-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SRBYFtZAxtiDUJadSryqyFNtjnZqyb0b6h3vAu/xQPrhsdYb3HtH68TWol4L0mqf 0MRl5sJ1gtOqSYaKeTGCww== 0001047469-03-041229.txt : 20031217 0001047469-03-041229.hdr.sgml : 20031217 20031217131432 ACCESSION NUMBER: 0001047469-03-041229 CONFORMED SUBMISSION TYPE: N-CSR/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030731 FILED AS OF DATE: 20031217 EFFECTIVENESS DATE: 20031217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY STRATEGIST FUND CENTRAL INDEX KEY: 0000837529 STATE OF INCORPORATION: MA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: N-CSR/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-05634 FILM NUMBER: 031059516 BUSINESS ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 BUSINESS PHONE: (212) 869-6397 MAIL ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY DEAN WITTER STRATEGIST FUND DATE OF NAME CHANGE: 19980622 FORMER COMPANY: FORMER CONFORMED NAME: DEAN WITTER STRATEGIST FUND DATE OF NAME CHANGE: 19920703 N-CSR/A 1 a2124397zn-csra.txt N-CSR/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-05634 Morgan Stanley Strategist Fund (Exact name of registrant as specified in charter) 1221 Avenue of the Americas, New York, New York 10020 (Address of principal executive offices) (Zip code) Ronald E. Robison 1221 Avenue of the Americas, New York, New York 10020 (Name and address of agent for service) Registrant's telephone number, including area code: 212-762-4000 Date of fiscal year end: July 31, 2003 Date of reporting period: July 31, 2003 Item 1 - Report to Shareholders WELCOME, SHAREHOLDER: IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY STRATEGIST FUND PERFORMED DURING THE ANNUAL PERIOD. THE PORTFOLIO MANAGEMENT TEAM WILL PROVIDE AN OVERVIEW OF THE MARKET CLIMATE AND DISCUSS SOME OF THE FACTORS THAT HELPED OR HINDERED PERFORMANCE DURING THE REPORTING PERIOD. IN ADDITION, THIS REPORT INCLUDES THE FUND'S FINANCIAL STATEMENTS AND A LIST OF FUND INVESTMENTS, AS WELL AS OTHER INFORMATION. THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING OFFERED. MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT THE MARKET VALUES OF SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE FUND SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THIS FUND. FUND REPORT TOTAL RETURN FOR THE 12-MONTH PERIOD ENDED JULY 31, 2003
LEHMAN LIPPER S&P BROTHERS FLEXIBLE 500 U.S. GOV./ PORTFOLIO CLASS A CLASS B CLASS C CLASS D INDEX(1) CREDIT INDEX(2) FUND INDEX(3) 10.11% 9.20% 9.09% 10.25% 10.65% 7.11% 9.21%
THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE FUND'S TOTAL RETURN FIGURES ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS, BUT DO NOT REFLECT THE DEDUCTION OF ANY APPLICABLE SALES CHARGES. SUCH COSTS WOULD LOWER PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SEE PERFORMANCE SUMMARY FOR STANDARDIZED PERFORMANCE INFORMATION. MARKET CONDITIONS The 12-month period ended July 31, 2003 was a volatile time for the capital markets. While the equity markets dominated the headlines, it was the bond markets that provided a more dramatic story. The period began with the 10-year bond at a yield of 4 percent, and ended at roughly the same level. That seeming stability belied an enormous amount of volatility, however, as the bond market veered from expectations of poor but stable economic conditions to fears of outright deflation following a speech by an influential Federal Reserve banker. These fears led to a steep drop in bond yields, which were then driven lower by trading involving mortgage-backed securities and other technical events. During this period, which lasted until the early spring of 2003, bonds handily outperformed the stock market, which suffered from continued weakness in economic and corporate results. Equity performance worsened in the early months of 2003 as uncertainty over the war in Iraq led investors to seek the relative safety of bonds. The equity market began to rally sharply in March, however, as investors began to perceive the beneficial effects of accommodative monetary and fiscal policy on economic results and corporate earnings. The rally continued through the end of the period, and erased much of the equity market's losses from earlier months. The bond market continued to perform strongly through much of the equity rally, with yields falling steadily until the first half of June. At that point, however, signs of economic growth led investors to fear that interest rates were unsustainably low. Bond prices (which move in opposition to yields) fell sharply through the end of the period as investors allocated assets out of the debt markets. PERFORMANCE ANALYSIS The Fund performed in line with its benchmark and peer indexes for the 12-month period. In keeping with the Fund's mandate, we made only one major change to its asset allocation during the period. For the bulk of the measurement period, we maintained an overweighted position in the equity market and underweighted bonds. This stance was a net drag on performance in the first part of the period, as equity markets sagged while the bond market rallied. It helped greatly, however, when the equity markets began their rally, and even more so when bond yields spiked in the last weeks of June. We made a shift in allocation at the very end of the period to take advantage of what we believed to be oversold prices for bonds by increasing that position from a substantial to a slight underweight. The equity portion of the portfolio entered the period balanced between moderate overexposures in the more cyclical technology and basic materials sectors and defensive positions in consumer goods and foods. Conversely, the portfolio was underweighted in utilities and consumer cyclicals. As stocks became cheaper through March, we realigned the equity portfolio to benefit from an improving economy. We increased the Fund's holdings of technology and basic materials and added to its positions in industrial and other cyclical stocks. At the same time, we kept the portfolio underweighted in consumer-related sectors such as food 2 and health care. This served the Fund well during the rally, which favored more cyclical sectors. Our expectations for an economic recovery led us to be fairly conservative in the Fund's bond portfolio. We kept the Fund's interest rate sensitivity low relative to that of the broader market, and kept its credit quality high. We also invested in higher-coupon mortgage-backed securities that, while offering protection from rising interest rates, underperformed for much of the period. TOP 10 HOLDINGS U.S. Treasury Bond 14.2% Federal National Mortgage Assoc. 4.3% Federal Home Loan Mortgage Corp. 3.4% Caterpillar Inc. 1.9% Celgene Corp. 1.8% Gilead Sciences Inc. 1.7% Citigroup Inc. 1.7% Honda Motor Co., Ltd 1.7% Fisher Scientific Intl. 1.6% American Express 1.6%
PORTFOLIO COMPOSITION Common Stocks 70.5% U.S. Government Agencies and Obligations 21.9% Short-Term 8.2% Corporate Bonds 6.4% Asset-Backed 1.4%
SUBJECT TO CHANGE DAILY. ALL PERCENTAGES ARE AS A PERCENTAGE OF NET ASSETS. PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED AS A RECOMMENDATION TO BUY THE SECURITIES MENTIONED. MORGAN STANLEY IS A FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL ADVISORY SERVICES. INVESTMENT STRATEGY - - THE FUND'S MANAGER ACTIVELY ALLOCATES THE FUND'S ASSETS AMONG THE MAJOR ASSET CLASSES OF EQUITY SECURITIES, FIXED-INCOME SECURITIES AND MONEY MARKET INSTRUMENTS. - - IN DETERMINING WHICH SECURITIES TO BUY, HOLD OR SELL FOR THE FUND, THE FUND'S MANAGER ALLOCATES THE FUND'S ASSETS BASED ON, AMONG OTHER THINGS, ITS ASSESSMENT OF THE EFFECTS OF ECONOMIC AND MARKET TRENDS ON DIFFERENT SECTORS OF THE MARKET. THERE IS NO LIMIT AS TO THE PERCENTAGE OF ASSETS THAT MAY BE ALLOCATED TO ANY ONE ASSET CLASS. ANNUAL HOUSEHOLDING NOTICE TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN SHAREHOLDER DOCUMENTS INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY MATERIALS TO INVESTORS WITH THE SAME LAST NAME AND WHO RESIDE AT THE SAME ADDRESS. YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME, UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE DOCUMENTS BY CALLING (800) 350-6414, 8:00 AM TO 8:00 PM, E.T. ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS. PROXY VOTING POLICIES AND PROCEDURES A DESCRIPTION OF THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES IS AVAILABLE WITHOUT CHARGE, UPON REQUEST, BY CALLING (800) 869-NEWS. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEBSITE AT http://www.sec.gov. 3 PERFORMANCE SUMMARY [CHART] PERFORMANCE OF A $10,000 INVESTMENT--CLASS B
FUND S&P 500(1) LEHMAN(2) LIPPER(3) 7/31/1993 $ 10,000 $ 10,000 $ 10,000 $ 10,000 7/31/1994 $ 10,353 $ 10,516 $ 9,987 $ 10,328 7/31/1995 $ 12,016 $ 13,262 $ 10,998 $ 12,031 7/31/1996 $ 13,394 $ 15,459 $ 11,582 $ 13,091 7/31/1997 $ 17,376 $ 23,515 $ 12,832 $ 16,871 7/31/1998 $ 19,595 $ 28,053 $ 13,867 $ 18,857 7/31/1999 $ 21,403 $ 33,720 $ 14,190 $ 20,828 7/31/2000 $ 24,140 $ 36,744 $ 15,001 $ 22,125 7/31/2001 $ 22,439 $ 31,476 $ 16,907 $ 20,835 7/31/2002 $ 18,675 $ 24,044 $ 18,071 $ 17,485 7/31/2003 $ 20,394(^) $ 26,604 $ 19,357 $ 19,095
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RETURNS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE. WHEN YOU SELL FUND SHARES, THEY MAY BE WORTH LESS THAN THEIR ORIGINAL COST. THE GRAPH AND TABLE DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS D SHARES WILL VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES. 4 AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED JULY 31, 2003
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++ 07/28/97 10/31/88 07/28/97 07/28/97 SYMBOL SRTAX SRTBX SRTCX SRTDX 1 YEAR 10.11(4)% 9.20(4)% 9.09(4)% 10.25(4)% 4.33(5) 4.20(5) 8.09(5) 5 YEARS 1.57(4) 0.80(4) 0.77(4) 1.77(4) 0.48(5) 0.52(5) 0.77(5) 10 YEARS 7.39(4) 7.39(5) SINCE INCEPTION 3.78(4) 9.41(4) 2.98(4) 4.01(4) 2.86(5) 9.41(5) 2.98(5)
- ---------- Notes on Performance (1) THE STANDARD AND POOR'S 500 INDEX (S&P 500(R)) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON STOCKS CHOSEN FOR MARKET SIZE, LIQUIDITY AND INDUSTRY GROUP REPRESENTATION. THE INDEX DOES NOT INCLUDE ANY EXPENSES, SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. (2) THE LEHMAN BROTHERS U.S. GOVERNMENT/CREDIT INDEX TRACKS THE PERFORMANCE OF GOVERNMENT AND CORPORATE OBLIGATIONS, INCLUDING U.S. GOVERNMENT AGENCY AND TREASURY SECURITIES AND CORPORATE AND YANKEE BONDS. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR SALES CHARGES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. (3) THE LIPPER FLEXIBLE PORTFOLIO FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER FLEXIBLE PORTFOLIO FUNDS CLASSIFICATION. THE INDEX, WHICH IS ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS REPRESENTED IN THIS INDEX. (4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE DEDUCTION OF ANY SALES CHARGES. (5) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR COMPLETE DETAILS ON FEES AND SALES CHARGES. * THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 5.25%. ** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%. THE CDSC DECLINES TO 0% AFTER SIX YEARS. + THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1% FOR SHARES REDEEMED WITHIN ONE YEAR OF PURCHASE. ++ CLASS D HAS NO SALES CHARGE. ^ CLOSING VALUE ASSUMING A COMPLETE REDEMPTION ON JULY 31, 2003. 5 MORGAN STANLEY STRATEGIST FUND PORTFOLIO OF INVESTMENTS - JULY 31, 2003
NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------------- COMMON STOCKS (70.5%) AEROSPACE & DEFENSE (1.5%) 198,000 Northrop Grumman Corp. $ 18,263,520 --------------- AGRICULTURAL COMMODITIES/MILLING (1.3%) 1,200,000 Archer-Daniels-Midland Co. 15,768,000 --------------- APPAREL/FOOTWEAR RETAIL (2.4%) 900,000 Gap, Inc. (The) 16,191,000 270,000 Ross Stores, Inc. 12,339,000 --------------- 28,530,000 --------------- BIOTECHNOLOGY (5.3%) 100,000 Amgen Inc.* 6,958,000 450,000 Applera Corp. - Celera Genomics Group* 4,527,000 570,000 Celgene Corp.* 20,867,700 199,000 Cephalon, Inc.* 9,946,020 304,000 Gilead Sciences, Inc.* 20,839,200 --------------- 63,137,920 --------------- CHEMICALS: MAJOR DIVERSIFIED (1.4%) 480,000 Dow Chemical Co. (The) 16,944,000 --------------- COMPUTER COMMUNICATIONS (1.2%) 762,000 Cisco Systems, Inc.* 14,874,240 --------------- COMPUTER PROCESSING HARDWARE (2.6%) 846,000 Apple Computer, Inc.* 17,808,300 398,000 Dell Inc.* 13,404,640 --------------- 31,212,940 --------------- CONTRACT DRILLING (0.7%) 450,000 Diamond Offshore Drilling, Inc. 8,757,000 --------------- DISCOUNT STORES (1.0%) 320,040 Costco Wholesale Corp.* 11,857,482 --------------- ELECTRICAL PRODUCTS (0.5%) 103,000 Emerson Electric Co. 5,531,100 --------------- ELECTRONIC COMPONENTS (0.6%) 600,000 Flextronics International, Ltd. (Singapore)* 6,600,000 --------------- ELECTRONIC PRODUCTION EQUIPMENT (1.0%) 636,900 Applied Materials, Inc.* 12,419,550 --------------- ENVIRONMENTAL SERVICES (1.5%) 735,000 Waste Management, Inc. 17,559,150 ---------------
SEE NOTES TO FINANCIAL STATEMENTS 6
NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------------- FINANCIAL CONGLOMERATES (4.8%) 430,000 American Express Co. $ 18,993,100 450,000 Citigroup Inc. 20,160,000 505,000 J.P. Morgan Chase & Co. 17,700,250 --------------- 56,853,350 --------------- FINANCIAL PUBLISHING/SERVICES (1.3%) 845,000 eSPEED, Inc (Class A)* 15,750,800 --------------- FOOD: MAJOR DIVERSIFIED (0.8%) 282,000 Kellogg Co. 9,681,060 --------------- FOOD: MEAT/FISH/DAIRY (1.4%) 551,820 Dean Foods Co.* 16,515,973 --------------- INDUSTRIAL CONGLOMERATES (1.5%) 630,000 General Electric Co. 17,917,200 --------------- INFORMATION TECHNOLOGY SERVICES (2.5%) 835,000 Accenture Ltd. (Class A) (Bermuda)* 16,215,700 162,000 International Business Machines Corp. 13,162,500 --------------- 29,378,200 --------------- INTERNET RETAIL (1.4%) 400,000 Amazon.com, Inc.* 16,688,000 --------------- MAJOR BANKS (2.5%) 180,000 Bank of America Corp. 14,862,600 300,000 Wells Fargo & Co. 15,159,000 --------------- 30,021,600 --------------- MANAGED HEALTH CARE (1.0%) 285,000 Oxford Health Plans, Inc.* 12,169,500 --------------- MEDIA CONGLOMERATES (0.8%) 600,000 AOL Time Warner Inc.* 9,258,000 --------------- MEDICAL SPECIALTIES (1.5%) 260,000 Bard (C.R.), Inc. 17,825,600 --------------- MOTOR VEHICLES (1.7%) 1,000,000 Honda Motor Co., Ltd. (ADR) (Japan) 19,760,000 --------------- MULTI-LINE INSURANCE (1.3%) 240,937 American International Group, Inc. 15,468,155 --------------- OIL & GAS PRODUCTION (1.1%) 290,000 Burlington Resources Inc. 13,389,300 ---------------
SEE NOTES TO FINANCIAL STATEMENTS 7
NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------------- OILFIELD SERVICES/EQUIPMENT (2.5%) 701,000 Halliburton Co. $ 15,541,170 388,000 Smith International, Inc.* 13,905,920 --------------- 29,447,090 --------------- PACKAGED SOFTWARE (2.0%) 400,000 Microsoft Corp. 10,560,000 1,112,000 Oracle Corp.* 13,344,000 --------------- 23,904,000 --------------- PHARMACEUTICALS: MAJOR (3.7%) 197,000 Lilly (Eli) & Co. 12,970,480 563,000 Pfizer Inc. 18,781,680 271,000 Wyeth 12,352,180 --------------- 44,104,340 --------------- PROPERTY - CASUALTY INSURERS (2.9%) 420,000 ACE Ltd. (Bermuda) 13,855,800 250,000 Allstate Corp. (The) 9,507,500 690,180 Travelers Property Casualty Corp. (Class B) 11,139,505 --------------- 34,502,805 --------------- RAILROADS (1.4%) 150,000 Burlington Northern Santa Fe Corp. 4,134,000 400,000 CSX Corp. 12,520,000 --------------- 16,654,000 --------------- SEMICONDUCTORS (3.2%) 481,700 Intel Corp. 12,018,415 1,067,300 Micron Technology, Inc.* 15,625,272 1,058,832 Taiwan Semiconductor Manufacturing Co. Ltd. (ADR) (Taiwan)* 10,588,320 --------------- 38,232,007 --------------- SPECIALTY STORES (1.2%) 381,440 Bed Bath & Beyond, Inc.* 14,811,315 --------------- STEEL (2.4%) 250,000 Nucor Corp. 12,330,000 1,010,000 United States Steel Corp. 15,917,600 --------------- 28,247,600 --------------- TELECOMMUNICATION EQUIPMENT (2.3%) 1,800,000 Motorola, Inc. 16,272,000 693,000 Nokia Corp. (ADR) (Finland) 10,602,900 --------------- 26,874,900 ---------------
SEE NOTES TO FINANCIAL STATEMENTS 8
NUMBER OF SHARES VALUE - ---------------------------------------------------------------------------------------------------------- TRUCKS/CONSTRUCTION/FARM MACHINERY (1.9%) 343,000 Caterpillar Inc. $ 23,142,210 --------------- WHOLESALE DISTRIBUTORS (1.6%) 520,000 Fisher Scientific International, Inc.* 19,656,000 --------------- WIRELESS TELECOMMUNICATIONS (0.8%) 550,000 Nextel Communications, Inc. (Class A)* 10,043,000 --------------- TOTAL COMMON STOCKS (COST $690,214,865) 841,750,907 --------------- PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE --------- ------ -------- CORPORATE BONDS (6.4%) AEROSPACE & DEFENSE (0.2%) $ 315 Boeing Co. 6.625% 02/15/38 303,243 190 Goodrich Corp. 7.625 12/15/12 206,458 540 Lockheed Martin Corp. 7.75 05/01/26 611,648 325 Lockheed Martin Corp. 8.50 12/01/29 398,732 335 Raytheon Co. 6.15 11/01/08 364,295 897 Systems 2001 Asset Trust - 144A** 6.664 09/15/13 1,003,799 --------------- 2,888,175 --------------- AIRLINES (0.3%) 1,358 American West Airlines 7.10 04/02/21 1,387,307 1,125 Continental Airlines, Inc. 6.90 01/02/18 1,058,860 575 Southwest Airlines Co. 5.496 11/01/06 609,403 --------------- 3,055,570 --------------- BROADCASTING (0.1%) 610 Clear Channel Communications, Inc. 7.65 09/15/10 697,925 --------------- BUILDING PRODUCTS (0.0%) 195 Celulosa Arauco Constitution - 144A** (Chile) 5.125 07/09/13 182,643 265 Masco Corp. 6.50 08/15/32 262,941 --------------- 445,584 --------------- CABLE/SATELLITE TV (0.2%) 430 Comcast Corp. 6.50 01/15/15 448,391 485 Cox Communications, Inc. 7.125 10/01/12 541,790 460 Liberty Media Corp. 5.70 05/15/13 428,020 550 TCI Communications, Inc. 7.875 02/15/26 598,857 --------------- 2,017,058 ---------------
SEE NOTES TO FINANCIAL STATEMENTS 9
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------- CHEMICALS: AGRICULTURAL (0.0%) $ 305 Monsanto Co. 7.375% 08/15/12 $ 343,409 --------------- CONTAINERS/PACKAGING (0.0%) 355 Sealed Air Corp - 144A** 5.625 07/15/13 339,473 --------------- DEPARTMENT STORES (0.2%) 300 Federated Department Stores, Inc. 6.625 09/01/08 329,642 600 Federated Department Stores, Inc. 6.90 04/01/29 610,095 980 May Department Stores Co. 5.95 11/01/08 1,033,770 --------------- 1,973,507 --------------- DRUGSTORE CHAINS (0.1%) 1,505 CVS Corp. 5.625 03/15/06 1,620,476 --------------- ELECTRIC UTILITIES (0.3%) 220 Appalachian Power Co. (Series H) 5.95 05/15/33 197,816 250 Cincinnati Gas & Electric Co. 5.70 09/15/12 259,285 180 Cincinnati Gas & Electric Co. (Series A) 5.40 06/15/33 157,032 215 Cincinnati Gas & Electric Co. (Series B) 5.375 06/15/33 186,851 175 Columbus Southern Power Co. - 144A** 6.60 03/01/33 176,447 480 Constellation Energy Group, Inc. 7.60 04/01/32 515,972 140 Detroit Edison Co. 6.125 10/01/10 148,587 135 Detroit Edison Co. 6.35 10/15/32 134,806 345 Duke Energy Corp. 4.50 04/01/10 341,314 265 Exelon Corp. 6.75 05/01/11 291,790 170 Florida Power & Light Co. 4.85 02/01/13 168,974 200 Ohio Power Co. - 144A** 6.60 02/15/33 201,673 380 Public Service Electric & Gas Co. 5.00 01/01/13 373,478 155 South Carolina Electric & Gas Co. 5.30 05/15/33 136,913 70 Wisconsin Electric Power Co. 5.625 05/15/33 64,431 125 Wisconsin Energy Corp. 6.20 04/01/33 120,719 --------------- 3,476,088 --------------- ELECTRICAL PRODUCTS (0.1%) 620 Cooper Industries Inc. 5.25 07/01/07 652,519 --------------- ENVIRONMENTAL SERVICES (0.0%) 305 Waste Management, Inc. 6.875 05/15/09 338,163 --------------- FINANCE/RENTAL/LEASING (0.4%) 1,135 American General Finance Corp. 5.875 07/14/06 1,230,926 710 Countrywide Home Loans, Inc. 3.25 05/21/08 686,347 50 Ford Motor Credit Co. 7.25 10/25/11 49,493 635 Ford Motor Credit Co. 7.375 10/28/09 648,106 200 Household Finance Corp. 6.375 10/15/11 213,694 185 Household Finance Corp. 6.40 06/17/08 202,977
SEE NOTES TO FINANCIAL STATEMENTS 10
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------- $ 280 Household Finance Corp. 6.75% 05/15/11 $ 306,283 235 International Lease Finance Corp. 3.75 08/01/07 235,220 100 MBNA Capital I (Series A) 8.278 12/01/26 100,166 705 MBNA Corp. 6.125 03/01/13 729,319 --------------- 4,402,531 --------------- FINANCIAL CONGLOMERATES (0.8%) 910 AXA Financial Inc. 6.50 04/01/08 1,002,432 350 Boeing Capital Corp. 6.10 03/01/11 363,045 150 Boeing Capital Corp. 6.50 02/15/12 157,713 920 Chase Manhattan Corp. 6.00 02/15/09 990,849 530 Citigroup Inc. 6.00 02/21/12 560,652 490 Citigroup Inc. 5.625 08/27/12 499,995 1,325 General Electric Capital Corp. 6.75 03/15/32 1,388,979 240 General Motors Acceptance Corp. 4.50 07/15/06 240,454 485 General Motors Acceptance Corp. 6.875 09/15/11 473,830 1,480 General Motors Acceptance Corp. 8.00 11/01/31 1,365,566 1,035 Prudential Holdings, LLC - 144A** 8.695 12/18/23 1,205,941 1,250 Prudential Holdings, LLC (Series B FSA) 144A** 7.245 12/18/23 1,347,488 --------------- 9,596,944 --------------- FOOD RETAIL (0.1%) 70 Albertson's Inc. 7.45 08/01/29 73,057 515 Albertson's Inc. 7.50 02/15/11 576,556 985 Kroger Co. 6.80 04/01/11 1,068,242 --------------- 1,717,855 --------------- FOOD: MAJOR DIVERSIFIED (0.0%) 65 Kraft Foods Inc. 5.625 11/01/11 65,655 390 Kraft Foods Inc. 6.25 06/01/12 408,250 --------------- 473,905 --------------- FOREIGN GOVERNMENT OBLIGATIONS (0.1%) 925 United Mexican States Corp. (Mexico) 8.00 09/24/22 948,125 800 United Mexican States Corp. (Mexico) 8.30 08/15/31 834,000 --------------- 1,782,125 --------------- FOREST PRODUCTS (0.1%) 680 Weyerhaeuser Co. 6.75 03/15/12 724,374 --------------- GAS DISTRIBUTORS (0.1%) 460 Consolidated Natural Gas Co. 6.25 11/01/11 495,734 415 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A** (Qatar) 8.294 03/15/14 468,950 185 Sempra Energy 6.00 02/01/13 191,351 --------------- 1,156,035 ---------------
SEE NOTES TO FINANCIAL STATEMENTS 11
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------- HOME BUILDING (0.0%) $ 280 Centex Corp. 7.875% 02/01/11 $ 320,214 220 Pulte Homes, Inc. 6.375 05/15/33 198,824 --------------- 519,038 --------------- HOME FURNISHINGS (0.0%) 290 Mohawk Industries Inc. 7.20 04/15/12 318,839 --------------- HOME IMPROVEMENT CHAINS (0.1%) 750 Lowe's Companies, Inc. 8.25 06/01/10 904,955 --------------- HOSPITAL/NURSING MANAGEMENT (0.2%) 1,950 Manor Care, Inc. 8.00 03/01/08 2,123,063 --------------- HOTELS/RESORTS/CRUISELINES (0.2%) 510 Hyatt Equities LLC - 144A** 6.875 06/15/07 517,442 1,255 Marriott International, Inc. (Series E) 7.00 01/15/08 1,385,031 --------------- 1,902,473 --------------- INDUSTRIAL CONGLOMERATES (0.1%) 885 Honeywell International, Inc. 6.125 11/01/11 948,393 335 Hutchinson Whampoa International Ltd. - 144A** (Virgin Islands) 6.50 02/13/13 333,820 --------------- 1,282,213 --------------- INFORMATION TECHNOLOGY SERVICES (0.0%) 45 Electronic Data Systems Corp. 7.125 10/15/09 47,475 260 Electronic Data Systems Corp. - 144A** 6.00 08/01/13 243,164 --------------- 290,639 --------------- INTEGRATED OIL (0.2%) 700 Amerada Hess Corp. 7.875 10/01/29 759,574 995 Conoco Inc. 6.95 04/15/29 1,075,340 --------------- 1,834,914 --------------- INVESTMENT BANKS/BROKERS (0.1%) 365 Goldman Sachs Group Inc. 6.125 02/15/33 347,785 640 Goldman Sachs Group Inc. 6.60 01/15/12 697,609 395 Goldman Sachs Group Inc. 6.875 01/15/11 440,281 --------------- 1,485,675 --------------- LIFE/HEALTH INSURANCE (0.2%) 1,005 American General Corp. 7.50 07/15/25 1,134,435 800 John Hancock 144A** 7.375 02/15/24 856,016 --------------- 1,990,451 --------------- MAJOR BANKS (0.1%) 180 Bank One Corp. 6.00 02/17/09 194,525
SEE NOTES TO FINANCIAL STATEMENTS 12
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------- $ 275 Citicorp. 6.75% 08/15/05 $ 299,777 485 Fleetboston Financial Corp. 7.25 09/15/05 535,880 595 UFJ Finance Aruba AEC (Aruba) 6.75 07/15/13 575,944 --------------- 1,606,126 --------------- MAJOR TELECOMMUNICATIONS (0.3%) 420 AT&T Corp. 8.50 11/15/31 444,224 235 British Telecom PLC (United Kingdom) 8.875 12/15/30 288,665 600 Deutsche Telekom International Finance Corp. (Netherlands) 8.75 06/15/30 702,510 1,700 GTE Corp. 6.94 04/15/28 1,726,008 365 Verizon Global Funding Corp. 7.75 12/01/30 407,241 --------------- 3,568,648 --------------- MANAGED HEALTH CARE (0.2%) 920 Aetna, Inc. 7.875 03/01/11 1,061,771 225 Cigna Corp. 6.375 10/15/11 236,055 530 Wellpoint Health Network, Inc. 6.375 06/15/06 583,378 --------------- 1,881,204 --------------- MEDIA CONGLOMERATES (0.2%) 190 AOL Time Warner Inc. 7.70 05/01/32 199,289 1,250 News America Holdings, Inc. 7.75 12/01/45 1,342,264 310 Time Warner, Inc. 6.625 05/15/29 287,494 --------------- 1,829,047 --------------- MOTOR VEHICLES (0.2%) 630 DaimlerChrysler North American Holdings Co. 8.50 01/18/31 687,956 325 Ford Motor Co 6.625 10/01/28 255,991 1,415 Ford Motor Co. 7.45 07/16/31 1,208,397 --------------- 2,152,344 --------------- MULTI-LINE INSURANCE (0.4%) 1,920 Farmers Exchange Capital - 144A** 7.05 07/15/28 1,636,704 95 Hartford Financial Services Group, Inc. 2.375 06/01/06 93,452 900 Hartford Financial Services Group, Inc. 7.90 06/15/10 1,053,788 295 Nationwide Mutual Insurance Co. - 144A** 7.50 02/15/24 291,271 1,090 Nationwide Mutual Insurance Co. - 144A** 8.25 12/01/31 1,217,305 --------------- 4,292,520 --------------- OIL & GAS PRODUCTION (0.1%) 70 Devon Financing Corp. 6.875 09/30/11 77,224 140 Devon Financing Corp 7.875 09/30/31 159,909 125 Kerr-McGee Corp. 5.875 09/15/06 133,763 165 Kerr-McGee Corp. 6.875 09/15/11 179,560
SEE NOTES TO FINANCIAL STATEMENTS 13
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------- $ 430 Pemex Project Funding Master Trust 8.00% 11/15/11 $ 466,550 285 Pemex Project Funding Master Trust 8.625 02/01/22 297,825 145 Pemex Project Funding Master Trust 9.125 10/13/10 167,475 70 Petro-Canada 4.00 07/15/13 63,145 280 Petro-Canada 5.35 07/15/33 240,685 --------------- 1,786,136 --------------- OIL REFINING/MARKETING (0.0%) 315 Marathon Oil Corp. 6.80 03/15/32 317,752 --------------- OTHER CONSUMER SERVICES (0.1%) 300 Cendant Corp. 7.125 03/15/15 325,083 460 Cendant Corp. 7.375 01/15/13 511,106 --------------- 836,189 --------------- OTHER METALS/MINERALS (0.1%) 355 BHP Finance USA Ltd. (Australia) 4.80 04/15/13 344,050 580 Inco Ltd. (Canada) 7.20 09/15/32 575,743 190 Inco Ltd. (Canada) 7.75 05/15/12 211,311 --------------- 1,131,104 --------------- PROPERTY - CASUALTY INSURERS (0.0%) 295 Florida Windstorm Underwrting Assoc. - 144A** 7.125 02/25/19 324,009 --------------- PULP & PAPER (0.1%) 390 International Paper Co. 5.85 10/30/12 399,460 305 International Paper Co. - 144A** 5.30 04/01/15 289,702 290 MeadWestVaco Corp. 6.85 04/01/12 316,299 305 Sappi Papier Holding AG - 144A** (Austria) 6.75 06/15/12 324,219 --------------- 1,329,680 --------------- REAL ESTATE DEVELOPMENT (0.1%) 999 World Financial Properties - 144A** 6.91 09/01/13 1,095,203 --------------- REAL ESTATE INVESTMENT TRUSTS (0.2%) 770 EOP Operating LP 6.763 06/15/07 847,772 145 Simon Property Group LP 6.35 08/28/12 151,583 700 Simon Property Group LP 6.375 11/15/07 758,998 375 Vornado Realty 5.625 06/15/07 390,167 --------------- 2,148,520 --------------- SAVINGS BANKS (0.0%) 470 Washington Mutual Bank 5.50 01/15/13 475,692 --------------- SERVICES TO THE HEALTH INDUSTRY (0.1%) 230 Anthem Insurance - 144A** 9.00 04/01/27 280,917 650 Anthem Insurance - 144A** 9.125 04/01/10 783,435 --------------- 1,064,352 ---------------
SEE NOTES TO FINANCIAL STATEMENTS 14
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------- TOBACCO (0.0%) $ 360 Altria Group, Inc. 7.75% 01/15/27 $ 347,061 --------------- TOTAL CORPORATE BONDS (COST $73,596,579) 76,539,563 --------------- U.S. GOVERNMENT AGENCY MORTGAGE BACKED SECURITIES (7.7%) Federal Home Loan Mortgage Corp. 34,450 6.50 + 35,451,117 2,275 7.50 + 2,418,609 2,353 7.50 11/01/29-08/01/32 2,501,280 36 8.00 07/01/30 38,372 Federal National Mortgage Assoc. 3,425 7.00 + 3,589,828 16,789 7.00 12/01/29-01/01/33 17,603,511 12,631 7.50 09/01/29-03/01/32 13,389,144 15,741 8.00 05/01/09-02/01/32 16,911,607 --------------- TOTAL U.S. GOVERNMENT AGENCY MORTGAGE BACKED SECURITIES (COST $91,847,568) 91,903,468 --------------- U.S. GOVERNMENT OBLIGATIONS (14.2%) 250 U.S. Treasury Bond 5.50 08/15/28 249,610 5,550 U.S. Treasury Bond 8.125 08/15/19 7,280,473 9,900 U.S. Treasury Bond 8.125 08/15/21 13,069,931 3,000 U.S. Treasury Note 3.50 11/15/06 3,087,423 150,000 U.S. Treasury Note 3.625 05/15/13 139,945,350 4,850 U.S. Treasury Note 6.50 02/15/10 5,584,697 --------------- TOTAL U.S. GOVERNMENT OBLIGATIONS (COST $171,232,806) 169,217,484 --------------- ASSET-BACKED SECURITIES (1.4%) FINANCE/RENTAL/LEASING 2,300 American Express Credit Account 5.53 10/15/08 2,470,483 196 BMW Vehicle Owner Trust 2002-A 2.83 12/25/04 196,318 2,960 Chase Credit Card Master Trust 2001-4A 5.50 11/17/08 3,182,597 5 Chase Manhattan Auto Owner Trust 2002-A 2.63 10/15/04 4,748 2,230 Citibank Credit Issuance Trust 2000-A1 6.90 10/15/07 2,443,339 524 Daimler Chrysler Auto Trust 2000-E 6.11 11/08/04 526,198 1,165 Daimler Chrysler Auto Trust 2002-A 2.90 12/06/04 1,169,132 650 Ford Credit Auto Owner Trust 2001-B 5.12 10/15/04 653,855 319 Ford Credit Auto Owner Trust 2002-B 2.97 06/15/04 319,127 158 Ford Credit Auto Owner Trust 2002-B 6.74 06/15/04 158,808 993 Harley-Davidson Motorcycle Trust 2002-1 3.02 09/15/06 999,473
SEE NOTES TO FINANCIAL STATEMENTS 15
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - ---------------------------------------------------------------------------------------------------------- $ 52 Honda Auto Receivables Owner Trust 2000-1 6.62% 07/15/04 $ 51,728 674 Honda Auto Receivables Owner Trust 2002-2 2.91 09/15/04 675,626 1,550 MBNA Master Credit Card Trust 5.90 08/15/11 1,684,464 70 National City Auto Receivables Trust 2002-A 3.00 01/15/05 70,122 1,800 Nissan Auto Receivables Owner Trust 2001-C 4.80 02/15/07 1,866,770 443 Nissan Auto Receivables Owner Trust 2002-B 3.07 08/16/04 443,486 --------------- TOTAL ASSET-BACKED SECURITIES (COST $16,198,821) 16,916,274 --------------- SHORT-TERM INVESTMENTS (8.2%) U.S. GOVERNMENT OBLIGATIONS (a) (0.1%) 500 U.S. Treasury Bill*** 1.15 09/25/03 499,122 400 U.S. Treasury Bill*** 0.935 01/15/04 398,265 --------------- TOTAL U.S. GOVERNMENT OBLIGATIONS (COST $897,387) 897,387 --------------- REPURCHASE AGREEMENTS (8.1%) 36,900 Joint repurchase agreement account (dated 07/31/03; proceeds $36,901,138) (b) (COST $36,900,000) 1.11 08/01/03 36,900,000 59,703 The Bank of New York (dated 07/31/03; proceeds $59,704,398) (c) (COST $59,702,947) 0.875 08/01/03 59,702,947 --------------- TOTAL REPURCHASE AGREEMENTS (COST $96,602,947) 96,602,947 --------------- TOTAL SHORT-TERM INVESTMENTS (COST $97,500,334) 97,500,334 --------------- TOTAL INVESTMENTS (COST $1,140,590,973) (d)(e) 108.4% 1,293,828,030 LIABILITIES IN EXCESS OF OTHER ASSETS (8.4) (100,284,439) ----- --------------- NET ASSETS 100.0% $ 1,193,543,591 ===== ===============
- ---------- ADR AMERICAN DEPOSITORY RECEIPT. * NON-INCOME PRODUCING SECURITY. ** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. *** ALL OR A PORTION OF THESE SECURITIES HAVE BEEN PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS. + SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS WITH AN APPROXIMATE PRINCIPAL AMOUNT AND NO DEFINITE MATURITY DATE; THE ACTUAL PRINCIPAL AMOUNT AND MATURITY DATE WILL BE DETERMINED UPON SETTLEMENT. (a) PURCHASED ON A DISCOUNT BASIS. THE INTEREST RATE SHOWN HAS BEEN ADJUSTED TO REFLECT A MONEY MARKET EQUIVALENT YIELD. (b) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS. (c) COLLATERALIZED BY U.S. TREASURY NOTE 2.00% DUE 11/30/04 VALUED AT $60,897,079. SEE NOTES TO FINANCIAL STATEMENTS 16 (d) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO $63,900,883 IN CONNECTION WITH OPEN FUTURES CONTRACTS AND SECURITIES PURCHASE ON A FORWARD COMMITMENT BASIS. (e) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $1,149,647,757. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $195,804,803 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $51,624,530, RESULTING IN NET UNREALIZED APPRECIATION OF $144,180,273. FUTURES CONTRACTS OPEN AT JULY 31, 2003:
UNDERLYING NUMBER OF DESCRIPTION, DELIVERY FACE AMOUNT UNREALIZED CONTRACTS LONG/SHORT MONTH, AND YEAR AT VALUE APPRECIATION - ---------------------------------------------------------------------------------------------------------- 5 Short U.S. Treasury Note 5 year, September 2003 $ (556,641) $ 5,951 21 Short U.S. Treasury Note 2 year, September 2003 (4,507,453) 31,915 149 Short U.S. Treasury Note 10 year, September 2003 (16,483,125) 820,881 13 Short U.S. Treasury Note 20 year, September 2003 (1,373,125) 87,997 --------------- Total unrealized appreciation $ 946,744 ===============
SEE NOTES TO FINANCIAL STATEMENTS 17 FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JULY 31, 2003 ASSETS: Investments in securities, at value (cost $1,140,590,973) $ 1,293,828,030 Cash 84,250,147 Receivable for: Investments sold 20,321,730 Interest 3,685,650 Shares of beneficial interest sold 1,066,349 Dividends 498,600 Variation margin 244,078 Prepaid expenses and other assets 88,224 --------------- TOTAL ASSETS 1,403,982,808 --------------- LIABILITIES: Payable for: Investments purchased 206,542,186 Shares of beneficial interest redeemed 2,135,707 Distribution fee 933,481 Investment management fee 573,946 Accrued expenses and other payables 253,897 --------------- TOTAL LIABILITIES 210,439,217 --------------- NET ASSETS $ 1,193,543,591 =============== COMPOSITION OF NET ASSETS: Paid-in-capital $ 1,320,463,422 Net unrealized appreciation 154,184,610 Dividends in excess of net investment income (210,400) Accumulated net realized loss (280,894,041) --------------- NET ASSETS $ 1,193,543,591 =============== CLASS A SHARES: Net Assets $ 53,951,414 Shares Outstanding (unlimited authorized, $.01 par value) 3,666,103 NET ASSET VALUE PER SHARE $ 14.72 =============== MAXIMUM OFFERING PRICE PER SHARE, (net asset value plus 5.54% of net asset value) $ 15.54 =============== CLASS B SHARES: Net Assets $ 1,041,817,961 Shares Outstanding (unlimited authorized, $.01 par value) 70,722,646 NET ASSET VALUE PER SHARE $ 14.73 =============== CLASS C SHARES: Net Assets $ 36,351,094 Shares Outstanding (unlimited authorized, $.01 par value) 2,479,782 NET ASSET VALUE PER SHARE $ 14.66 =============== CLASS D SHARES: Net Assets $ 61,423,122 Shares Outstanding (unlimited authorized, $.01 par value) 4,169,111 NET ASSET VALUE PER SHARE $ 14.73 ===============
SEE NOTES TO FINANCIAL STATEMENTS 18 STATEMENT OF OPERATIONS FOR THE YEAR ENDED JULY 31, 2003 NET INVESTMENT INCOME: INCOME Interest $ 12,899,964 Dividends (net of $105,635 foreign withholding tax) 10,036,787 --------------- TOTAL INCOME 22,936,751 --------------- EXPENSES Distribution fee (Class A shares) 140,490 Distribution fee (Class B shares) 10,606,022 Distribution fee (Class C shares) 339,131 Investment management fee 6,860,966 Transfer agent fees and expenses 1,675,768 Shareholder reports and notices 147,429 Professional fees 75,040 Registration fees 51,783 Trustees' fees and expenses 23,058 Other 31,212 --------------- TOTAL EXPENSES 19,950,899 --------------- NET INVESTMENT INCOME 2,985,852 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS): NET REALIZED LOSS ON: Investments (63,530,018) Futures contracts (2,843,321) --------------- NET REALIZED LOSS (66,373,339) --------------- NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON: Investments 157,447,678 Futures contracts 1,400,629 --------------- NET APPRECIATION 158,848,307 --------------- NET GAIN 92,474,968 --------------- NET INCREASE $ 95,460,820 ===============
SEE NOTES TO FINANCIAL STATEMENTS 19 STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR ENDED ENDED JULY 31, 2003 JULY 31, 2002 --------------- --------------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 2,985,852 $ 13,000,843 Net realized loss (66,373,339) (99,598,492) Net change in unrealized depreciation 158,848,307 (221,381,038) --------------- --------------- NET INCREASE (DECREASE) 95,460,820 (307,978,687) --------------- --------------- DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME Class A shares (867,122) (1,681,731) Class B shares (4,004,321) (15,594,689) Class C shares (103,363) (441,710) Class D shares (806,241) (1,437,376) --------------- --------------- TOTAL DIVIDENDS (5,781,047) (19,155,506) --------------- --------------- Net decrease from transactions in shares of beneficial interest (284,302,141) (355,197,919) --------------- --------------- NET DECREASE (194,622,368) (682,332,112) NET ASSETS: Beginning of period 1,388,165,959 2,070,498,071 --------------- --------------- END OF PERIOD (Including dividends in excess of net investment income of $210,400 and accumulated undistributed net investment income of $123,826, respectively) $ 1,193,543,591 $ 1,388,165,959 =============== ===============
SEE NOTES TO FINANCIAL STATEMENTS 20 NOTES TO FINANCIAL STATEMENTS - JULY 31, 2003 1. ORGANIZATION AND ACCOUNTING POLICIES Morgan Stanley Strategist Fund (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a non-diversified, open-end management investment company. The Fund's investment objective is to maximize the total return of its investments. The Fund seeks to achieve its objective by actively allocating its assets among major asset categories of equity and fixed-income securities and money market instruments. The Fund was organized as a Massachusetts business trust on August 5, 1988 and commenced operations on October 31, 1988. On July 28, 1997, the Fund converted to a multiple class share structure. The Fund offers Class A shares, Class B shares, Class C shares and Class D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within one year, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses. The following is a summary of significant accounting policies: A. VALUATION OF INVESTMENTS -- (1) an equity portfolio security listed or traded on the New York or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other equity portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) futures are valued at the latest price published by the commodities exchange on which they trade; (6) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the "Investment Manager") determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Trustees; (7) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; and (8) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. 21 Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily. C. REPURCHASE AGREEMENTS -- Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment Manager, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, U.S. Treasury or federal agency obligations. The Fund may also invest directly with institutions in repurchase agreements. The Fund's custodian receives the collateral, which is marked-to-market daily to determine that the value of the collateral does not decrease below the repurchase price plus accrued interest. D. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class. E. FOREIGN CURRENCY TRANSLATION AND FORWARD FOREIGN CURRENCY CONTRACTS -- The books and records of the Fund are maintained in U.S. dollars as follows: (1) the foreign currency market value of investment securities, other assets and liabilities and forward foreign currency contracts ("forward contracts") are translated at the exchange rates prevailing at the end of the period; and (2) purchases, sales, income and expenses are translated at the exchange rates prevailing on the respective dates of such transactions. The resultant exchange gains and losses are recorded as realized and unrealized gain/loss on foreign exchange transactions. Pursuant to U.S. Federal income tax regulations, certain foreign exchange gains/losses included in realized and unrealized gain/loss are included in or are a reduction of ordinary income for federal income tax purposes. The Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of the securities. Forward contracts are valued daily at the appropriate exchange rates. The resultant unrealized exchange gains and losses are recorded as unrealized foreign currency gain or loss. The Fund records realized gains or losses on delivery of the currency or at the time the forward contract is extinguished (compensated) by entering into a closing transaction with the same counterparty prior to delivery. 22 F. FUTURES CONTRACTS -- A futures contract is an agreement between two parties to buy and sell financial instruments or contracts based on financial indices at a set price on a future date. Upon entering into such a contract, the Fund is required to pledge to the broker cash, U.S. Government securities or other liquid portfolio securities equal to the minimum initial margin requirements of the applicable futures exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments known as variation margin are recorded by the Fund as unrealized gains and losses. Upon closing of the contract, the Fund realizes a gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. G. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required. H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to shareholders are recorded on the ex-dividend date. I. USE OF ESTIMATES -- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. 2. INVESTMENT MANAGEMENT AGREEMENT Pursuant to an Investment Management Agreement, the Fund pays the Investment Manager a management fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined at the close of each business day: 0.60% to the portion of daily net assets not exceeding $500 million; 0.55% to the portion of daily net assets exceeding $500 million but not exceeding $1 billion; 0.50% to the portion of daily net assets exceeding $1 billion but not exceeding $1.5 billion; 0.475% to the portion of daily net assets exceeding $1.5 billion but not exceeding $2 billion; 0.45% to the portion of daily net assets exceeding $2 billion but not exceeding $3 billion; and 0.425% to the portion of daily net assets in excess of $3 billion. 3. PLAN OF DISTRIBUTION Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B -- 1.0% of the lesser of: (a) the average daily aggregate gross sales of 23 the Class B shares since the inception of the Plan on November 8, 1989 (not including reinvestment of dividend or capital gain distributions) less the average daily aggregate net asset value of the Class B shares redeemed since the Plan's inception upon which a contingent deferred sales charge has been imposed or waived; or (b) the average daily net assets of Class B attributable to shares issued, net of related shares redeemed, since the Plan's inception; and (iii) Class C -- up to 1.0% of the average daily net assets of Class C. In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $23,604,027 at July 31, 2003. In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the year ended July 31, 2003, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.20% and 1.0%, respectively. The Distributor has informed the Fund that for the year ended July 31, 2003, it received contingent deferred sales charges from certain redemptions of the Fund's Class A shares, Class B shares and Class C shares of $1,663, $1,500,244 and $10,582, respectively and received $85,004 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund. 4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES The cost of purchases and proceeds from sales/maturities/prepayments of portfolio securities, excluding short-term investments, for the year ended July 31, 2003 aggregated $1,376,814,408, and $1,505,655,253, respectively. Included in the aforementioned are purchases and sales/maturities/prepayments of U.S. Government securities of $822,853,115 and $726,728,287, respectively. Included in the aforementioned are purchases and sales of $13,492,371 and $1,872,000, respectively, with other Morgan Stanley Funds including a net realized gain of $413,541. 24 For the year ended July 31, 2003, the Fund incurred brokerage commissions of $345,325 with Morgan Stanley & Co., Inc. an affiliate of the Investment Manager and Distributor, for portfolio transactions executed on behalf of the Fund. At July 31, 2003, the Fund's receivable for investments sold and payable for investments purchased included unsettled trades with Morgan Stanley & Co. of $1,261,112 and $5,489,982, respectively. Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent. At July 31, 2003, the Fund had transfer agent fees and expenses payable of approximately $18,000. The Fund has an unfunded noncontributory defined benefit pension plan covering all independent Trustees of the Fund who will have served as independent Trustees for at least five years at the time of retirement. Benefits under this plan are based on years of service and compensation during the last five years of service. Aggregate pension costs for the year ended July 31, 2003 included in Trustees' fees and expenses in the Statement of Operations amounted to $9,632. At July 31, 2003, the Fund had an accrued pension liability of $76,749 which is included in accrued expenses in the Statement of Assets and Liabilities. 5. FEDERAL INCOME TAX STATUS The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital. The tax character of distributions paid was as follows:
FOR THE YEAR FOR THE YEAR ENDED ENDED JULY 31, 2003 JULY 31, 2002 -------------- -------------- Ordinary Income $ 5,781,047 $ 19,155,506
As of July 31, 2003, the tax-basis components of accumulated losses were as follows: Undistributed ordinary income $ 162,353 Undistributed long-term gains -- -------------- Net accumulated earnings 162,353 Capital loss carryforward* (271,186,519) Temporary differences (76,749) Net unrealized appreciation 144,181,084 -------------- Total accumulated losses $ (126,919,831) ==============
25 * As of July 31, 2003, the Fund had a net capital loss carryforward of $271,186,519 of which $16,425,882 will expire on July 31, 2009, $158,335,545 will expire on July 31, 2010 and $96,425,092 will expire on July 31, 2011 to offset future capital gains to the extent provided by regulations. As of July 31, 2003, the Fund had temporary book/tax differences primarily attributable to capital loss deferrals on wash sales and straddles, mark-to-market of open futures contracts and book amortization of premiums on debt securities and permanent book/tax differences attributable to losses on paydowns and tax adjustments on debt securities sold by the Fund. To reflect reclassifications arising from the permanent differences, accumulated net realized loss was charged and dividends in excess of net investment income was credited $2,460,969. 6. PURPOSES OF AND RISKS RELATING TO CERTAIN FINANCIAL INSTRUMENTS The Fund may enter into forward contracts to facilitate settlement of foreign currency denominated portfolio transactions or to manage foreign currency exposure associated with foreign currency denominated securities. The Fund may invest in futures to facilitate the reallocation of its assets ("futures contracts"). Forward contracts and futures contracts involve elements of market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the value of the underlying securities or in the foreign exchange rates underlying the forward contracts. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts. At July 31, 2003, there were outstanding futures contracts and no outstanding forward contracts. 26 7. SHARES OF BENEFICIAL INTEREST Transactions in shares of beneficial interest were as follows:
FOR THE YEAR FOR THE YEAR ENDED ENDED JULY 31, 2003 JULY 31, 2002 ----------------------------- ----------------------------- SHARES AMOUNT SHARES AMOUNT ----------- --------------- ----------- --------------- CLASS A SHARES Sold 1,845,888 $ 24,260,526 3,521,343 $ 54,004,509 Reinvestment of dividends 44,688 590,931 72,055 1,091,984 Redeemed (4,032,753) (52,770,954) (4,869,870) (74,349,220) ----------- --------------- ----------- --------------- Net decrease -- Class A (2,142,177) (27,919,497) (1,276,472) (19,252,727) ----------- --------------- ----------- --------------- CLASS B SHARES Sold 5,788,543 78,164,128 9,830,411 152,646,505 Reinvestment of dividends 267,210 3,508,089 903,464 13,721,081 Redeemed (25,138,244) (334,420,291) (32,096,615) (489,833,764) ----------- --------------- ----------- --------------- Net decrease -- Class B (19,082,491) (252,748,074) (21,362,740) (323,466,178) ----------- --------------- ----------- --------------- CLASS C SHARES Sold 594,700 7,963,172 687,657 10,604,697 Reinvestment of dividends 7,120 93,720 26,732 405,978 Redeemed (701,340) (9,319,392) (923,012) (14,008,932) ----------- --------------- ----------- --------------- Net decrease -- Class C (99,520) (1,262,500) (208,623) (2,998,257) ----------- --------------- ----------- --------------- CLASS D SHARES Sold 609,164 8,132,406 1,246,420 19,113,212 Reinvestment of dividends 56,139 745,232 88,193 1,341,447 Redeemed (839,347) (11,249,708) (1,951,913) (29,935,416) ----------- --------------- ----------- --------------- Net decrease -- Class D (174,044) (2,372,070) (617,300) (9,480,757) ----------- --------------- ----------- --------------- Net decrease in Fund (21,498,232) $ (284,302,141) (23,465,135) $ (355,197,919) =========== =============== =========== ===============
27 FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE YEAR ENDED JULY 31, --------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- CLASS A SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 13.53 $ 16.43 $ 20.64 $ 20.16 $ 20.23 ----------- ----------- ----------- ----------- ----------- Income (loss) from investment operations: Net investment income++ 0.14 0.22 0.44 0.44 0.32 Net realized and unrealized gain (loss) 1.21 (2.84) (1.55) 2.16 1.46 ----------- ----------- ----------- ----------- ----------- Total income (loss) from investment operations 1.35 (2.62) (1.11) 2.60 1.78 ----------- ----------- ----------- ----------- ----------- Less dividends and distributions from: Net investment income (0.16) (0.28) (0.50) (0.37) (0.32) Net realized gain - - (2.60) (1.75) (1.53) ----------- ----------- ----------- ----------- ----------- Total dividends and distributions (0.16) (0.28) (3.10) (2.12) (1.85) ----------- ----------- ----------- ----------- ----------- Net asset value, end of period $ 14.72 $ 13.53 $ 16.43 $ 20.64 $ 20.16 =========== =========== =========== =========== =========== TOTAL RETURN+ 10.11% (16.14)% (6.24)% 13.48% 10.01% RATIOS TO AVERAGE NET ASSETS(1): Expenses 0.93% 0.88% 0.85% 0.88% 0.87% Net investment income 0.95% 1.44% 2.41% 2.06% 1.66% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 53,951 $ 78,583 $ 116,383 $ 110,600 $ 64,418 Portfolio turnover rate 124% 164% 136% 187% 121%
- ---------- ++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 28
FOR THE YEAR ENDED JULY 31, --------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- CLASS B SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 13.54 $ 16.43 $ 20.65 $ 20.16 $ 20.23 ----------- ----------- ----------- ----------- ----------- Income (loss) from investment operations: Net investment income++ 0.02 0.10 0.30 0.29 0.19 Net realized and unrealized gain (loss) 1.22 (2.84) (1.57) 2.18 1.46 ----------- ----------- ----------- ----------- ----------- Total income (loss) from investment operations 1.24 (2.74) (1.27) 2.47 1.65 ----------- ----------- ----------- ----------- ----------- Less dividends and distributions from: Net investment income (0.05) (0.15) (0.35) (0.23) (0.19) Net realized gain - - (2.60) (1.75) (1.53) ----------- ----------- ----------- ----------- ----------- Total dividends and distributions (0.05) (0.15) (2.95) (1.98) (1.72) ----------- ----------- ----------- ----------- ----------- Net asset value, end of period $ 14.73 $ 13.54 $ 16.43 $ 20.65 $ 20.16 =========== =========== =========== =========== =========== TOTAL RETURN+ 9.20% (16.77)% (7.05)% 12.79% 9.23% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.73% 1.67% 1.63% 1.53% 1.57% Net investment income 0.15% 0.64% 1.63% 1.41% 0.96% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 1,041,818 $ 1,216,023 $ 1,826,910 $ 2,043,540 $ 1,833,935 Portfolio turnover rate 124% 164% 136% 187% 121%
- ---------- ++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 29
FOR THE YEAR ENDED JULY 31, --------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- CLASS C SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 13.46 $ 16.36 $ 20.57 $ 20.11 $ 20.19 ----------- ----------- ----------- ----------- ----------- Income (loss) from investment operations: Net investment income (loss)++ 0.03 0.10 0.29 0.29 0.16 Net realized and unrealized gain (loss) 1.21 (2.83) (1.55) 2.15 1.47 ----------- ----------- ----------- ----------- ----------- Total income (loss) from investment operations 1.24 (2.73) (1.26) 2.44 1.63 ----------- ----------- ----------- ----------- ----------- Less dividends and distributions from: Net investment income (0.04) (0.17) (0.35) (0.23) (0.18) Net realized gain - - (2.60) (1.75) (1.53) ----------- ----------- ----------- ----------- ----------- Total dividends and distributions (0.04) (0.17) (2.95) (1.98) (1.71) ----------- ----------- ----------- ----------- ----------- Net asset value, end of period $ 14.66 $ 13.46 $ 16.36 $ 20.57 $ 20.11 =========== =========== =========== =========== =========== TOTAL RETURN+ 9.09% (16.70)% (7.00)% 12.62% 9.15% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.73% 1.67% 1.63% 1.63% 1.65% Net investment income 0.15% 0.64% 1.63% 1.31% 0.88% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 36,351 $ 34,727 $ 45,612 $ 39,006 $ 16,147 Portfolio turnover rate 124% 164% 136% 187% 121%
- ---------- ++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. + DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 30
FOR THE YEAR ENDED JULY 31, --------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- CLASS D SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 13.55 $ 16.45 $ 20.67 $ 20.18 $ 20.25 ----------- ----------- ----------- ----------- ----------- Income (loss) from investment operations: Net investment income++ 0.16 0.26 0.48 0.48 0.37 Net realized and unrealized gain (loss) 1.21 (2.85) (1.56) 2.18 1.45 ----------- ----------- ----------- ----------- ----------- Total income (loss) from investment operations 1.37 (2.59) (1.08) 2.66 1.82 ----------- ----------- ----------- ----------- ----------- Less dividends and distributions from: Net investment income (0.19) (0.31) (0.54) (0.42) (0.36) Net realized gain - - (2.60) (1.75) (1.53) ----------- ----------- ----------- ----------- ----------- Total dividends and distributions (0.19) (0.31) (3.14) (2.17) (1.89) ----------- ----------- ----------- ----------- ----------- Net asset value, end of period $ 14.73 $ 13.55 $ 16.45 $ 20.67 $ 20.18 =========== =========== =========== =========== =========== TOTAL RETURN+ 10.25% (15.94)% (6.07)% 13.79% 10.23% RATIOS TO AVERAGE NET ASSETS(1): Expenses 0.73% 0.67% 0.63% 0.63% 0.65% Net investment income 1.15% 1.64% 2.63% 2.31% 1.88% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 61,423 $ 58,834 $ 81,594 $ 80,925 $ 72,554 Portfolio turnover rate 124% 164% 136% 187% 121%
- ---------- ++ THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIOD. + CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 31 INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF MORGAN STANLEY STRATEGIST FUND: We have audited the accompanying statement of assets and liabilities of Morgan Stanley Strategist Fund (the "Fund"), including the portfolio of investments, as of July 31, 2003, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of July 31, 2003, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Morgan Stanley Strategist Fund as of July 31, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP NEW YORK, NEW YORK SEPTEMBER 12, 2003 2003 FEDERAL TAX NOTICE (UNAUDITED) During the fiscal year ended July 31, 2003, 97.81% of the income dividends paid by the Fund qualified for the dividends received deduction available to corporations. Of the Fund's ordinary income dividends paid during the fiscal year ended July 31, 2003, 8.39% was attributable to qualifying Federal obligations. Please consult your tax advisor to determine if any portion of the dividends you received is exempt from state income tax. Additionally, please note that of the Fund's ordinary income dividends of $5,781,047 paid during the fiscal year ended July 31, 2003, $4,915,775 qualified for the lower income tax rate available to individuals under the recently enacted Jobs and Growth Tax Relief Reconciliation Act of 2003. 32 TRUSTEE AND OFFICER INFORMATION INDEPENDENT TRUSTEES:
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE - ------------------------------------- ----------- ------------ ------------------------ ------------- -------------------- Michael Bozic (62) Trustee Since Retired; Director or 216 Director of Weirton c/o Mayer, Brown, Rowe & Maw LLP April 1994 Trustee of the Retail Steel Corporation. Counsel to the Independent Directors Funds and TCW/DW Term 1675 Broadway Trust 2003 (since April New York, NY 1994) and the Institutional Funds (since July 2003); formerly Vice Chairman of Kmart Corporation (December 1998-October 2000), Chairman and Chief Executive Officer of Levitz Furniture Corporation (November 1995-November 1998) and President and Chief Executive Officer of Hills Department Stores (May 1991-July 1995); formerly variously Chairman, Chief Executive Officer, President and Chief Operating Officer (1987-1991) of the Sears Merchandise Group of Sears, Roebuck & Co. Edwin J. Garn (70) Trustee Since Director or Trustee of 216 Director of Franklin c/o Summit Ventures LLC January 1993 the Retail Funds and Covey (time 1 Utah Center TCW/DW Term Trust 2003 management systems), 201 S. Main Street (since January 1993) and BMW Bank of North Salt Lake City, UT the Institutional Funds America, Inc. (since July 2003); (industrial loan member of the Utah corporation), United Regional Advisory Board Space Alliance of Pacific Corp.; (joint venture formerly United States between Lockheed Senator (R-Utah) Martin and the (1974-1992) and Boeing Company) and Chairman, Senate Banking Nuskin Asia Pacific Committee (1980-1986), (multilevel Mayor of Salt Lake City, marketing); member Utah (1971-1974), of the board of Astronaut, Space Shuttle various civic and Discovery (April 12-19, charitable 1985), and Vice organizations. Chairman, Huntsman Corporation (chemical company). Wayne E. Hedien (69) Trustee Since Retired; Director or 216 Director of The PMI c/o Mayer, Brown, Rowe & Maw LLP September Trustee of the Retail Group Inc. (private Counsel to the Independent Directors 1997 Funds and TCW/DW Term mortgage insurance); 1675 Broadway Trust 2003; (Since Trustee and Vice New York, NY September 1997) and the Chairman of The Institutional Funds Field Museum of (since July 2003); Natural History; formerly associated with director of various the Allstate Companies other business and (1966-1994), most charitable recently as Chairman of organizations. The Allstate Corporation (March 1993-December 1994) and Chairman and Chief Executive Officer of its wholly-owned subsidiary, Allstate Insurance Company (July 1989-December 1994).
33
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE - ------------------------------------- ----------- ------------ ------------------------ ------------- -------------------- Dr. Manuel H. Johnson (54) Trustee Since Chairman of the Audit 216 Director of NVR, c/o Johnson Smick International, Inc. July 1991 Committee and Director Inc. (home 2099 Pennsylvania Avenue, N.W. or Trustee of the Retail construction); Suite 950 Funds and TCW/DW Term Chairman and Trustee Washington, D.C. Trust 2003 (since July of the Financial 1991) and the Accounting Institutional Funds Foundation (since July 2003); (oversight Senior Partner, Johnson organization of the Smick International, Financial Accounting Inc., a consulting firm; Standards Board); Co-Chairman and a Director of RBS founder of the Group of Greenwich Capital Seven Council (G7C), an Holdings (financial international economic holding company). commission; formerly Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury. Joseph J. Kearns (60) Trustee Since Deputy Chairman of the 217 Director of Electro PMB754 July 2003 Audit Committee and Rent Corporation 23852 Pacific Coast Highway Director or Trustee of (equipment leasing), Malibu, CA the Retail Funds and The Ford Family TCW/DW Term Trust 2003 Foundation, and the (since July 2003) and UCLA Foundation. the Institutional Funds (since August 1994); previously Chairman of the Audit Committee of the Institutional Funds (October 2001-July 2003); President, Kearns & Associates LLC (investment consulting); formerly CFO of the J. Paul Getty Trust. Michael E. Nugent (67) Trustee Since Chairman of the 216 Director of various c/o Triumph Capital, L.P. July 1991 Insurance Committee and business 445 Park Avenue Director or Trustee of organizations. New York, NY the Retail Funds and TCW/DW Term Trust 2003 (since July 1991) and the Institutional Funds (since July 2001); General Partner of Triumph Capital, L.P., a private investment partnership; formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988). Fergus Reid (70) Trustee Since Chairman of the 217 Trustee and Director 85 Charles Colman Blvd. July 2003 Governance Committee and of certain Pawling, NY Director or Trustee of investment companies the Retail Funds and in the JPMorgan TCW/DW Term Trust 2003 Funds complex (since July 2003) and managed by JP Morgan the Institutional Funds Investment (since June 1992); Management Inc. Chairman of Lumelite Plastics Corporation.
34 INTERESTED TRUSTEES:
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS INTERESTED TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE - ------------------------------------- ----------- ------------ ------------------------ ------------- -------------------- Charles A. Fiumefreddo (70) Chairman Since Chairman and Director or 216 None c/o Morgan Stanley Trust of the July 1991 Trustee of the Retail Harborside Financial Center, Board and Funds and TCW/DW Term Plaza Two, Trustee Trust 2003 (since July Jersey City, NJ 1991) and the Institutional Funds (since July 2003); formerly Chief Executive Officer of the Retail Funds and the TCW/DW Term Trust 2003 (until September 2002). James F. Higgins (55) Trustee Since Director or Trustee of 216 Director of AXA c/o Morgan Stanley Trust June 2000 the Retail Funds and Financial, Inc. and Harborside Financial Center, TCW/DW Term Trust 2003 The Equitable Life Plaza Two, (since June 2000) and Assurance Society of Jersey City, NJ the Institutional Funds the United States (since July 2003); (financial Senior Advisor of Morgan services). Stanley (since August 2000); Director of the Distributor and Dean Witter Realty Inc.; previously President and Chief Operating Officer of the Private Client Group of Morgan Stanley (May 1999-August 2000), and President and Chief Operating Officer of Individual Securities of Morgan Stanley (February 1997-May 1999). Philip J. Purcell (59) Trustee Since Director or Trustee of 216 Director of American 1585 Broadway April 1994 the Retail Funds and Airlines, Inc. and New York, NY TCW/DW Term Trust 2003 its parent company, (since April 1994) and AMR Corporation. the Institutional Funds (since July 2003); Chairman of the Board of Directors and Chief Executive Officer of Morgan Stanley and Morgan Stanley DW Inc.; Director of the Distributor; Chairman of the Board of Directors and Chief Executive Officer of Novus Credit Services Inc.; Director and/or officer of various Morgan Stanley subsidiaries.
- ---------- * THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT MANAGER") (THE "RETAIL FUNDS"). ** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT MANAGEMENT INC., MORGAN STANLEY INVESTMENTS LP AND MORGAN STANLEY AIP GP LP (THE "INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE DIRECTOR/TRUSTEE BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS APPLICABLE. *** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT MANAGER AND ANY FUNDS THAT HAVE AN INVESTMENT ADVISOR THAT IS AN AFFILIATED PERSON OF THE INVESTMENT MANAGER (INCLUDING BUT NOT LIMITED TO MORGAN STANLEY INVESTMENT MANAGEMENT INC. AND MORGAN STANLEY INVESTMENTS LP). 35 OFFICERS:
TERM OF POSITION(S) OFFICE AND NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** - ------------------------------------- ----------- ----------------- -------------------------------------------------------- Mitchell M. Merin (49) President Since May 1999 President and Chief Operating Officer of Morgan Stanley 1221 Avenue of the Americas Investment Management Inc.; President, Director and Chief New York, NY Executive Officer of the Investment Manager and Morgan Stanley Services; Chairman, Chief Executive Officer and Director of the Distributor; Chairman and Director of the Transfer Agent; Director of various Morgan Stanley subsidiaries; President Morgan Stanley Investments LP (since February 2003); President of the Institutional Funds (since July 2003) and President of the Retail Funds and TCW/DW Term Trust 2003 (since May 1999); Trustee (since July 2003) and President (since December 2002) of the Van Kampen Closed-End Funds; Trustee (since May 1999) and President (since October 2002) of the Van Kampen Open-End Funds. Ronald E. Robison (64) Executive Since April 2003 Chief Global Operations Officer and Managing Director of 1221 Avenue of the Americas Vice Morgan Stanley Investment Management Inc.; Managing New York, NY President DIrector of Morgan Stanley & Co. Incorporated; Managing and DIrector of Morgan Stanley; Managing Director, Chief Principal Administrative Officer and Director of the Investment Executive Manager and Morgan Stanley Services; Chief Executive Officer Officer and Director of the Transfer Agent; Executive Vice President and Principal Executive Officer of the Institutional Funds (since July 2003); and the TCW/DW Term Trust 2003 (since April 2003); previously President of the Institutional Funds (March 2001-July 2003) and Director of the Institutional Funds (March 2001-July 2003). Barry Fink (48) Vice Since General Counsel (since May 2000) and Managing Director 1221 Avenue of the Americas President February 1997 (since December 2000) of Morgan Stanley Investment New York, NY and General Management; Managing Director (since December 2000), Counsel Secretary (since February 1997) and Director (since July 1998) of the Investment Manager and Morgan Stanley Services; Assistant Secretary of Morgan Stanley DW; Chief Legal Officer of Morgan Stanley Investments LP (since July 2002); Vice President of the Institutional Funds (since July 2003); Vice President and Secretary of the Distributor; previously Secretary of the Retail Funds (February 1997-July 2003); previously Vice President and Assistant General Counsel of the Investment Manager and Morgan Stanley Services (February 1997-December 2001). Joseph J. McAlinden (60) Vice Since July 1995 Managing Director and Chief Investment Officer of the 1221 Avenue of the Americas President Investment Manager, Morgan Stanley Investment New York, NY Management Inc. and Morgan Stanley Investments LP; Director of the Transfer Agent, Chief Investment Officer of the Van Kampen Funds; Vice President of the Institutional Funds (since July 2003) and the Retail Funds (since July 1995). Stefanie V. Chang (36) Vice Since July 2003 Executive Director of Morgan Stanley & Co. and Morgan 1221 Avenue of the Americas President Stanley Investment Management Inc. and Vice President New York, NY of the Institutional Funds (since December 1997) and the Retail Funds (since July 2003); formerly practiced law with the New York law firm of Rogers & Wells (now Clifford Chance LLP).
36
TERM OF POSITION(S) OFFICE AND NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS** - ------------------------------------- ----------- ----------------- -------------------------------------------------------- Francis Smith (37) Treasurer Treasurer since Executive Director of the Investment Manager and Morgan c/o Morgan Stanley Trust and July 2003 and Stanley Services (since December 2001); previously Vice Harborside Financial Center, Chief Chief Financial President of the Retail Funds (September 2002-July 2003); Plaza Two, Financial Officer since previously Vice President of the Investment Manager and Jersey City, NJ Officer September 2002 Morgan Stanley Services (August 2000-November 2001) and Senior Manager at PricewaterhouseCoopers LLP (January 1998-August 2000). Thomas F. Caloia (57) Vice Since July 2003 Executive Director (since December 2002) and Assistant c/o Morgan Stanley Trust President Treasurer of the Investment Manager, the Distributor and Harborside Financial Center, Morgan Stanley Services; previously Treasurer of the Plaza Two, Retail Funds (April 1989-July 2003); formerly First Vice Jersey City, NJ President of the Investment Manager, the Distributor and Morgan Stanley Services. Mary E. Mullin (36) Secretary Since July 2003 Vice President of Morgan Stanley & Co. Incorporated and 1221 Avenue of the Americas Morgan Stanley Investment Management Inc.; Secretary of New York, NY the Institutional Funds (since June 1999) and the Retail Funds (since July 2003); formerly practiced law with the New York law firms of McDermott, Will & Emery and Skadden, Arps, Slate, Meagher & Flom LLP.
- ------- * THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. EACH OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS ELECTED. ** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICE AS AN OFFICER FOR THE RETAIL AND INSTITUTIONAL FUNDS REFLECT THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS AS APPLICABLE. 37 [GRAPHIC] MORGAN STANLEY STRATEGIST FUND ANNUAL REPORT JULY 31, 2003 [MORGAN STANLEY LOGO] TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael E. Nugent Philip J. Purcell Fergus Reid OFFICERS Charles A. Fiumefreddo CHAIRMAN OF THE BOARD Mitchell M. Merin PRESIDENT Ronald E. Robison EXECUTIVE VICE PRESIDENT and PRINCIPAL EXECUTIVE OFFICER Barry Fink VICE PRESIDENT and GENERAL COUNSEL Joseph J. McAlinden VICE PRESIDENT Stefanie V. Chang VICE PRESIDENT Francis Smith TREASURER and CHIEF FINANCIAL OFFICER Thomas F. Caloia VICE PRESIDENT Mary E. Mullin SECRETARY TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT AUDITORS Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT MANAGER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. (C) 2003 Morgan Stanley [MORGAN STANLEY LOGO] 38585RPT-12080H03-AP-8/03 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 A. (2) Not applicable. (3) Not applicable. Item 3. Audit Committee Financial Expert. The Fund's Board of Trustees has determined that it has two "audit committee financial experts" serving on its audit committee, each of whom are "independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Trustees in the absence of such designation or identification. Item 4. Principal Accountant Fees and Services Applicable only for reports covering fiscal years ending on or after December 15, 2003. Item 5. Audit Committee of Listed Registrants. Applicable only for reports covering periods ending on or after the earlier of (i) the first annual shareholder meeting after January 15, 2004 or (ii) October 31, 2004. Item 6. [Reserved.] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Applicable only to annual reports filed by closed-end funds. Item 8. [Reserved.] Item 9 - 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. There were no significant changes or corrective actions with regard to significant deficiencies or material weaknesses in the Fund's internal controls or in other factors that could significantly affect the Fund's internal controls subsequent to the date of their evaluation. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 10 Exhibits (a) The Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Morgan Stanley Strategist Fund /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer September 22, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer September 22, 2003 /s/ Francis Smith Francis Smith Principal Financial Officer September 22, 2003 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Morgan Stanley Strategist Fund /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer December 8, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer December 8, 2003 /s/ Francis Smith Francis Smith Principal Financial Officer December 8, 2003 EX-99.CODE-ETH 3 a2124397zex-99_codeeth.txt CODE OF ETHICS Exhibit 99.CODE_ETH EXHIBIT 10 A CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS ADOPTED JULY 31, 2003 I. This Code of Ethics (the "Code") for the investment companies within the Morgan Stanley complex identified in Exhibit A (collectively, "Funds" and each, a "Fund") applies to each Fund's Principal Executive Officer, President, Principal Financial Officer and Treasurer (or persons performing similar functions) ("Covered Officers" each of whom are set forth in Exhibit B) for the purpose of promoting: - honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. - full, fair, accurate, timely and understandable disclosure in reports and documents that a company files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Fund; - compliance with applicable laws and governmental rules and regulations; - prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and - accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. Any question about the application of the Code should be referred to the General Counsel or his/her designee (who is set forth in Exhibit C). II. COVERED OFFICERS SHOULD HANDLE ETHICALLY ACTUAL AND APPARENT CONFLICTS OF INTEREST OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes, or appears to interfere, with the interests of, or his service to, the Fund. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the Fund. Certain conflicts of interest arise out of the relationships between Covered Officers and the Fund and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Fund because of their status as "affiliated persons" (as defined in the Investment Company Act) of the Fund. The Fund's and its investment adviser's compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside the parameters of this Code, unless or until the General Counsel determines that any violation of such programs and procedures is also a violation of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts may arise from, or as a result of, the contractual relationship between the Fund and its investment adviser of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Fund or for the investment adviser, or for both), be involved in establishing policies and implementing decisions that will have different effects on the Fund and its investment adviser. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Fund and the investment adviser and is consistent with the performance by the Covered Officers of their duties as officers of the Fund. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Funds' Boards of Directors/Trustees ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Fund. Each Covered Officer must not: - - use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally (directly or indirectly) to the detriment of the Fund; - cause the Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Fund; or - use material non-public knowledge of portfolio transactions made or contemplated for, or actions proposed to be taken by, the Fund to trade personally or cause others to trade personally in contemplation of the market effect of such transactions. Each Covered Officer must, at the time of signing this Code, report to the General Counsel all affiliations or significant business relationships outside the Morgan Stanley complex and must update the report annually. Conflict of interest situations should always be approved by the General Counsel and communicated to the relevant Fund or Fund's Board. Any activity or relationship that would present such a conflict for a Covered Officer would likely also present a conflict for the Covered Officer if an immediate member of the Covered Officer's family living in the same household engages in such an activity or has such a relationship. Examples of these include: - service or significant business relationships as a director on the board of any public or private company; - accepting directly or indirectly, anything of value, including gifts and gratuities in excess of $100 per year from any person or entity with which the Fund has current or prospective business dealings, not including occasional meals or tickets for theatre or sporting events or other similar entertainment; provided it is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety; - any ownership interest in, or any consulting or employment relationship with, any of the Fund's service providers, other than its investment adviser, principal underwriter, or any affiliated person thereof; and - a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Fund for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. III. DISCLOSURE AND COMPLIANCE - Each Covered Officer should familiarize himself/herself with the disclosure and compliance requirements generally applicable to the Funds; - each Covered Officer must not knowingly misrepresent, or cause others to misrepresent, facts about the Fund to others, whether within or outside the Fund, including to the Fund's Directors/Trustees and auditors, or to governmental regulators and self-regulatory organizations; - each Covered Officer should, to the extent appropriate within his area of responsibility, consult with other officers and employees of the Funds and their investment advisers with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and - it is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. IV. REPORTING AND ACCOUNTABILITY Each Covered Officer must: - upon adoption of the Code (thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Boards that he has received, read and understands the Code; - annually thereafter affirm to the Boards that he has complied with the requirements of the Code; - not retaliate against any other Covered Officer, other officer or any employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; and - notify the General Counsel promptly if he/she knows or suspects of any violation of this Code. Failure to do so is itself a violation of this Code. The General Counsel is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any waivers(1) sought by a Covered Officer must be considered by the Board of the relevant Fund or Funds. The Funds will follow these procedures in investigating and enforcing this Code: - the General Counsel will take all appropriate action to investigate any potential violations reported to him; - ------------------------------ (1) Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics." - if, after such investigation, the General Counsel believes that no violation has occurred, the General Counsel is not required to take any further action; - any matter that the General Counsel believes is a violation will be reported to the relevant Fund's Audit Committee; - if the directors/trustees/managing general partners who are not "interested persons" as defined by the Investment Company Act (the "Independent Directors/Trustees/Managing General Partners") of the relevant Fund concur that a violation has occurred, they will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer or other appropriate disciplinary actions; - the Independent Directors/Trustees/Managing General Partners of the relevant Fund will be responsible for granting waivers of this Code, as appropriate; and - any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, the Funds' investment advisers, principal underwriters, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code unless any provision of this Code conflicts with any applicable federal or state law, in which case the requirements of such law will govern. The Funds' and their investment advisers' and principal underwriters' codes of ethics under Rule 17j-1 under the Investment Company Act and Morgan Stanley's Code of Ethics are separate requirements applying to the Covered Officers and others, and are not part of this Code. VI. AMENDMENTS Any amendments to this Code, other than amendments to Exhibits A, B or C, must be approved or ratified by a majority vote of the Board of each Fund, including a majority of Independent Directors/Trustees/Managing General Partners. VII. CONFIDENTIALITY All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the Independent Directors/Trustees/Managing General Partners of the relevant Fund or Funds and their counsel, the relevant Fund or Funds and their counsel and the relevant investment adviser and its counsel. VIII. INTERNAL USE The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Fund, as to any fact, circumstance, or legal conclusion I have read and understand the terms of the above Code. I recognize the responsibilities and obligations incurred by me as a result of my being subject to the Code. I hereby agree to abide by the above Code. - ----------------------------------- Date: ----------------------------- EXHIBIT B INSTITUTIONAL FUNDS COVERED OFFICERS Mitchell M. Merin - President Ronald E. Robison - Executive Vice President and Principal Executive Officer James W. Garrett - Chief Financial Officer and Treasurer RETAIL FUNDS COVERED OFFICERS Mitchell M. Merin - President Ronald E. Robison - Executive Vice President and Principal Executive Officer Frank Smith - Chief Financial Officer and Treasurer EXHIBIT C GENERAL COUNSEL Barry Fink EX-99.CERT 4 a2124397zex-99_cert.txt CERT EXHIBIT 10 B1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER CERTIFICATIONS I, Ronald E. Robison, certify that: 1. I have reviewed this report on Form N-CSR of Morgan Stanley Strategist Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: September 22, 2003 /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer EXHIBIT 10 B2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER CERTIFICATIONS I, Francis Smith, certify that: 6. I have reviewed this report on Form N-CSR of Morgan Stanley Strategist Fund; 7. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 8. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 9. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: b) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] e) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and f) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 10. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): c) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: September 22, 2003 /s/ Francis Smith Francis Smith Principal Financial Officer EXHIBIT 10 B3 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER CERTIFICATIONS I, Ronald E. Robison, certify that: 1. I have reviewed this report on Form N-CSR of Morgan Stanley Strategist Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: December 8, 2003 /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer EXHIBIT 10 B4 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER CERTIFICATIONS I, Francis Smith, certify that: 6. I have reviewed this report on Form N-CSR of Morgan Stanley Strategist Fund; 7. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 8. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 9. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: b) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] e) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and f) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 10. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): c) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: December 8, 2003 /s/ Francis Smith Francis Smith Principal Financial Officer EX-99.906CERT 5 a2124397zex-99_906cert.txt CERTIFICATE SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Strategist Fund In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended July 31, 2003 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: September 22, 2003 /s/ Ronald E. Robison --------------------------- Ronald E. Robison Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Strategist Fund and will be retained by Morgan Stanley Strategist Fund and furnished to the Securities and Exchange Commission or its staff upon request. SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Strategist Fund In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended July 31, 2003 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: September 22, 2003 /s/ Francis Smith --------------------------- Francis Smith Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Strategist Fund and will be retained by Morgan Stanley Strategist Fund and furnished to the Securities and Exchange Commission or its staff upon request. SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Strategist Fund In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended July 31, 2003 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: December 8, 2003 /s/ Ronald E. Robison --------------------------- Ronald E. Robison Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Strategist Fund and will be retained by Morgan Stanley Strategist Fund and furnished to the Securities and Exchange Commission or its staff upon request. SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Strategist Fund In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended July 31, 2003 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: December 8, 2003 /s/ Francis Smith --------------------------- Francis Smith Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Strategist Fund and will be retained by Morgan Stanley Strategist Fund and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----