48

%

Portfolio Turnover Rate

 

155

%

55

%

84

%

151

%

216

%

(1) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

1.21

%+

1.04

%

N/A

 

1.07

%

N/A

 

Net Investment Income (Loss) to Average Net Assets

 

6.00

%+

6.00

%

N/A

 

7.30

%

N/A

 

 

 

 

Class B††

 

 

 

Year Ended December 31,

 

Selected Per Share Data and Ratios

 

2007

 

2006

 

2005

 

2004

 

2003

 

Net Asset Value, Beginning of Period

 

$  12.29

 

$  11.85

 

$  11.16

 

$  10.80

 

$   9.00

 

Income (Loss) from Investment Operations

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income†

 

0.69

 

0.50

 

0.78

 

0.78

 

0.75

 

Net Realized and Unrealized Gain (Loss) on Investments

 

(0.23

)

0.81

 

0.60

 

0.30

 

1.80

 

Total from Investment Operations

 

0.46

 

1.31

 

1.38

 

1.08

 

2.55

 

Distributions from and/or in Excess of:

 

 

 

 

 

 

 

 

 

 

 

Net Investment Income

 

(0.98

)

(0.87

)

(0.69

)

(0.72

)

(0.75

)

Redemption Fees

 

0.00

‡

0.00

‡

—

 

—

 

—

 

Net Asset Value, End of Period

 

$  11.77

 

$     12.29

 

$     11.85

 

$     11.16

 

$    10.80

 

Total Return++

 

4.29

%

10.79

%

12.54

%

9.90

%

28.34

%

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

Net Assets, End of Period (Thousands)

 

$    870

 

$    565

 

$    596

 

$    437

 

$    429

 

Ratio of Expenses to Average Net Assets(2)

 

1.20

%#+

1.17

%#

1.26

%

1.29

%#

1.41

%

Ratio of Expenses to Average Net Assets Excluding Bank Overdraft Expense and Country Tax Expense

 

1.10

%+

1.16

%

1.25

%

1.29

%

1.38

%

Ratio of Net Investment Income to Average Net Assets(2)

 

5.99

%+

5.94

%

6.70

%

7.07

%

7.23

%

Portfolio Turnover Rate

 

155

%

55

%

84

%

151

%

216

%

(2) Supplemental Information on the Ratios to Average Net Assets:

 

 

 

 

 

 

 

 

 

 

 

Ratios before expense limitation:

 

 

 

 

 

 

 

 

 

 

 

Expenses to Average Net Assets

 

1.49

%+

1.29

%

N/A

 

1.32

%

N/A

 

Net Investment Income (Loss) to Average Net Assets

 

5.71

%+

5.82

%

N/A

 

7.04

%

N/A

 

††            On March 17, 2006, the Portfolio effected a reverse stock split as described in the Notes to Financial Statements. Per share data prior to this date has been restated to give effect to the reverse stock split.

†                  Per share amount is based on average shares outstanding.

‡                  Amount is less than $0.005 per share.

#                 Effective June 1, 2006, the Adviser has voluntarily agreed to limit the ratio of expenses to average net assets to the maximum ratio of 0.85% for Class A shares and 1.10% for Class B shares. Prior to June 1, 2006, these maximum ratios were 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.

+                 Reflects rebate of certain Portfolio expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio — Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets were effected by less than 0.005%.

++          Calculated based on the net asset value as of the last business day of the period.

 

 

The accompanying notes are an integral part of the financial statements.

217

 


 

2007 Annual Report

 

 

December 31, 2007

 

Notes to Financial Statements

 

Morgan Stanley Institutional Fund, Inc. (the “Fund”) is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Fund is comprised of twenty-four 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 Portfolio) offers two classes of shares - Class A and Class B. Effective January 2, 2008, Class A shares and Class B shares of the Portfolios will be changed to Class I shares and Class P shares, respectively. 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. Effective May 31, 2007, the Systematic Large Cap Core Active Extension and Disciplined Large Cap Value Active Extension Portfolios commenced operations. Effective July 31, 2007, the International Growth Active Extension Portfolio commenced operations. Effective September 27, 2007, the U.S. Small/Mid Cap Value Portfolio commenced operations.

 

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 Global Franchise, International Equity, International Real Estate, International Small Cap and U.S. Real Estate Portfolios are currently closed to new investors. However, these Portfolios will continue to offer shares as follows: (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, (7) to benefit plans sponsored by Morgan Stanley and its affiliates, and (8) through certain mutual fund wrap programs sponsored by affiliates of the Adviser. The Portfolios 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.

 

The Fund has suspended offering shares of the Small Company Growth Portfolio to new investors. The Fund will continue to offer shares of the Portfolio to existing shareholders. The Fund may recommence offering shares of the Portfolio to new investors in the future.

 

On April 28, 2006, the net assets of the Equity Portfolio’s (formerly, a Portfolio of Morgan Stanley Institutional Fund Trust) Institutional Class shares were merged into the Large Cap Relative Value Portfolio’s Class A shares through a tax-free exchange. In exchange for the $66,823,000 in net assets received, including $3,685,000 in unrealized appreciation, 5,706,469 Class A shares of the Large Cap Relative Value Portfolio were issued. Prior to the combination, the net assets of the Large Cap Relative Value Portfolio totaled $194,284,000. Immediately after the combination, the net assets of the Large Cap Relative Value Portfolio totaled $261,107,000.

 

A. Accounting Policies: The following significant accounting policies are in conformity with U.S. generally accepted accounting principles. 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: 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. 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. 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.

 

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,

 

218


 

 

2007 Annual Report

 

December 31, 2007

 

Notes to Financial Statements (cont’d)

 

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 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.

 

At December 31, 2007, the Portfolios did not have any outstanding 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, prior to the close of the NYSE, 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.

 

219


 

2007 Annual Report

 

 

December 31, 2007

 

Notes to Financial Statements (cont’d)

 

Governmental approval for foreign investments may be required in advance of making an investment 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. Certain Portfolios may also enter into cross currency hedges which involve the sale of one currency against the positive exposure to a different currency. Cross currency hedges may be used for hedging purposes or to establish an active exposure to the exchange rate between any two 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 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 counterparts 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 participation in Loans (“Participation”) or assignments of all or a portion of Loans (“Assignments”) from third parties. A Portfolio’s investment in a Participation 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 or other liquid securities. 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.

 

220


 

 

2007 Annual Report

 

December 31, 2007

 

Notes to Financial Statements (cont’d)

 

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.

 

The value of loaned securities and related collateral outstanding at December 31, 2007 are as follows:

 

Portfolio

 

Value of
Loaned
Securities
(000)

 

Value of
Collateral
(000)

 

Active International Allocation

 

$101,774

 

$ 106,330

 

Emerging Markets

 

252,057

 

263,443

 

Global Real Estate

 

2,594

 

2,631

 

Global Value Equity

 

4,408

 

4,604

 

International Equity

 

448,800

 

468,328

 

International Growth Equity

 

580

 

610

 

International Magnum

 

15,270

 

15,980

 

Systematic Active Large Cap Core

 

724

 

743

 

Systematic Active Small Cap Core

 

1,826

 

1,919

 

Systematic Active Small Cap Growth

 

1,898

 

1,974

 

Systematic Active Small Cap Value

 

1,802

 

1,911

 

U.S. Real Estate

 

153,417

 

155,964

 

Emerging Markets Debt

 

4,055

 

4,191

 

 

The following Portfolios had income from securities lending (after rebates to borrowers and fee paid to securities lending agent):

 

Portfolio

 

Net Interest
Earned by
Portfolio
(000)

 

Active International Allocation

 

$

1,172

 

Emerging Markets

 

972

 

Global Real Estate

 

@—

 

Global Value Equity

 

$

 52

 

International Equity

 

7,024

 

International Growth Equity

 

1

 

International Magnum

 

124

 

Systematic Active Large Cap Core

 

2

 

Systematic Active Small Cap Core

 

11

 

Systematic Active Small Cap Growth

 

12

 

Systematic Active Small Cap Value

 

12

 

U.S. Real Estate

 

1

 

Emerging Markets Debt

 

31

 

@ Amount is less than $500.

 

 

 

 

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

 

221


 

2007 Annual Report

 

 

December 31, 2007

 

Notes to Financial Statements (cont’d)

 

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.

 

Options written for the year ended December 31, 2007 were as follows:

 

Emerging Markets Debt Portfolio

 

Total
Number of
Contracts
(000)

 

Total
Premiums
Received
(000)

Options Outstanding — January 1, 2007

 

—

 

$    —

Options Written

 

24,293

 

609

Options Terminated in Closing Purchase
Transactions

 

(24,293)

 

(609)

Options Outstanding — December 31, 2007

 

—

 

$    —

 

11.       Unfunded Commitments: Subject to the terms of a Subscription Agreement between the U.S. Real Estate Portfolio and BRCP REIT I, LLC 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, 2007, BRCP REIT I, LLC has drawn down $5,934,000, which represents 84.8% of the commitment. In addition, the Portfolio received return of capital distributions totaling $1,114,000.

 

Subject to the terms of a Subscription Agreement between the U.S. Real Estate Portfolio and BRCP REIT II, LLC the Portfolio has made a subscription commitment of $9,000,000 for which it will receive 9,000,000 shares of common stock. As of December 31, 2007, BRCP REIT II, LLC has drawn down $5,586,000, which represents 62.1% of the commitment.

 

Subject to the terms of a Subscription Agreement between the Global Real Estate Portfolio and Exeter Industrial Value Fund LP the Portfolio has made a subscription commitment of $2,000,000 for which it will receive 2,000,000 shares of common stock. As of December 31, 2007, Exeter Industrial Value Fund LP has drawn down $200,000, which represents 10.0% of the commitment.

 

Subject to the terms of a Subscription Agreement between the U.S. Real Estate Portfolio and Exeter Industrial Value Fund LP the Portfolio has made a subscription commitment of $8,500,000 for which it will receive 8,500,000 shares of common stock. As of December 31, 2007, Exeter Industrial Value Fund LP has drawn down $850,000, which represents 10.0% of the commitment.

 

Subject to the terms of a Subscription Agreement between the U.S. Real Estate Portfolio and Keystone Industrial Fund, LP, the Portfolio has made a subscription commitment of $7,500,000 for which it will receive 7,500,000 shares of common stock. As of December 31, 2007, Keystone Industrial Fund, LP has drawn down $5,703,000, which represents 76.0% of the commitment. In addition, the Portfolio received return of capital distributions totaling $297,000.

 

Subject to the terms of a Subscription Agreement between the Global Real Estate Portfolio and Keystone Industrial Fund II, LP, the Portfolio has made a subscription commitment of $5,000,000 for which it will receive 5,000,000 shares of common stock. As of December 31, 2007, Keystone Industrial Fund II, LP has not drawn down on the commitment.

 

Subject to the terms of a Subscription Agreement between the U.S. Real Estate Portfolio and Keystone

 

222


 

 

2007 Annual Report

 

December 31, 2007

 

Notes to Financial Statements (cont’d)

 

Industrial Fund II, LP, the Portfolio has made a subscription commitment of $10,000,000 for which it will receive 10,000,000 shares of common stock. As of December 31, 2007, Keystone Industrial Fund II, LP has not drawn down on the commitment.

 

Subject to the terms of a Subscription Agreement between the U.S. Real Estate Portfolio and Cabot Industrial Value Fund, LP, the Portfolio has made a subscription commitment of $7,500,000 for which it will receive 15,000 shares of common stock. As of December 31, 2007, Cabot Industrial Value Fund, LP has drawn down $3,334,000, which represents 44.4% of the commitment.

 

12.       Redemption Fees: The following redemption fees are designed to protect each Portfolio and its shareholders from the effects of short-term trading. Shares of the Active International Allocation, Emerging Markets, Global Franchise, Global Real Estate, Global Value Equity, International Equity, International Growth Active Extension, International Growth Equity, International Magnum, International Real Estate, International Small Cap, Large Cap Relative Value, Small Company Growth, Systematic Active Small Cap Core, Systematic Active Small Cap Growth, Systematic Active Small Cap Value, U.S. Real Estate and Emerging Markets Debt Portfolios redeemed within 30 days of purchase may be subject to a 2% redemption fee. Shares of the Disciplined Large Cap Value Active Extension, Focus Equity, Systematic Active Large Cap Core, Systematic Large Cap Core Active Extension, U.S. Large Cap Growth and U.S. Small/Mid Cap Value Portfolios redeemed within 7 days of purchase may be subject to a 2% redemption fee. These fees, if any, are included on the Statements 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 Portfolio 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.       New Accounting Pronouncement: In September 2006, Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”), was issued and is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. As of December 31, 2007, the Adviser does not believe the adoption of SFAS 157 will impact the amounts reported in the financial statements, however, additional disclosures will be required about the inputs used to develop the measurements of fair value and the effect of certain measurements reported in the Statement of Operations for a fiscal period.

 

15.       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 and distributions are 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 or other appropriate measures. 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.

 

Certain Portfolios may own 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”) 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 for certain expenses, after giving effect to custody fee offsets, if necessary, if the total annual operating expenses, excluding bank overdraft, certain foreign taxes and extraordinary expenses as

 

223


 

2007 Annual Report

 

 

December 31, 2007

 

Notes to Financial Statements (cont’d)

 

defined, expressed as a percentage of average daily net assets, exceed the maximum ratios indicated as follows:

 

 

 

 

 

 

 

Maximum

 

 

 

 

 

 

 

Expense Ratio

 

 

 

Average Daily

 

Advisory

 

 

 

 

 

Portfolio

 

Net Assets

 

Fee

 

Class A

 

Class B

 

Active International Allocation

 

 

first $1.0 billion

 

0.65

%

 

0.80

%

 

1.05

%

 

 

 

 

over $1.0 billion

 

0.60

 

 

 

 

 

 

 

 

Emerging Markets

 

 

first $500 million

 

1.25

 

 

1.65

 

 

1.90

 

 

 

 

 

next $500 million

 

1.20

 

 

 

 

 

 

 

 

 

 

 

next $1.5 billion

 

1.15

 

 

 

 

 

 

 

 

 

 

 

over $2.5 billion

 

1.00

 

 

 

 

 

 

 

 

Global Franchise

 

 

first $500 million

 

0.80

 

 

1.00

 

 

1.25

 

 

 

 

 

next $500 million

 

0.75

 

 

 

 

 

 

 

 

 

 

 

over $1.0 billion

 

0.70

 

 

 

 

 

 

 

 

Global Real Estate

 

 

 

 

0.85

 

 

1.05

 

 

1.30

 

 

Global Value Equity

 

 

first $1.0 billion

 

0.67

 

 

1.00

 

 

1.25

 

 

 

 

 

next $500 million

 

0.645

 

 

 

 

 

 

 

 

 

 

 

next $1.0 billion

 

0.62

 

 

 

 

 

 

 

 

 

 

 

next $1.0 billion

 

0.595

 

 

 

 

 

 

 

 

 

 

 

next $1.0 billion

 

0.57

 

 

 

 

 

 

 

 

 

 

 

over $4.5 billion

 

0.545

 

 

 

 

 

 

 

 

International Equity

 

 

first $10 billion

 

0.80

 

 

1.00

 

 

1.25

 

 

 

 

 

over $10 billion

 

0.75

 

 

 

 

 

 

 

 

International Growth Active Extension

 

 

first $1.0 billion

 

1.15

 

 

1.25

 

 

1.50

 

 

 

 

 

next $500 million

 

1.05

 

 

 

 

 

 

 

 

 

 

 

over $1.5 billion

 

0.95

 

 

 

 

 

 

 

 

International Growth Equity

 

 

first $1.0 billion

 

0.75

 

 

1.00

 

 

1.25

 

 

 

 

 

over $1.0 billion

 

0.70

 

 

 

 

 

 

 

 

International Magnum

 

 

first $500 million

 

0.80

 

 

1.00

 

 

1.25

 

 

 

 

 

next $500 million

 

0.75

 

 

 

 

 

 

 

 

 

 

 

over $1.0 billion

 

0.70

 

 

 

 

 

 

 

 

International Real Estate

 

 

 

 

0.80

 

 

1.00

 

 

1.25

 

 

International Small Cap

 

 

first $1.5 billion

 

0.95

 

 

1.15

 

 

N/A

 

 

 

 

 

over $1.5 billion

 

0.90

 

 

 

 

 

 

 

 

Disciplined Large Cap Value Active Extension

 

 

first $1.0 billion

 

1.15

 

 

1.35

 

 

1.60

 

 

 

 

 

next $500 million

 

1.05

 

 

 

 

 

 

 

 

 

 

 

over $1.5 billion

 

0.95

 

 

 

 

 

 

 

 

Focus Equity

 

 

first $1.0 billion

 

0.50

 

 

1.00

 

 

1.25

 

 

 

 

 

next $1.0 billion

 

0.45

 

 

 

 

 

 

 

 

 

 

 

next $1.0 billion

 

0.40

 

 

 

 

 

 

 

 

 

 

 

over $3.0 billion

 

0.35

 

 

 

 

 

 

 

 

Large Cap Relative Value

 

 

first $150 million

 

0.50

 

 

0.70

 

 

0.95

 

 

 

 

 

next $100 million

 

0.45

 

 

 

 

 

 

 

 

 

 

 

next $100 million

 

0.40

 

 

 

 

 

 

 

 

 

 

 

over $350 million

 

0.35

 

 

 

 

 

 

 

 

Small Company Growth

 

 

first $1.0 billion

 

0.92

 

 

1.10

 

 

1.35

 

 

 

 

 

next $500 million

 

0.85

 

 

 

 

 

 

 

 

 

 

 

over $1.5 billion

 

0.80

 

 

 

 

 

 

 

 

Systematic Active Large Cap Core

 

 

 

 

0.35

 

 

0.60

 

 

0.85

 

 

Systematic Active Small Cap Core

 

 

 

 

0.75

 

 

1.10

 

 

1.35

 

 

Systematic Active Small Cap Growth

 

 

 

 

0.75

 

 

1.10

 

 

1.35

 

 

Systematic Active Small Cap Value

 

 

 

 

0.75

 

 

1.10

 

 

1.35

 

 

Systematic Large Cap Core Active Extension

 

 

first $1.0 billion

 

1.15

 

 

1.35

 

 

1.60

 

 

 

 

 

next $500 million

 

1.05

 

 

 

 

 

 

 

 

 

 

 

over $1.5 billion

 

0.95

 

 

 

 

 

 

 

 

U.S. Large Cap Growth

 

 

first $1.0 billion

 

0.50

%

 

0.80

%

 

1.05

%

 

 

 

 

next $1.0 billion

 

0.45

 

 

 

 

 

 

 

 

 

 

 

next $1.0 billion

 

0.40

 

 

 

 

 

 

 

 

 

 

 

over $3.0 billion

 

0.35

 

 

 

 

 

 

 

 

U.S. Real Estate

 

 

first $500 million

 

0.80

 

 

1.00

 

 

1.25

 

 

 

 

 

next $500 million

 

0.75

 

 

 

 

 

 

 

 

 

 

 

over $1.0 billion

 

0.70

 

 

 

 

 

 

 

 

U.S. Small/Mid Cap Value

 

 

 

 

0.67

 

 

N/A

 

 

N/A

 

 

Emerging Markets Debt

 

 

first $500 million

 

0.75

 

 

0.85

 

 

1.10

 

 

 

 

 

next $500 million

 

0.70

 

 

 

 

 

 

 

 

 

 

 

over $1.0 billion

 

0.65

 

 

 

 

 

 

 

 

 

Fee waivers and/or expense reimbursements are voluntary and may be commenced or terminated at any time. For the year ended December 31, 2007, the Portfolios had advisory fees waived and/or certain expenses reimbursed as follows:

 

Portfolio

 

Advisory Fees
Waived and/or
Reimbursed
(000)

 

Active International Allocation

 

$   42

 

International Growth Active Extension

 

104

 

International Growth Equity

 

115

 

International Magnum

 

42

 

Disciplined Large Cap Value Active Extension

 

50

 

Focus Equity

 

19

 

Systematic Active Large Cap Core

 

42

 

Systematic Active Small Cap Core

 

43

 

Systematic Active Small Cap Growth

 

42

 

Systematic Active Small Cap Value

 

44

 

Systematic Large Cap Core Active Extension

 

48

 

Emerging Markets Debt

 

148

 

 

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: MS Investment Management (the “Administrator”) also provides the Fund with administrative services pursuant to an administration agreement for a monthly fee, which on an annual basis equals 0.08% of the average daily net assets of each Portfolio. Under an agreement between the Administrator and JPMorgan Investor Services

 

224


 

 

2007 Annual Report

 

December 31, 2007

 

Notes to Financial Statements (cont’d)

 

Co. (“JPMIS”), a corporate affiliate of JPMorgan Chase Bank, N.A., 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. Administration costs (including out-of-pocket expenses) incurred in the ordinary course of providing services under the administration agreement, except pricing services and extraordinary expenses, are covered under the administration fee. In addition, the Fund incurs local administration fees in connection with doing business in certain emerging market countries.

 

D. Shareholder Servicing Fees: Morgan Stanley Distribution, Inc. (“MSDI” or the “Distributor”), a wholly-owned subsidiary of the Adviser, serves as the Distributor of the Fund. Effective July 2, 2007, each Portfolio pays the Distributor a shareholder servicing fee, accrued daily and paid monthly, at an annual rate of 0.25% of the Portfolio’s average daily net assets attributable to Class B shares pursuant to a Shareholder Services Plan. The shareholder servicing fee is used to support the expenses associated with servicing and maintaining accounts. The Distributor may compensate other parties for providing shareholder support services to investors who purchase Class B shares.

 

Prior to July 1, 2007, MSDI served as the Distributor of the Fund and provided Class B shareholders of the applicable Portfolios with distribution services pursuant to a Distribution Plan in accordance with Rule 12b-1 under the 1940 Act. The Distribution Plan was terminated effective July 2, 2007.

 

E. Custodian Fees: JPMorgan Chase Bank, N.A. (the “Custodian”) 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. The Fund has entered into an arrangement with its Custodian whereby credits realized on uninvested cash balances were used to offset a portion of each applicable Portfolio’s expenses. These custodian credits are shown as “Expense Offset” on the Statements of Operations.

 

F. Portfolio Investment Activity:

 

1.

Security Transactions: During the year ended December 31, 2007, purchases and sales of investment securities, other than long-term U.S. Government securities and short-term investments, were:

 

Portfolio

 

Purchases
(000)

 

Sales
(000)

Active International Allocation

 

$

271,496

 

$

274,022

Emerging Markets

 

2,981,821

 

2,890,586

Global Franchise

 

28,555

 

51,885

Global Real Estate

 

643,394

 

167,902

Global Value Equity

 

31,262

 

73,735

International Equity

 

2,094,983

 

3,446,257

International Growth Active Extension

 

15,735

 

2,663

International Growth Equity

 

17,277

 

2,847

International Magnum

 

47,796

 

52,996

International Real Estate

 

1,168,131

 

819,647

International Small Cap

 

633,540

 

1,115,406

Disciplined Large Cap Value Active Extension

 

16,135

 

3,393

Focus Equity

 

8,167

 

10,363

Large Cap Relative Value

 

105,513

 

89,503

Small Company Growth

 

942,602

 

1,030,461

Systematic Active Large Cap Core

 

3,914

 

3,918

Systematic Active Small Cap Core

 

3,692

 

4,343

Systematic Active Small Cap Growth

 

3,674

 

4,529

Systematic Active Small Cap Value

 

3,066

 

3,659

Systematic Large Cap Core Active Extension

 

16,131

 

3,106

U.S. Large Cap Growth

 

834,568

 

612,868

U.S. Real Estate

 

625,839

 

1,122,001

U.S. Small/Mid Cap Value

 

4,566

 

3,573

Emerging Markets Debt

 

83,234

 

110,441

 

There were no purchases and sales of long-term U.S. Government securities for the year ended December 31, 2007.

 

2.              Transactions with Affiliates: The Portfolios invest in the Institutional Class of portfolios within the Morgan Stanley Institutional Liquidity Funds (the “Liquidity Funds”), open-end management investment companies managed by the Adviser.

 

A summary of the Portfolios’ transactions in the shares of the Liquidity Funds during the year ended December 31, 2007 is set forth below:

 

 

 

Market Value
December 31, 2006

 

Purchases
at Cost

 

Sales
Proceeds

 

Dividend
Income

 

Market Value
December 31, 2007

 

Portfolio

 

(000)

 

(000)

 

(000)

 

(000)

 

(000)

 

Active International Allocation

 

$

—

 

$

238,830

 

$

167,342

 

$

1,748

 

$

71,488

 

Emerging Markets

 

—

 

603,495

 

567,928

 

1,566

 

35,567

 

Global Franchise

 

—

 

30,950

 

28,682

 

94

 

2,268

 

Global Real Estate

 

—

 

366,553

 

366,553

 

618

 

—

 

Global Value Equity

 

—

 

12,932

 

12,149

 

25

 

783

 

International Equity

 

—

 

1,804,113

 

1,695,857

 

4,917

 

108,256

 

International Growth Active

 

 

 

 

 

 

 

 

 

 

 

Extension

 

—

 

10,163

 

10,120

 

4

 

43

 

International Growth Equity

 

—

 

15,646

 

2,335

 

9

 

13,311

 

International Magnum

 

—

 

26,024

 

19,238

 

292

 

6,786

 

International Real Estate

 

—

 

403,869

 

403,869

 

1,053

 

—

 

International Small Cap

 

—

 

244,148

 

244,148

 

456

 

—

 

Disciplined Large Cap Value Active Extension

 

—

 

10,607

 

10,524

 

6

 

83

 

Focus Equity

 

—

 

5,815

 

4,668

 

20

 

1,147

 

Large Cap Relative Value

 

—

 

84,150

 

79,207

 

479

 

4,943

 

 

225


 

2007 Annual Report

 

 

December 31, 2007

 

Notes to Financial Statements (cont’d)

 

A summary of the Portfolios’ transactions in the shares of the Liquidity Funds during the year ended December 31, 2007 is set forth below:

 

 

 

Market Value

 

Purchases

 

Sales

 

Dividend

 

Market Value

 

 

 

December 31, 2006

 

at Cost

 

Proceeds

 

Income

 

December 31, 2007

 

Portfolio

 

(000)

 

(000)

 

(000)

 

(000)

 

(000)

 

Small Company Growth

 

$

—

 

$

539,036

 

$

525,103

 

$

1,487

 

$

13,933

 

Systematic Active Large Cap Core

 

—

 

982

 

702

 

17

 

280

 

Systematic Active Small Cap Core

 

—

 

1,128

 

411

 

18

 

717

 

Systematic Active Small Cap Growth

 

—

 

1,487

 

617

 

24

 

870

 

Systematic Active Small Cap Value

 

—

 

922

 

672

 

15

 

250

 

Systematic Large Cap Core Active Extension

 

—

 

9,261

 

9,241

 

6

 

20

 

U.S. Large Cap Growth

 

—

 

343,653

 

318,845

 

550

 

24,808

 

U.S. Real Estate

 

—

 

301,853

 

301,853

 

770

 

—

 

U.S. Small /Mid Cap Value

 

—

 

23,255

 

21,977

 

28

 

1,278

 

Emerging Markets Debt

 

—

 

58,941

 

57,054

 

83

 

1,887

 

 

Investment Advisory fees paid by the Portfolios are reduced by an amount equal to their pro-rata share of the advisory and administration fees paid by the Liquidity Funds (“Rebate”). For the year ended December 31, 2007, advisory fees paid were reduced as follows:

 

 

Rebate

 

Portfolio

 

(000)

 

 

 

 

 

Active International Allocation

 

$    36

 

Emerging Markets

 

33

 

Global Franchise

 

2

 

Global Real Estate

 

13

 

Global Value Equity

 

1

 

International Equity

 

103

 

International Growth Active Extension

 

@—

 

International Growth Equity

 

@—

 

International Magnum

 

6

 

International Real Estate

 

21

 

International Small Cap

 

9

 

Disciplined Large Cap Value Active Extension

 

@—

 

Focus Equity

 

1

 

Large Cap Relative Value

 

10

 

Small Company Growth

 

32

 

Systematic Active Large Cap Core

 

@—

 

Systematic Active Small Cap Core

 

@—

 

Systematic Active Small Cap Growth

 

1

 

Systematic Active Small Cap Value

 

@—

 

Systematic Large Cap Core Active Extension

 

@—

 

U.S. Large Cap Growth

 

12

 

U.S. Real Estate

 

16

 

U.S. Small/Mid Cap Value

 

1

 

Emerging Markets Debt

 

2

 

 

@ Amount is less than $500.

 

The Emerging Markets Equity Portfolio invests in Morgan Stanley Growth Fund, a closed-end management investment company advised by an affiliate of the Adviser. The Morgan Stanley Growth Fund was acquired at a cost of $3,415,000.

 

A summary of the Portfolio’s transactions in shares of the affiliated issuer during the year ended December 31, 2007 is as follows:

 

Market Value

 

 

 

 

 

 

 

Market Value

 

December 31,

 

Purchases

 

Sales

 

Dividend

 

December 31,

 

2006

 

at Cost

 

Proceeds

 

Income

 

2007

 

(000)

 

(000)

 

(000)

 

(000)

 

(000)

 

$16,810

 

—

 

—

 

—

 

$28,374

 

 

During the year ended December 31, 2007, the following Portfolios paid brokerage commissions to Morgan Stanley & Co., an affiliated broker/dealer:

 

 

 

 

 

Brokerage

 

 

 

 

 

Commissions

 

Portfolio

 

 

 

(000)

 

Emerging Markets

 

 

 

$

5

 

Focus Equity

 

 

 

2

 

Global Real Estate

 

 

 

3

 

Global Value Equity

 

 

 

1

 

International Real Estate

 

 

 

@—

 

Small Company Growth

 

 

 

3

 

U.S. Large Cap Growth

 

 

 

53

 

U.S. Real Estate

 

 

 

5

 

U.S. Small/Mid Cap Value

 

 

 

@—

 

 

@ Amount is less than $500.

 

Additionally, during the year ended December 31, 2007, Emerging Markets Portfolio paid approximately $40,000 in brokerage commissions to China International Capital Corporation (Hong Kong) Limited (CICC), 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. Each Portfolio files tax returns with the U.S. Internal Revenue Service and various states. Generally, the tax authorities can examine all tax returns filed for the last three years.

 

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

 

226


 

 

2007 Annual Report

 

December 31, 2007

 

Notes to Financial Statements (cont’d)

 

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 Portfolios adopted the provisions of the Financial Accounting Standards Board’s (“FASB”) Interpretation number 48 Accounting for Uncertainty in Income Taxes (the “Interpretation’’), on June 30, 2007. The Interpretation is to be applied to all open tax years as of the date of effectiveness. As of December 31, 2007, this did not result in an impact to the Portfolios’ financial statements.

 

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 tax character of distributions paid during 2007 and 2006 were as follows:

 

 

 

2007

 

2006

 

 

 

Distributions

 

Distributions

 

 

 

Paid From:

 

Paid From:

 

 

 

Ordinary

 

Return of

 

Long-term

 

Ordinary

 

Long-term

 

 

 

Income

 

Capital

 

Capital Gain

 

Income

 

Capital Gain

 

Portfolio

 

(000)

 

(000)

 

(000)

 

(000)

 

(000)

 

Active International

 

 

 

 

 

 

 

 

 

 

 

Allocation

 

$  43,168

 

$  —

 

$  50,249

 

$  22,425

 

$           —

 

Emerging Markets

 

111,228

 

—

 

501,698

 

18,163

 

365,634

 

Global Franchise

 

1,348

 

—

 

17,751

 

1,579

 

6,022

 

Global Real Estate

 

31,622

 

—

 

3,308

 

2,647

 

84

 

Global Value Equity

 

2,759

 

—

 

13,384

 

2,202

 

6,107

 

International Equity*

 

205,097

 

—

 

800,160

 

217,756

 

1,050,872

 

International Growth

 

 

 

 

 

 

 

 

 

 

 

Active Extension

 

—

 

—

 

—

 

—

 

—

 

International Growth

 

 

 

 

 

 

 

 

 

 

 

Equity

 

127

 

—

 

260

 

84

 

—

 

International Magnum

 

4,349

 

—

 

6,016

 

2,676

 

13,917

 

International Real

 

 

 

 

 

 

 

 

 

 

 

Estate

 

91,243

 

—

 

63,755

 

43,788

 

17,429

 

International Small Cap

 

21,636

 

—

 

212,655

 

36,378

 

213,836

 

Disciplined Large Cap

 

 

 

 

 

 

 

 

 

 

 

Value Active

 

 

 

 

 

 

 

 

 

 

 

Extension

 

29

 

—

 

—

 

—

 

—

 

Focus Equity

 

22

 

—

 

—

 

—

 

—

 

Large Cap Relative

 

 

 

 

 

 

 

 

 

 

 

Value

 

5,050

 

—

 

11,838

 

3,869

 

11,341

 

Small Company Growth

 

—

 

—

 

82,806

 

—

 

148,745

 

Systematic Active

 

 

 

 

 

 

 

 

 

 

 

Large Cap Core

 

104

 

14

 

55

 

50

 

—

 

Systematic Active

 

 

 

 

 

 

 

 

 

 

 

Small Cap Core

 

102

 

—

 

11

 

19

 

—

 

Systematic Active

 

 

 

 

 

 

 

 

 

 

 

Small Cap Growth

 

200

 

—

 

44

 

—

 

—

 

Systematic Active

 

 

 

 

 

 

 

 

 

 

 

Small Cap Value

 

391

 

—

 

25

 

40

 

—

 

Systematic Large Cap

 

 

 

 

 

 

 

 

 

 

 

Core Active

 

 

 

 

 

 

 

 

 

 

 

Extension

 

1

 

—

 

—

 

—

 

—

 

U.S. Large Cap Growth

 

5,423

 

—

 

—

 

184

 

—

 

U.S. Real Estate

 

69,511

 

—

 

339,875

 

47,476

 

198,314

 

U.S. Small/Mid Cap

 

 

 

 

 

 

 

 

 

 

 

Value

 

18

 

—

 

—

 

—

 

—

 

Emerging Markets Debt

 

4,283

 

—

 

—

 

5,968

 

—

 

 

*Amounts based on October 31 tax year end.

 

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. These 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 (losses) on certain investment transactions and the timing and the deductibility of certain expenses.

 

Permanent differences, primarily due to differing treatments of gains (losses) related to REIT adjustments, foreign currency transactions, foreign futures and options transactions, short sales, defaulted bonds, paydown adjustments, return of capital from certain securities, expiring capital losses, distribution reclass, foreign taxes paid on capital gains, net operating losses, nondeductible expenses, certain equity securities designated as issued by “passive foreign investment companies” and excess distributions resulted in the following reclassifications among the Portfolios’ components of net assets at December 31, 2007:

 

 

 

Accumulated

 

 

 

 

 

 

 

Undistributed

 

 

 

 

 

 

 

(Distributions in

 

 

 

 

 

 

 

Excess of) Net

 

Accumulated

 

 

 

 

 

Investment

 

Net Realized

 

Paid-in

 

 

 

Income (Loss)

 

Gain (Loss)

 

Capital

 

Portfolio

 

(000)

 

(000)

 

(000)

 

Active International Allocation

 

$11,159

 

$(11,159

)

$      —

 

Emerging Markets

 

(7,627

)

7,631

 

(4

)

Global Franchise

 

(1,547

)

1,547

 

—

 

Global Real Estate

 

3,295

 

(3,254

)

(41

)

Global Value Equity

 

(102

)

115

 

(13

)

International Equity

 

(9,147

)

9,424

 

(277

)

International Growth Active Extension

 

20

 

(6

)

(14

)

International Growth Equity

 

(4

)

4

 

—

 

International Magnum

 

1,520

 

(1,520

)

—

 

International Real Estate

 

29,710

 

(29,710

)

@—

 

International Small Cap

 

2,437

 

(2,437

)

—

 

Disciplined Large Cap Value Active Extension

 

2

 

(1

)

(1

)

Focus Equity

 

2

 

(2

)

—

 

Large Cap Relative Value

 

(3

)

11

 

(8

)

Small Company Growth

 

8,843

 

7,548

 

(16,391

)

Systematic Active Large Cap Core

 

1

 

13

 

(14

)

Systematic Active Small Cap Core

 

(17

)

10

 

7

 

Systematic Active Small Cap Growth

 

(1

)

@—

 

1

 

Systematic Active Small Cap Value

 

(24

)

12

 

12

 

Systematic Large Cap Core Active Extension

 

2

 

(1

)

(1

)

U.S. Large Cap Growth

 

(37

)

37

 

—

 

U.S. Real Estate

 

11,898

 

(12,855

)

957

 

U.S. Small/Mid Cap Value

 

1

 

—

 

(1

)

Emerging Markets Debt

 

1,876

 

5,331

 

(7,207

)

 

@ Amount is less than $500.

 

227


 

2007 Annual Report

 

 

December 31, 2007

 

Notes to Financial Statements (cont’d)

 

At December 31, 2007, 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

 

$

980

 

$

40,186

 

Emerging Markets

 

46,240

 

78,079

 

Global Franchise

 

910

 

1,482

 

Global Real Estate

 

194

 

1,812

 

Global Value Equity

 

241

 

662

 

International Growth Equity

 

9

 

267

 

International Magnum

 

—

 

2,533

 

International Real Estate

 

152

 

5,252

 

International Small Cap

 

—

 

30,493

 

Large Cap Relative Value

 

3

 

1,219

 

Systematic Active Small Cap Core

 

3

 

132

 

Systematic Active Small Cap Growth

 

17

 

63

 

Systematic Active Small Cap Value

 

1

 

120

 

U.S. Large Cap Growth

 

114

 

1,427

 

U.S. Real Estate

 

1,393

 

66,270

 

U.S. Small/Mid Cap Value

 

26

 

—

 

 

Any Portfolios not shown above had no distributable earnings on a tax basis at December 31, 2007.

 

At December 31, 2007, 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

 

$

930,401

 

$

273,484

 

$

(27,130

)

$

246,354

 

Emerging Markets

 

2,704,478

 

1,116,698

 

(63,074

)

1,053,624

 

Global Franchise

 

89,103

 

32,012

 

(5,034

)

26,978

 

Global Real Estate

 

703,455

 

25,109

 

(106,923

)

(81,814

)

Global Value Equity

 

75,473

 

22,011

 

(2,742

)

19,269

 

International Equity

 

5,435,768

 

1,502,618

 

(290,965

)

1,211,653

 

International Growth

 

 

 

 

 

 

 

 

 

Active Extension

 

13,038

 

1,070

 

(502

)

568

 

International Growth

 

 

 

 

 

 

 

 

 

Equity

 

34,621

 

1,956

 

(109

)

1,847

 

International Magnum

 

122,523

 

31,107

 

(3,123

)

27,984

 

International Real Estate

 

1,357,090

 

47,649

 

(237,117

)

(189,468

)

International Small Cap

 

733,098

 

152,045

 

(102,482

)

49,563

 

Disciplined Large Cap

 

 

 

 

 

 

 

 

 

Value Active Extension

 

12,587

 

299

 

(1,106

)

(807

)

Focus Equity

 

13,510

 

4,305

 

(976

)

3,329

 

Large Cap Relative Value

 

257,452

 

51,513

 

(19,590

)

31,923

 

Small Company Growth

 

1,578,428

 

415,873

 

(150,861

)

265,012

 

Systematic Active Large

 

 

 

 

 

 

 

 

 

Cap Core

 

6,714

 

1,046

 

(328

)

718

 

Systematic Active Small

 

 

 

 

 

 

 

 

 

Cap Core

 

8,735

 

343

 

(1,185

)

(842

)

Systematic Active Small

 

 

 

 

 

 

 

 

 

Cap Growth

 

9,227

 

692

 

(1,106

)

(414

)

Systematic Active Small

 

 

 

 

 

 

 

 

 

Cap Value

 

8,691

 

322

 

(1,652

)

(1,330

)

Systematic Large Cap

 

 

 

 

 

 

 

 

 

Core Active Extension

 

12,810

 

445

 

(777

)

(332

)

U.S. Large Cap Growth

 

1,215,852

 

387,620

 

(69,792

)

317,828

 

 

 

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

Appreciation

 

 

 

Cost

 

Appreciation

 

Depreciation

 

(Depreciation)

 

Portfolio

 

(000)

 

(000)

 

(000)

 

(000)

 

U.S. Real Estate

 

$  1,187,399

 

$  165,678

 

$  (126,688

)

$  38,990

 

U.S. Small/Mid Cap

 

 

 

 

 

 

 

 

 

Value

 

21,452

 

566

 

(1,652

)

(1,086

)

Emerging Markets Debt

 

57,515

 

927

 

(1,781

)

(854

)

 

At December 31, 2007, 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

 

2009

 

2010

 

2011

 

2012

 

2013

 

2015

 

Total

 

International

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Growth Active

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extension

 

$

—

 

$

—

 

$

—

 

$

—

 

$

—

 

$

52

 

$

52

 

Disciplined Large

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cap Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extension

 

—

 

—

 

—

 

—

 

—

 

162

 

162

 

Focus Equity

 

—

 

15,905

 

—

 

296

 

—

 

—

 

16,201

 

Large Cap Relative Value*

 

16,091

 

32,106

 

—

 

—

 

—

 

—

 

48,197

 

Small Company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Growth

 

—

 

14,422

 

—

 

—

 

—

 

—

 

14,422

 

Systematic Large

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cap Core

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extension

 

—

 

—

 

—

 

—

 

—

 

31

 

31

 

Emerging

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Markets Debt

 

778

 

—

 

—

 

—

 

—

 

—

 

778

 

 

*Capital loss carryover from target fund.

 

The amounts reflected in the capital loss carryforward table for Large Cap Relative Value Portfolio represent capital loss carry- forward brought forward as a result of the Portfolio’s merger with the MSIFT Equity Portfolio. Based on certain provisions in the Internal Revenue Code, various limitations regarding the future utilization of these carryforwards may apply. This acquired capital loss carryforward is expected to expire between 2009-2010.

 

In addition, the amounts reflected in the capital loss carryforward table above for the Small Company Growth Portfolio represent capital loss carryforward acquired from MSIFT Small Cap Growth Portfolio after limitations pursuant to Internal Revenue Code, Section 383.

 

During the year ended December 31, 2007, the following Portfolios utilized capital loss carryforwards for U.S. Federal income tax purposes of approximately:

 

Portfolio

 

Capital Loss
Carryforward
Utilized
(000)

 

Active International Allocation

 

$14,711

 

Focus Equity

 

1,359

 

Large Cap Relative Value

 

2,838

 

 

228


 

2007 Annual Report

 

December 31, 2007

 

Notes to Financial Statements (cont’d)

 

Portfolio

 

Capital Loss
Carryforward
Utilized
(000)

 

Small Company Growth

 

$

4,660

 

Systematic Active Large Cap Core

 

33

 

Systematic Active Small Cap Core

 

166

 

Systematic Active Small Cap Growth

 

184

 

Systematic Active Small Cap Value

 

5

 

U.S. Large Cap Growth

 

66,874

 

Emerging Markets Debt

 

4,217

 

 

The Large Cap Relative Value Portfolio utilized approximately $2,838,000 of the capital losses acquired from MSIFT Equity Portfolio for federal tax purposes during the year ended December 31, 2007.

 

The Small Company Growth Portfolio utilized $4,660,000 of the capital losses acquired from MSIFT Small Cap Growth Portfolio for federal tax purposes during the year ended December 31, 2007.

 

During the year ended December 31, 2007, the Emerging Markets Debt Portfolio had expired capital loss carryforwards for U.S. Federal income tax purposes of approximately $5,544,000.

 

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, 2007, the Portfolio deferred to January 2, 2008 for U.S. Federal income tax purposes, post-October capital, PFIC and currency losses as indicated:

 

Portfolio

 

Capital
Losses
(000)

 

Currency
Losses
(000)

 

PFIC
Losses
(000)

 

Active International Allocation

 

$—

 

$1,851

 

$     —

 

Global Real Estate

 

—

 

96

 

7,350

 

Global Value Equity

 

—

 

—

 

1

 

International Growth Active Extension

 

26

 

5

 

—

 

International Growth Equity

 

—

 

6

 

—

 

International Magnum

 

—

 

524

 

7

 

International Real Estate

 

—

 

—

 

17,172

 

International Small Cap

 

—

 

335

 

—

 

Disciplined Large Cap Value Active Extension

 

78

 

—

 

—

 

Focus Equity

 

282

 

—

 

—

 

Systematic Active Large Cap Core

 

66

 

—

 

—

 

Systematic Large Cap Core Active Extension

 

204

 

—

 

—

 

U.S. Large Cap Growth

 

—

 

85

 

—

 

U.S. Real Estate

 

—

 

19

 

—

 

U.S. Small/Mid Cap Value

 

41

 

—

 

—

 

 

 

 

 

 

 

 

 

@ Amount is less than $500.

 

 

 

 

 

 

 

 

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.

 

Global Real Estate, International Real Estate and U.S. Real Estate Portfolios invest a significant portion of their assets in securities of real estate investment trusts (REIT). The market’s perception of prospective declines in private real estate values and other financial assets may result in increased volatility of market prices that can negatively impact the valuation of certain issuers held by the Portfolios.

 

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.

 

At December 31, 2007, certain Portfolios had otherwise unaffiliated record owners of 10% or greater. Investment activities of these shareholders could have a material impact on these Portfolios.

 

229


 

2007 Annual Report

 

December 31, 2007

 

Notes to Financial Statements (cont’d)

 

These Portfolios and the aggregate percentage of such owners were as follows:

 

 

 

Percentage of Ownership

 

Portfolio

 

Class A

 

Class B

 

Active International Allocation

 

—%

 

35.7%

 

Emerging Markets

 

47.2

 

91.7

 

Global Franchise

 

63.7

 

—

 

Global Real Estate

 

40.3

 

26.9

 

Global Value Equity

 

63.2

 

91.1

 

International Equity

 

—

 

83.8

 

International Growth Active Extension

 

—

 

—

 

International Growth Equity

 

66.6

 

22.0

 

International Magnum

 

19.7

 

82.0

 

International Real Estate

 

39.1

 

73.2

 

International Small Cap

 

20.2

 

—

 

Disciplined Large Cap Value Active Extension

 

—

 

—

 

Focus Equity

 

10.1

 

18.7

 

Large Cap Relative Value

 

70.7

 

96.5

 

Small Company Growth

 

31.3

 

57.4

 

Systematic Active Large Cap Core

 

—

 

—

 

Systematic Active Small Cap Core

 

—

 

—

 

Systematic Active Small Cap Growth

 

—

 

—

 

Systematic Active Small Cap Value

 

—

 

—

 

Systematic Large Cap Core Active Extension

 

—

 

—

 

U.S. Large Cap Growth

 

18.1

 

89.1

 

U.S. Real Estate

 

28.5

 

76.6

 

U.S. Small/Mid Cap Value

 

—

 

—

 

Emerging Markets Debt

 

83.8

 

35.4

 

 

J.  Reverse Stock Split: After the close of business on March 17, 2006, Emerging Markets Debt Portfolio effected a 1 for 3 reverse stock split for Class A and Class B shares of the Portfolio. All transactions in capital stock and per share data prior to March 18, 2006 have been restated to give effect to the reverse stock split. The reverse stock split had no impact on the overall value of a shareholder’s investment in the Portfolio.

 

K.  Supplemental Proxy Information (unaudited): On January 25, 2007, a Special Meeting of Shareholders of the Global Franchise Portfolio (“Portfolio”) was held in order to vote on a proposal to change the Portfolio from a diversified fund to a non-diversified fund. The votes were as follows:

 

For

 

Against

 

Abstain

 

BNV*

 

3,566,586

 

27,417

 

39,879

 

0

 

 

* Broker “non-votes” are shares held in street name for which the broker indicates that instructions have not been received from the beneficial owners or other persons entitled to vote and for which the broker does not have discretionary voting authority.

 

L.  Subsequent Event: Effective January 2, 2008, all references to Class A shares and Class B shares of the Portfolios are changed to Class I shares and Class P shares, respectively. The Directors of the Fund also approved a change in the investment minimums for these classes. The minimum initial investments are $5,000,000 and $1,000,000 for Class I and Class P, respectively. The Directors of the Fund also approved adding Class H shares to Global Real Estate, International Growth Active Extension, Disciplined Large Cap Value Active Extension, Systematic Large Cap Core Active Extension and Emerging Markets Debt Portfolios.

 

230


 

2007 Annual Report

 

December 31, 2007

 

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. (the “Fund”) (comprising, respectively, the Active International Allocation Portfolio, Disciplined Large Cap Value Active Extension Portfolio, Emerging Markets Portfolio, Global Franchise Portfolio, Global Real Estate Portfolio, Global Value Equity Portfolio, International Equity Portfolio, International Growth Active Extension Portfolio, International Growth Equity Portfolio, International Magnum Portfolio, International Real Estate Portfolio, International Small Cap Portfolio, Focus Equity Portfolio, Large Cap Relative Value Portfolio, Small Company Growth Portfolio, Systematic Active Large Cap Core Portfolio, Systematic Active Small Cap Core Portfolio, Systematic Active Small Cap Growth Portfolio, Systematic Active Small Value Portfolio, Systematic Large Cap Core Active Extension Portfolio, U.S. Large Cap Growth Portfolio, U.S. Real Estate Portfolio, Emerging Markets Debt Portfolio, and U.S. Small/Mid Cap Value Portfolio), as of December 31, 2007, and the related statements of operations, the statements of changes in net assets, the statements of cash flows for the Disciplined Large Cap Value Active Extension Portfolio, International Growth Active Extension Portfolio and Systematic Large Cap Core Active Extension Portfolio, 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 highlights based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2007, 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 aforementioned portfolios constituting the Morgan Stanley Institutional Fund, Inc. at December 31, 2007, the results of their operations, the changes in their net assets, the cash flows for the aforementioned three portfolios and the financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.

 

 

Boston, Massachusetts
February 19, 2008

 

231


 

2007 Annual Report

 

December 31, 2007

 

Federal Income Tax Information: (unaudited)

 

For Federal income tax purposes, the following information is furnished with respect to the distributions paid by each applicable Portfolio during the taxable year ended December 31, 2007.

 

For corporate shareholders, the following percentages of dividends paid by each Portfolio qualified for the dividends received deduction. Additionally, the following percentages of each Portfolio’s dividends was attributable to qualifying U.S. Government obligations. (Please consult your tax advisor to determine if any portion of the dividends you received is exempt from state income tax.):

 

Portfolio

 

Div. Received
Deduction %

 

Qualifying U.S.
Govt. Income %

 

Global Franchise

 

70.7

%

—

%

Global Real Estate

 

1.1

 

—

 

Global Value Equity

 

25.8

 

—

 

Disciplined Large Cap Value Active Extension

 

100.0

 

—

 

Focus Equity

 

100.0

 

—

 

Large Cap Relative Value

 

100.0

 

—

 

Systematic Active Large Cap Core

 

90.4

 

—

 

Systematic Active Small Cap Core

 

55.9

 

—

 

Systematic Active Small Cap Growth

 

16.1

 

—

 

Systematic Active Small Cap Value

 

25.3

 

—

 

Systematic Large Cap Core Active Extension

 

100.0

 

—

 

U.S. Large Cap Growth

 

100.0

 

—

 

U.S. Real Estate

 

2.2

 

—

 

U.S. Small/Mid Cap Value

 

76.5

 

—

 

 

Each of the applicable Portfolios designated and paid the following amounts as a long-term capital gain distribution:

 

Portfolio

 

Amount
(000)

 

Active International Allocation

 

$   50,249

 

Emerging Markets

 

501,698

 

Global Franchise

 

17,751

 

Global Real Estate

 

3,308

 

Global Value Equity

 

13,384

 

International Equity

 

800,160

 

International Growth Equity

 

260

 

International Magnum

 

6,016

 

International Real Estate

 

63,755

 

International Small Cap

 

212,655

 

Large Cap Relative Value

 

11,838

 

Small Company Growth

 

82,806

 

Systematic Active Large Cap Core

 

55

 

Systematic Active Small Cap Core

 

11

 

Systematic Active Small Cap Growth

 

44

 

Systematic Active Small Cap Value

 

25

 

U.S. Real Estate

 

339,875

 

 

232


 

2007 Annual Report

 

December 31, 2007

 

Federal Income Tax Information: (cont’d)

 

For Federal income tax purposes, the following information is furnished with respect to the earnings of each applicable Portfolio for the taxable year ended December 31, 2007.

 

When distributed, certain earnings may be subject to a maximum tax rate of 15% as provided for the Jobs and Growth Tax Relief Reconciliation Act of 2003. Each of the applicable Portfolios designated up to the following maximum amounts as taxable at this lower rate:

 

Portfolio

 

Amount
(000)

 

Active International Allocation

 

$   12,811

 

 

Emerging Markets

 

31,538

 

 

Global Franchise

 

1,453

 

 

Global Real Estate

 

1,863

 

 

Global Value Equity

 

2,094

 

 

International Equity

 

119,295

 

 

International Growth Equity

 

115

 

 

International Magnum

 

1,446

 

 

International Real Estate

 

34,367

 

 

International Small Cap

 

23,961

 

 

Disciplined Large Cap Value Active Extension

 

29

 

 

Focus Equity

 

21

 

 

Large Cap Relative Value

 

5,050

 

 

Systematic Active Large Cap Core

 

87

 

 

Systematic Active Small Cap Core

 

70

 

 

Systematic Active Small Cap Growth

 

17

 

 

Systematic Active Small Cap Value

 

91

 

 

Systematic Large Cap Core Active Extension

 

1

 

 

U.S. Large Cap Growth

 

5,422

 

 

U.S. Small/Mid Cap Value

 

18

 

 

 

The following Portfolios intend to pass through foreign tax credits and have derived net income from sources within foreign countries amounting to:

 

Portfolio

 

Foreign Tax
Credits

 

Net Foreign
Source Income

Active International Allocation

 

$    346

 

$    25,662

Emerging Markets

 

2,073

 

46,529

Global Franchise

 

149

 

2,610

Global Real Estate

 

152

 

7,468

International Equity

 

2,965

 

210,403

International Growth Equity

 

9

 

162

International Magnum

 

23

 

2,821

International Real Estate

 

1,808

 

50,372

International Small Cap

 

2,220

 

29,307

 

In January, each applicable Portfolio provides tax information to shareholders for the preceding calendar year.

 

233


 

2007 Annual Report

 

December 31, 2007

 

An Important Notice Concerning Our U.S. Privacy Policy (unaudited)

 

POLICY CONCERNING CUSTOMER INFORMATION

 

Morgan Stanley Institutional Fund, Inc. (the “Fund”) is required by federal law to provide you with a copy of their Privacy Policy (the “Policy”) annually. The following Policy applies to current and former individual clients of the Fund. This Policy is not applicable to partnerships, corporations, trusts or other non individual clients or account holders. Please note that this Policy may be amended at any time, and that you will be informed of any changes to this Policy as required by law.

 

THE FUND RESPECTS YOUR PRIVACY

 

The Fund appreciates that you have provided your personal financial information and strive to maintain the privacy of such information. This Policy describes, and is designed to help you understand, what non-public personal information the Fund may collect about you, why the Fund collects it, and when the Fund may share it with others. Throughout this Policy, the non-public information that personally identifies you or your accounts is referred to as “personal information.”

 

1.          WHAT PERSONAL INFORMATION DOES THE FUND COLLECT ABOUT YOU?

 

To serve you better and manage your investment, it is important that the Fund collects and maintains accurate information about you. The Fund obtains this information from applications and other forms you submit, from your dealings with the Fund, and from third parties and other sources.

 

For example:

 

·  The Fund collects information such as your name, address, e-mail address, and telephone/fax numbers through applications and other forms you may submit.

 

·  The Fund may obtain information about account balances, your use of account(s) and the types of products and services you prefer to receive through your dealings and transactions with the Fund and other sources.

 

·  The Fund may collect background information from and through third-party vendors to verify representations you have made and to comply with various regulatory requirements.

 

2.          WHEN DOES THE FUND DISCLOSE PERSONAL INFORMATION COLLECTED ABOUT YOU?

 

To provide you with the products and services you request, to serve you better and to manage your investment, the Fund may disclose personal information collected about you to affiliated companies and to non-affiliated third parties as required or permitted by law.

 

a.          Information the Fund discloses to affiliated companies:

 

The Fund does not disclose personal information collected about you to affiliated companies except to enable them to provide services on their behalf or as otherwise required or permitted by law.

 

b.          Information the Fund discloses to third parties:

 

The Fund does not disclose personal information collected about you to non-affiliated third parties except to enable them to provide services on the Fund’s behalf, to perform joint marketing agreements with other financial institutions, or as otherwise required or permitted by law. For example, some instances where the Fund may disclose information about you to non-affiliated third parties include: for servicing and processing transactions, to protect against fraud, for institutional risk control or to respond to judicial process. When the Fund shares personal information with these third parties, they are required to limit their use of personal information to the particular purpose for which it was shared and they are not allowed to share personal information with others except to fulfill that limited purpose.

 

234

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

An Important Notice Concerning Our U.S. Privacy Policy (cont’d)

 

3. HOW DOES THE FUND PROTECT THE SECURITY AND CONFIDENTIALITY OF PERSONAL INFORMATION COLLECTED ABOUT YOU?

 

The Fund and/or its service providers maintain physical, electronic and procedural security measures to help safeguard the personal information collected about you. The Fund and its service providers have internal policies governing the proper handling of client information. Third parties that provide support or marketing services on the Fund’s behalf may also receive personal information, and they are required to adhere to confidentiality standards with respect to such information.

 

If you have any questions regarding this Policy, please contact a Fund representative at (800) 548-7786.

 

 

© 2007 Morgan Stanley Institutional Fund, Inc.

 

 

235

 


 

2007 Annual Report

 

December 31, 2007

 

Director and Officer Information (unaudited)

 

Independent Directors:

 

Name, Age and Address of Independent Director

 

Position(s) Held
with Registrant

 

Length of Time Served*

 

Principal Occupation(s) During Past 5 Years

 

Number of
Portfolios in
Fund Complex
Overseen by
Independent
Director**

 

Other Directorships Held by Director

Frank L. Bowman (63)
c/o Kramer Levin Naftalis &
Frankel LLP
Counsel to the Independent

Directors

1177 Avenue of the Americas

New York, NY 10036

 

Director

 

Since

August

2006

 

President and Chief Executive Officer, Nuclear Energy Institute (policy organization) (since February 2005); Director or Trustee of various Retail Funds and Institutional Funds (since August 2006); Chairperson of the Insurance Sub-Committee of the Insurance, Valuation and Compliance Committee (since February 2007); formerly, variously, Admiral in the U.S. Navy, Director of Naval Nuclear Propulsion Program and Deputy Administrator— Naval Reactors in the National Nuclear Security Administration at the U.S. Department of Energy (1996-2004). Honorary Knight Commander of the Most Excellent Order of the British Empire.

 

180

 

Director of the National Energy

Foundation, the U.S. Energy

Association, the American Council for

Capital Formation and the Armed

Services YMCA of the USA.

 

 

 

 

 

 

 

 

 

 

 

Michael Bozic (66)
c/o Kramer Levin Naftalis &
Frankel LLP
Counsel to the Independent
Directors
1177 Avenue of the Americas
New York, NY 10036

 

Director

 

Since
April
1994

 

Private Investor; Chairperson of the Insurance, Valuation and Compliance Committee (since October 2006); Director or Trustee of the Retail Funds (since April 1994) and the Institutional Funds (since July 2003); formerly, Chairperson of the Insurance Committee (July 2006- September 2006), Vice Chairman of Kmart Corporation (December 1998-October 2000), Chairman and Chief Executive Officer of Levitz Furniture Corporation (November 1995-November 1998) and President and Chief Executive Officer of Hills Department Stores (May 1991-July 1995); variously Chairman, Chief Executive Officer, President and Chief Operating Officer (1987-1991) of the Sears Merchandise Group of Sears Roebuck & Co.

 

182

 

Director of various business
organizations.

 

 

 

 

 

 

 

 

 

 

 

Kathleen A. Dennis (54)

c/o Kramer Levin Naftalis &

Frankel LLP

Counsel to the Independent

Directors

1177 Avenue of the Americas

New York, NY 10036

 

Director

 

Since

August

2006

 

President, Cedarwood Associates (mutual fund and investment management) (since July 2006); Chairperson of the Money Market and Alternatives Sub-Committee of the Investment Committee (since October 2006) and Director or Trustee of various Retail Funds and Institutional Funds (since August 2006); formerly, Senior Managing Director of Victory Capital Management (1993- 2006).

 

180

 

Director of various non-profit

organizations.

 

 

 

 

 

 

 

 

 

 

 

 

Dr. Manuel H. Johnson (58)

c/o Johnson Smick

Group, Inc.

888 16th Street, N.W.

Suite 740

Washington, D.C. 20006

 

Director

 

Since

July

1991

 

Senior Partner, Johnson Smick International, Inc. (consulting firm); Chairperson of the Investment Committee (since October 2006) and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2003); Co-Chairman and a founder of the Group of Seven Council (G7C) international economic commission; formerly, Chairperson of the Audit Committee (July 1991-September 2006); Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury.

 

182

 

Director of NVR, Inc. (home

construction); Director of Evergreen

Energy.

 

 

 

 

 

 

 

 

 

 

 

Joseph J. Kearns (65)

c/o Kearns & Associates LLC

PMB754

23852 Pacific Coast Highway

Malibu, CA 90265

 

Director

 

Since

August

1994

 

President, Kearns & Associates LLC (investment consulting); Chairperson of the Audit Committee (since October 2006) and Director or Trustee of the Retail Funds (since July 2003) and the Institutional Funds (since August 1994); formerly Deputy Chairperson of the Audit Committee (July 2003-September 2006) and Chairperson of the Audit Committee of the Institutional Funds (October 2001- July 2003); CFO of the J. Paul Getty Trust.

 

183

 

Director of Electro Rent Corporation

(equipment leasing) and The Ford

Family Foundation.

 

236

 


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Director and Officer Information (cont’d)

 

Independent Directors: (cont’d)

 

Name, Age and Address of

Independent Director

 

Position(s) Held

with Registrant

 

Length of

Time Served*

 

Principal Occupation(s) During Past 5 Years

 

Number of
Portfolios in
Fund Complex
Overseen by
Independent
Director**

 

Other Directorships Held by Director

Michael F. Klein (49)
c/o Kramer Levin Naftalis &
Frankel LLP
Counsel to the
Independent Directors
1177 Avenue of the Americas

New York, NY 10036

 

Director

 

Since

August

2006

 

Managing Director, Aetos Capital, LLC (since March 2000) and Co-President, Aetos Alternatives Management, LLC (since January 2004); Chairperson of the Fixed- Income Sub-Committee of the Investment Committee (since October 2006) and Director or Trustee of various Retail Funds and Institutional Funds (since August 2006); formerly, Managing Director, Morgan Stanley & Co., Inc. and Morgan Stanley Dean Witter Investment Management, President, Morgan Stanley Institutional Funds (June 1998-March 2000) and Principal, Morgan Stanley & Co., Inc. and Morgan Stanley Dean Witter Investment Management (August 1997-December 1999).

 

180

 

Director of certain investment funds managed or sponsored by Aetos Capital LLC; Director of Sanitized AG and Sanitized Marketing AG (specialty chemicals).

 

 

 

 

 

 

 

 

 

 

 

Michael E. Nugent (71)
c/o Triumph Capital, L.P.
445 Park Avenue
New York, NY 10022

 

Chairman of the
Board and
Director

 

Chairman of
the Boards
since July
2006 and
Trustee since
July 1991

 

General Partner of Triumph Capital, L.P. (private investment partnership); Chairman of the Boards of the Retail Funds and Institutional Funds (since July 2006); Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2001); formerly, Chairperson of the Insurance Committee (until July 2006).

 

182

 

None.

 

 

 

 

 

 

 

 

 

 

 

W. Allen Reed (60)
c/o Kramer Levin Naftalis &
Frankel LLP
Counsel to the
Independent Directors
1177 Avenue of the Americas
New York, NY 10036

 

Director

 

Since
August
2006

 

Chairperson of the Equity Sub-Committee of the Investment Committee (since October 2006) and Director or Trustee of various Retail and Institutional Funds (since August 2006); formerly, President and CEO of General Motors Asset Management; Chairman and Chief Executive Officer of the GM Trust Bank and Corporate Vice President of General Motors Corporation (July 1994- December 2005).

 

180

 

Director of Temple-Inland Industries (packaging and forest products); Director of Legg Mason and Director of the Auburn University Foundation.

 

 

 

 

 

 

 

 

 

 

 

Fergus Reid (75)
c/o Lumelite Plastics
Corporation
85 Charles Coleman Blvd.
Pawling, NY 12564

 

Director

 

Since
June
1992

 

Chairman of Lumelite Plastics Corporation; Chairperson of the Governance Committee and Director or Trustee of the Retail Funds (since July 2003) and the Institutional Funds (since June 1992).

 

183

 

Trustee and Director of certain investment companies in the JPMorgan Funds complex managed by JPMorgan Investment Management Inc.

 

237


 

2007 Annual Report

 

December 31, 2007

 

Director and Officer Information (cont’d)

 

Interested Director:

 

Name, Age and Address of
Interested Director

 

Position(s)
Held with
Registrant

 

Term of Office
and Length of
Time Served*

 

Principal Occupation(s) During Past 5 Years

 

Number of
Portfolios in
Fund Complex
Overseen by
Interested
Director**

 

Other Directorships Held by Director

James F. Higgins (59)
c/o Morgan Stanley Trust
Harborside Financial Center
Plaza Two
Jersey City, NJ 07311

 

Director

 

Since
June
2000

 

Director or Trustee of the Retail Funds (since June 2000) and the Institutional Funds (since July 2003); Senior Advisor of Morgan Stanley (since August 2000).

 

181

 

Director of AXA Financial, Inc. and The Equitable Life Assurance Society of the United States (financial services).

 

*      This is the earliest date the Director began serving the Retail Funds or Institutional Funds. Each Director serves an indefinite term, until his or her successor is elected.

**   The Fund Complex includes all open-end and closed-end funds (including all of their portfolios) advised by the Adviser and any funds that have an investment adviser that is an affiliated person of the Adviser (including, but not limited to, Morgan Stanley Investment Management, 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. You may also retrieve this information on-line at the Securities and Exchange Commission’s website at “http://www.sec.gov”.

 

238


 

 

2007 Annual Report

 

 

 

December 31, 2007

 

Director and Officer Information (cont’d)

 

Executive Officers:

 

Name, Age and Address of Executive Officer

 

Position(s)
Held with
Registrant

 

Term of Office
and Length of
Time Served*

 

Principal Occupation(s) During Past 5 Years

 

 

 

 

 

 

 

Ronald E. Robison (68)
Morgan Stanley Investment Management Inc. 522 Fifth Avenue
New York, NY 10036

 

President and
Principal
Executive
Officer

 

President since
September
2005 and
Principal
Executive
Officer since
May 2003

 

President (since September 2005) and Principal Executive Officer (since May 2003) of funds in the Fund Complex; President (since September 2005) and Principal Executive Officer (since May 2003) of the Van Kampen Funds; Managing Director, Director and/or Officer of the Adviser and various entities affiliated with the Adviser; Director of Morgan Stanley SICAV (since May 2004). Formerly, Executive Vice President (July 2003 to September 2005) of funds in the Fund Complex and the Van Kampen Funds; President and Director of the Institutional Funds (March 2001 to July 2003); Chief Global Operating Officer of the Adviser; Chief Administrative Officer of Morgan Stanley Investment Advisors Inc.; Chief Administrative Officer of Morgan Stanley Services Company Inc.

 

 

 

 

 

 

 

J. David Germany (53)
Morgan Stanley Investment Management
Limited
20 Bank Street
Canary Wharf
London, England
E144AD

 

Vice
President

 

Since February
2006

 

Managing Director and (since December 2005) Chief Investment Officer—Global Fixed Income of Morgan Stanley Investment Management; Managing Director and Director of Morgan Stanley Investment Management Limited; Vice President of the Retail Funds and Institutional Funds (since February 2006).

 

 

 

 

 

 

 

Dennis F. Shea (54)
Morgan Stanley Investment Management Inc.
522 Fifth Avenue
New York, NY 10036

 

Vice
President

 

Since February
2006

 

Managing Director and (since February 2006) Chief Investment Officer—Global Equity of Morgan Stanley Investment Management; Vice President of the Retail Funds and Institutional Funds (since February 2006). Formerly, Managing Director and Director of Global Equity Research at Morgan Stanley.

 

 

 

 

 

 

 

Amy R. Doberman (45)
Morgan Stanley Investment Management Inc.
522 Fifth Avenue
New York, NY 10036

 

Vice
President

 

Since
July
2004

 

Managing Director and General Counsel, U.S. Investment Management of Morgan Stanley Investment Management (since July 2004); Vice President of the Retail Funds and Institutional Funds (since July 2004); Vice President of the Van Kampen Funds (since August 2004); Secretary (since February 2006) and Managing Director (since July 2004) of the Adviser and various entities affiliated with the Adviser. Formerly, Managing Director and General Counsel — Americas, UBS Global Asset Management (July 2000-July 2004).

 

 

 

 

 

 

 

Carsten Otto (44)
Morgan Stanley Investment Management Inc.
522 Fifth Avenue
New York, NY 10036

 

Chief
Compliance
Officer

 

Since
October
2004

 

Managing Director and Global Head of Compliance for Morgan Stanley Investment Management (since April 2007) and Chief Compliance Officer of Morgan Stanley Retail Funds and Institutional Funds (since October 2004). Formerly, U.S. Director of Compliance (October 2004 - April 2007) and Assistant Secretary and Assistant General Counsel of the Retail Funds.

 

 

 

 

 

 

 

Stefanie V. Chang Yu (41)
Morgan Stanley Investment Management Inc.
522 Fifth Avenue
New York, NY 10036

 

Vice
President

 

Since
December
1997

 

Managing Director of the Adviser and various entities affiliated with the Adviser; Vice President of the Retail Funds (since July 2002) and the Institutional Funds (since December 1997). Formerly, Secretary of various entities affiliated with the Adviser.

 

 

 

 

 

 

 

Mary E. Mullin (40)
Morgan Stanley Investment Management Inc.
522 Fifth Avenue
New York, NY 10036

 

Secretary

 

Since
June
1999

 

Executive Director of the Adviser and various entities affiliated with the Adviser; Secretary of the Retail Funds (since July 2003) and the Institutional Funds (since June 1999).

 

 

 

 

 

 

 

James W. Garrett (39)
Morgan Stanley Investment Management Inc.
522 Fifth Avenue
New York, NY 10036

 

Treasurer and
Chief
Financial
Officer

 

Treasurer since
February 2002
and Chief
Financial Officer
since July 2003

 

Head of Global Fund Administration; Managing Director of the Adviser and various entities affiliated with the Adviser; Treasurer and Chief Financial Officer of the Institutional Funds.

 

 

 

*

This is the earliest date the Officer began serving the Retail Funds or Institutional Funds. Each Officer serves an indefinite term, until his or her successor is elected.

 

 

239


 

2007 Annual Report

 

December 31, 2007

 

 

Investment Adviser and Administrator

Morgan Stanley Investment Management Inc.

522 Fifth Avenue

New York, NY 10036

 

 

Distributor

Morgan Stanley Distribution, Inc.

One Tower Bridge

100 Front Street, Suite 1100

West Conshohocken, PA 19428-2899

 

 

Custodian

JPMorgan Chase Bank, N.A.

270 Park Avenue

New York, NY 10017

 

 

Legal Counsel

Clifford Chance US LLP

31 West 52nd Street

New York, NY 10019-6131

 

 

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.  The semi-annual reports and the annual reports are filed electronically with the Securities and Exchange Commission (SEC) on Form N-CSRS and Form N-CSR, respectively. Morgan Stanley also delivers the 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, http:/www.sec.gov. You may also review and copy them at the SEC’s public reference room in Washington, DC. Information on the operation of the SEC’s Public Reference Room may be obtained by calling the SEC at 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

 

You may obtain a copy of the Fund’s Proxy Voting Policy and Procedures and information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30, without charge, upon request, by calling toll-free 1(800) 548-7786 or by visiting our website at www.morganstanley.com/msim. This information is also available on the SEC’s website at http://www.sec.gov.

 

This report is authorized for distribution only when preceded or accompanied by the prospectus 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/msim or call 1(800) 548-7786.

 

240


 

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.

522 Fifth Avenue

New York, NY 10036

MSIF: (800) 548-7786

 

© 2008 Morgan Stanley

 

 

MSIFTANN IU08-00820P-Y12/07

 


 

Item 2.    Code of Ethics.

 

(a)           The Fund has adopted a code of ethics (the “Code of Ethics”) that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Fund or a third party.

 

(b)           No information need be disclosed pursuant to this paragraph.

 

(c)           Not applicable.

 

(d)           Not applicable.

 

(e)           Not applicable.

 

(f)

 

(1)           The Fund’s Code of Ethics is attached hereto as Exhibit 12 A.

 

(2)           Not applicable.

 

(3)           Not applicable.

 

Item 3.    Audit Committee Financial Expert.

 

The Fund’s Board of Trustees has determined that Joseph J. Kearns, an “independent” Trustee, is an “audit committee financial expert” serving on its audit committee. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an “expert” for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Trustees in the absence of such designation or identification.

 


 

Item 4.  Principal Accountant Fees and Services.

 

(a)(b)(c)(d) and (g).  Based on fees billed for the periods shown:

 

2007

 

 

 

Registrant

 

Covered Entities(1)

 

Audit Fees

 

$

724,100

 

N/A

 

 

 

 

 

 

 

Non-Audit Fees

 

 

 

 

 

Audit-Related Fees

 

$

 

$

731,800

(2)

Tax Fees

 

$

71,650

(3)

$

104,020

(4)

All Other Fees

 

$

 

$

166,270

(5)

Total Non-Audit Fees

 

$

71,650

 

$

1,002,090

 

 

 

 

 

 

 

Total

 

$

795,750

 

$

1,002,090

 

 

2006

 

 

 

Registrant

 

Covered Entities(1)

 

Audit Fees

 

$

627,000

 

N/A

 

 

 

 

 

 

 

Non-Audit Fees

 

 

 

 

 

Audit-Related Fees

 

$

 

$

756,000

(2)

Tax Fees

 

$

68,000

(3)

$

79,422

(6)

All Other Fees

 

$

 

$

531,708

(7)

Total Non-Audit Fees

 

$

68,000

 

$

1,367,130

 

 

 

 

 

 

 

Total

 

$

695,000

 

$

1,367,130

 

 

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 and consulting services for the Van Kampen Funds.

 

(5)   All Other Fees represent attestation services provided in connection with performance presentation standards.

 


 

(6)   Tax Fees represent tax advice services provided to Covered Entities, including research and identification of PFIC Entities.

 

(7)   All Other Fees represent attestation services provided in connection with performance presentation standards and a compliance review project performed.

 

(e)(1) The audit committee’s pre-approval policies and procedures are as follows:

 

APPENDIX A

 

AUDIT COMMITTEE

AUDIT AND NON-AUDIT SERVICES

PRE-APPROVAL POLICY AND PROCEDURES

OF THE

MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS

 

AS ADOPTED AND AMENDED JULY 23, 2004,(1)

 

1.     Statement of Principles

 

The Audit Committee of the Board is required to review and, in its sole discretion, pre-approve all Covered Services to be provided by the Independent Auditors to the Fund and Covered Entities in order to assure that services performed by the Independent Auditors do not impair the auditor’s independence from the Fund.

 

The SEC has issued rules specifying the types of services that an independent auditor may not provide to its audit client, as well as the audit committee’s administration of the engagement of the independent auditor.  The SEC’s rules establish two different approaches to pre-approving services, which the SEC considers to be equally valid.  Proposed services either: may be pre-approved without consideration of specific case-by-case services by the Audit Committee (“general pre-approval”); or require the specific pre-approval of the Audit Committee or its delegate (“specific pre-approval”).  The Audit Committee believes that the combination of these two approaches in this Policy will result in an effective and efficient procedure to pre-approve services performed by the Independent Auditors.  As set forth in this Policy, unless a type of service has received general pre-approval, it will require specific pre-approval by the Audit Committee (or by any member of the Audit Committee to which pre-approval authority has been delegated) if it is to be provided by the Independent Auditors.  Any proposed services exceeding

 

(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.

 


 

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.

 

The purpose of this Policy is to set forth the policy and procedures by which the Audit Committee intends to fulfill its responsibilities.  It does not delegate the Audit Committee’s responsibilities to pre-approve services performed by the Independent Auditors to management.

 

The Fund’s Independent Auditors have reviewed this Policy and believes that implementation of the Policy will not adversely affect the Independent Auditors’ independence.

 

2.     Delegation

 

As provided in the Act and the SEC’s rules, the Audit Committee may delegate either type of pre-approval authority to one or more of its members.  The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.

 

3.     Audit Services

 

The annual Audit services engagement terms and fees are subject to the specific pre-approval of the Audit Committee.  Audit services include the annual financial statement audit and other procedures required to be performed by the Independent Auditors to be able to form an opinion on the Fund’s financial statements.  These other procedures include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating to the audit.  The Audit Committee will approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope, Fund structure or other items.

 

In addition to the annual Audit services engagement approved by the Audit Committee, the Audit Committee may grant general pre-approval to other Audit services, which are those services that only the Independent Auditors reasonably can provide.  Other Audit services may include statutory audits and services associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4, etc.), periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings.

 

The Audit Committee has pre-approved the Audit services in Appendix B.1.  All other Audit services not listed in Appendix B.1 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).

 


 

4.     Audit-related Services

 

Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Fund’s financial statements and, to the extent they are Covered Services, the Covered Entities or that are traditionally performed by the Independent Auditors.  Because the Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor and is consistent with the SEC’s rules on auditor independence, the Audit Committee may grant general pre-approval to Audit-related services.  Audit-related services include, among others, accounting consultations related to accounting, financial reporting or disclosure matters not classified as “Audit services”; assistance with understanding and implementing new accounting and financial reporting guidance from rulemaking authorities; agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters; and assistance with internal control reporting requirements under Forms N-SAR and/or N-CSR.

 

The Audit Committee has pre-approved the Audit-related services in Appendix B.2.  All other Audit-related services not listed in Appendix B.2 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).

 

5.     Tax Services

 

The Audit Committee believes that the Independent Auditors can provide Tax services to the Fund and, to the extent they are Covered Services, the Covered Entities, such as tax compliance, tax planning and tax advice without impairing the auditor’s independence, and the SEC has stated that the Independent Auditors may provide such services.

 

Pursuant to the preceding paragraph, the Audit Committee has pre-approved the Tax Services in Appendix B.3.  All Tax services in Appendix B.3 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).

 

6.     All Other Services

 

The Audit Committee believes, based on the SEC’s rules prohibiting the Independent Auditors from providing specific non-audit services, that other types of non-audit services are permitted.  Accordingly, the Audit Committee believes it may grant general pre-approval to those permissible non-audit services classified as All Other services that it believes are routine and recurring services, would not impair the independence of the auditor and are consistent with the SEC’s rules on auditor independence.

 

The Audit Committee has pre-approved the All Other services in Appendix B.4.  Permissible All Other services not listed in Appendix B.4 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated).

 


 

7.     Pre-Approval Fee Levels or Budgeted Amounts

 

Pre-approval fee levels or budgeted amounts for all services to be provided by the Independent Auditors will be established annually by the Audit Committee.  Any proposed services exceeding these levels or amounts will require specific pre-approval by the Audit Committee.  The Audit Committee is mindful of the overall relationship of fees for audit and non-audit services in determining whether to pre-approve any such services.

 

8.     Procedures

 

All requests or applications for services to be provided by the Independent Auditors that do not require specific approval by the Audit Committee will be submitted to the Fund’s Chief Financial Officer and must include a detailed description of the services to be rendered.  The Fund’s Chief Financial Officer will determine whether such services are included within the list of services that have received the general pre-approval of the Audit Committee.  The Audit Committee will be informed on a timely basis of any such services rendered by the Independent Auditors.  Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by both the Independent Auditors and the Fund’s Chief Financial Officer, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC’s rules on auditor independence.

 

The Audit Committee has designated the Fund’s Chief Financial Officer to monitor the performance of all services provided by the Independent Auditors and to determine whether such services are in compliance with this Policy.  The Fund’s Chief Financial Officer will report to the Audit Committee on a periodic basis on the results of its monitoring.  Both the Fund’s Chief Financial Officer and management will immediately report to the chairman of the Audit Committee any breach of this Policy that comes to the attention of the Fund’s Chief Financial Officer or any member of management.

 

9.     Additional Requirements

 

The Audit Committee has determined to take additional measures on an annual basis to meet its responsibility to oversee the work of the Independent Auditors and to assure the auditor’s independence from the Fund, such as reviewing a formal written statement from the Independent Auditors delineating all relationships between the Independent Auditors and the Fund, consistent with Independence Standards Board No. 1, and discussing with the Independent Auditors its methods and procedures for ensuring independence.

 

10.  Covered Entities

 

Covered Entities include the Fund’s investment adviser(s) and any entity controlling, controlled by or under common control with the Fund’s investment adviser(s) that provides ongoing services to the Fund(s).  Beginning with non-audit service contracts entered into on or after May 6, 2003, the Fund’s audit committee must pre-approve non-audit services provided not only to the Fund but also to the Covered Entities if the engagements relate directly to the operations and financial reporting of the Fund.  This list of Covered Entities would include:

 

Morgan Stanley Retail Funds

Morgan Stanley Investment Advisors Inc.

Morgan Stanley & Co. Incorporated

 


 

Morgan Stanley DW Inc.

Morgan Stanley Investment Management Inc.

Morgan Stanley Investment Management Limited

Morgan Stanley Investment Management Private Limited

Morgan Stanley Asset & Investment Trust Management Co., Limited

Morgan Stanley Investment Management Company

Van Kampen Asset Management

Morgan Stanley Services Company, Inc.

Morgan Stanley Distributors Inc.

Morgan Stanley Trust FSB

 

Morgan Stanley Institutional Funds

Morgan Stanley Investment Management Inc.

Morgan Stanley Investment Advisors Inc.

Morgan Stanley Investment Management Limited

Morgan Stanley Investment Management Private Limited

Morgan Stanley Asset & Investment Trust Management Co., Limited

Morgan Stanley Investment Management Company

Morgan Stanley & Co. Incorporated

Morgan Stanley Distribution, Inc.

Morgan Stanley AIP GP LP

Morgan Stanley Alternative Investment Partners LP

 

(e)(2)  Beginning with non-audit service contracts entered into on or after May 6, 2003, the audit committee also is required to pre-approve services to Covered Entities to the extent that the services are determined to have a direct impact on the operations or financial reporting of the Registrant. 100% of such services were pre-approved by the audit committee pursuant to the Audit Committee’s pre-approval policies and procedures (attached hereto).

 

(f)     Not applicable.

 

(g)    See table above.

 

(h)    The audit committee of the Board of Trustees has considered whether the provision of services other than audit services performed by the auditors to the Registrant and Covered Entities is compatible with maintaining the auditors’ independence in performing audit services.

 

Item 5. Audit Committee of Listed Registrants.

 

(a) The Fund has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act whose members are: Frank Joseph Kearns, Michael Nugent and Allen Reed.

 


 

(b) Not applicable.

 

Item 6. Schedule of Investments

 

Refer to Item 1.

 

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

 

Applicable only to reports filed by closed-end funds.

 

Item 8. Portfolio Managers of Closed-End Management Investment Companies

 

Applicable only to reports filed by closed-end funds.

 

Item 9. Closed-End Fund Repurchases

 

Applicable only to reports filed by closed-end funds.

 

Item 10. Submission of Matters to a Vote of Security Holders

 

Not applicable.

 

Item 11. Controls and Procedures

 

(a)  The Fund’s principal executive officer and principal financial officer have concluded that the Fund’s disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, based upon such officers’ evaluation of these controls and procedures as of a date within 90 days of the filing date of the report.

 

(b)  There were no changes in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

Item 12. Exhibits

 


 

(a) The Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto.

 

(b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT.

 


 

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:

February 15, 2008

 

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:

February 15, 2008

 

 

By:

/s/ James W. Garrett

 

 

 

Name:

James W. Garrett

Title:

Principal Financial Officer

Date:

February 15, 2008