N-CSR 1 a2143951zn-csr.txt N-CSR UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-05634 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, 2004 Date of reporting period: July 31, 2004 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. WE WILL PROVIDE AN OVERVIEW OF THE MARKET CONDITIONS, AND DISCUSS SOME OF THE FACTORS THAT AFFECTED PERFORMANCE DURING THE REPORTING PERIOD. IN ADDITION, THIS REPORT INCLUDES THE FUND'S FINANCIAL STATEMENTS AND A LIST OF FUND INVESTMENTS. THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING OFFERED. MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THIS FUND. FUND REPORT For the year ended July 31, 2004 TOTAL RETURN FOR THE 12-MONTH PERIOD ENDED JULY 31, 2004
LIPPER LEHMAN FLEXIBLE S&P BROTHERS U.S. PORTFOLIO 500 GOVERNMENT/ FUNDS CLASS A CLASS B CLASS C CLASS D INDEX(1) CREDIT INDEX(2) INDEX(3) 12.10% 11.24% 11.25% 12.37% 13.17% 4.72% 11.06%
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 Global stock and bond market conditions remained favorable for much of the 12-month period ended July 31, 2004, before deteriorating in the final months. The equity markets gained considerably during the first six months of the period as strong GDP growth, improving corporate profit results and continued consumer spending combined to push equity benchmarks higher. In this first half, concerns about deflation were replaced by worries about inflationary pressure as the recovery accelerated. Equities remained strong through May as promising job reports added to investors' confidence in the economic recovery. Small- to mid-cap stocks performed the best, with energy, chemical and industrials companies the strongest performers. The equity market entered a new phase in the last few months of the period in which gains were moderated by fears that the Federal Reserve would move to raise interest rates more rapidly than anticipated. The market was also restrained by reports indicating a lack of new hiring in the economic recovery, as well as by the possibility of inflationary pressure. By July, the economy was demonstrating clear signs of slowing, and equity market returns stagnated. Performance was also mixed in the bond market. Bonds began the period in the red as investors pushed yields higher and prices lower in anticipation of economic recovery. After peaking in September, yields fell steadily through the next six months as the bond market began signaling its weakening confidence in the strength of the economy. The bond market became more volatile in the second half of the period as yields were driven alternatively up and down by investors' responses to conflicting economic signals, geopolitical events and commodity price volatility. PERFORMANCE ANALYSIS Morgan Stanley Strategist Fund underperfomed the S&P 500 Index, but outperformed the Lehman Brothers U.S. Government/Credit Index and the Lipper Flexible Portfolio Funds Index for the 12 months ended July 31, 2004. The Fund's underperformance was driven primarily by sector selection within the Fund's asset class allocations.The Fund entered the period with a defensive posture toward the bond market and an increased exposure to equities. Our cautious bond allocation paid off as interest rates rose sharply early in the fiscal year, reflecting an increasingly optimistic economic outlook. We took advantage of this price pullback and increased our allocation to bonds in the belief that they represented an attractive value. In addition, as corporate profits reports suggested that a more robust earnings recovery was under way, we shifted more Fund assets into cyclical 2 sectors of the equity market as well. This reallocation proved beneficial, as both equities and bonds posted strong gains for the early part of the period. Within the equity portfolio, a number of our sector weightings turned out to be beneficial during the period. Performance within the early stages of the recovery was helped by sector exposures to industrials, energy, basic materials and technology, all more heavily weighted than the S&P 500 stock index. In the industrials sector, diversified electricals and construction equipment companies were gainers, while large integrated oil companies were strong performers for the energy sector. Semiconductor, telecommunication and hardware companies led the technology sector, and within basic materials, steel companies performed strongly. During the back half of the fiscal year, choppy results from the cyclical sectors, especially technology, led to underperformance versus our peers. While we had shifted some gains to less economically sensitive sectors, we continue to believe that the global economy, and thus cyclical stocks, should enjoy one more solid period of outperformance during this recovery. Bond holdings provided positive returns throughout much of the period, particularly during December-January and during the rally of the final months when fears of an economic slowdown developed. Our bond portfolio was skewed toward government issues throughout the period. The long-maturity portion of the Treasury yield curve performed admirably during the bond rallies throughout the fiscal year. In July, performance was hindered by the Fund's positions in equities as stocks began to suffer from concerns about inflation and weak job reports. A slight overweighting to technology relative to the S&P 500 Index was a drag on performance, as was an underweighted position in financials, which were strong over the 12 months. Although our allocation to bonds was generally positive for the Fund during the period, a greater emphasis on bonds during their rally would have added considerably to performance. 3 TOP 10 HOLDINGS U.S. Treasury Securities 17.3% Fed. Natl. Mtge. Assoc. 2.6 General Electric Co. 1.9 Dean Foods 1.8 J.P. Morgan Chase 1.7 American Express Co. 1.7 Citigroup Inc. 1.6 Honda Motor Ltd Amern. 1.6 Costco Wholesale Corp. 1.6 Northrop Grumman Corp. 1.6
PORTFOLIO COMPOSITION* Common Stocks 69.8% U.S. Government Obligations 17.2 Corporate Bond 5.6 U.S. Government Agency Mortgaged-Backed 3.5 Short-Term 2.8 Asset-Backed 1.0 Foreign Government Bonds 0.1
DATA AS OF JULY 31, 2004. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP 10 HOLDINGS ARE AS A PERCENTAGE OF NET ASSETS AND PERCENTAGES FOR PORTFOLIO COMPOSITION ARE AS A PERCENTAGE OF TOTAL INVESTMENTS. PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL ADVISORY SERVICES. * THE FUND HAS OUTSTANDING SHORT FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $15,321,094 WITH UNREALIZED DEPRECIATION OF $365,106. INVESTMENT STRATEGY THE FUND'S INVESTMENT MANAGER, MORGAN STANLEY INVESTMENT ADVISORS INC., ACTIVELY ALLOCATES THE FUND'S ASSETS AMONG THE MAJOR ASSET CATEGORIES OF EQUITY SECURITIES (INCLUDING DEPOSITARY RECEIPTS), FIXED-INCOME SECURITIES AND MONEY MARKET INSTRUMENTS. IN DETERMINING WHICH SECURITIES TO BUY, HOLD OR SELL FOR THE FUND, THE INVESTMENT 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. FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS, AND MAKES THESE REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE SEC'S WEB SITE, http://www.sec.gov. YOU 4 MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT 1-800-SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. YOU MAY OBTAIN COPIES OF A FUND'S FISCAL QUARTER FILINGS BY CONTACTING MORGAN STANLEY CLIENT RELATIONS AT (800) 847-2424. PROXY VOTING POLICIES AND PROCEDURES A DESCRIPTION OF (1) THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES; AND (2) HOW THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JULY 31 IS AVAILABLE WITHOUT CHARGE, UPON REQUEST, BY CALLING (800) 869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEBSITE AT www.morganstanley.com. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEBSITE AT http://www.sec.gov. 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, ET. ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS. 5 PERFORMANCE SUMMARY [CHART] PERFORMANCE OF A $10,000 INVESTMENT--CLASS B
CLASS B^ S&P 500(1) LEHMAN(2) LIPPER(3) Jul 31, 94 $ 10,000 $ 10,000 $ 10,000 $ 10,000 Jul 31, 95 $ 11,605 $ 12,611 $ 11,013 $ 11,649 Jul 31, 96 $ 12,937 $ 14,700 $ 11,597 $ 12,675 Jul 31, 97 $ 16,783 $ 22,361 $ 12,848 $ 16,334 Jul 31, 98 $ 18,926 $ 26,676 $ 13,885 $ 18,257 Jul 31, 99 $ 20,672 $ 32,065 $ 14,208 $ 20,164 Jul 31, 2000 $ 23,316 $ 34,941 $ 15,020 $ 21,420 Jul 31, 2001 $ 21,673 $ 29,932 $ 16,929 $ 20,171 Jul 31, 2002 $ 18,038 $ 22,864 $ 18,095 $ 16,927 Jul 31, 2003 $ 19,698 $ 25,299 $ 19,382 $ 18,486 Jul 31, 2004 $ 21,912 $ 28,630 $ 20,297 $ 20,530
ENDING VALUE
CLASS B^ S&P 500(1) LEHMAN(2) LIPPER(3) ---------- ---------- ---------- ---------- $ 21,912 $ 28,630 $ 20,297 $ 20,530
6 AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED JULY 31, 2004
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++ (SINCE 07/28/97) (SINCE 10/31/88) (SINCE 07/28/97) (SINCE 07/28/97) SYMBOL SRTAX SRTBX SRTCX SRTDX 1 Year 12.10%(4) 11.24%(4) 11.25%(4) 12.37%4 6.22(5) 6.24(5) 10.25(5) -- 5 Years 1.95(4) 1.17(4) 1.15(4) 2.17(4) 0.86(5) 0.86(5) 1.15(5) -- 10 Years -- 8.16(4) -- -- -- 8.16(5) -- -- Since Inception 4.93(4) 9.53(4) 4.12(4) 5.16(4) 4.13(5) 9.53(5) 4.12(5) --
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT MORGANSTANLEY.COM OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE GRAPH AND TABLE DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS D SHARES WILL VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES. * THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 5.25%. ** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%. THE CDSC DECLINES TO 0% AFTER SIX YEARS. + THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1% FOR SHARES REDEEMED WITHIN ONE YEAR OF PURCHASE. ++ CLASS D HAS NO SALES CHARGE. (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. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. (2) THE LEHMAN BROTHERS U.S. GOVERNMENT/CREDIT INDEX TRACKS THE PERFORMANCE OF GOVERNMENT AND CORPORATE OBLIGATIONS, INCLUDING U.S. GOVERNMENT AGENCY AND TREASURY SECURITIES AND CORPORATE AND YANKEE BONDS. INDEXES ARE UNMANAGED AND THEIR RETURNS DO NOT INCLUDE ANY SALES CHARGES OR FEES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. (3) THE LIPPER FLEXIBLE PORTFOLIO FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER FLEXIBLE PORTFOLIO FUNDS CLASSIFICATION. THE INDEX, WHICH IS ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS REPRESENTED IN THIS INDEX. (4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE DEDUCTION OF ANY SALES CHARGES. (5) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR COMPLETE DETAILS ON FEES AND SALES CHARGES. ^ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON JULY 31, 2004. 7 EXPENSE EXAMPLE As a shareholder of the Fund, you incur ongoing costs, including management fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 02/01/04 - 07/31/04. ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds that have transactional costs, such as sales charges (loads), and redemption fees, or exchange fees.
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- --------------- 02/01/04 - 02/01/04 07/31/04 07/31/04 ------------- ------------- --------------- CLASS A Actual $ 1,000.00 $ 989.90 $ 4.65 Hypothetical (5% return before expenses) $ 1,000.00 $ 1,020.19 $ 4.72 CLASS B Actual $ 1,000.00 $ 984.90 $ 8.39 Hypothetical (5% return before expenses) $ 1,000.00 $ 1,016.41 $ 8.52 CLASS C Actual $ 1,000.00 $ 985.50 $ 8.39 Hypothetical (5% return before expenses) $ 1,000.00 $ 1,016.41 $ 8.52 CLASS D Actual $ 1,000.00 $ 989.90 $ 3.46 Hypothetical (5% return before expenses) $ 1,000.00 $ 1,021.38 $ 3.52
---------- * EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.94%, 1.70%, 1.70% AND 0.70% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 182/366 (TO REFLECT THE ONE-HALF YEAR PERIOD). 8 MORGAN STANLEY STRATEGIST FUND PORTFOLIO OF INVESTMENTS - JULY 31, 2004
NUMBER OF SHARES VALUE --------------------------------------------------------------------------------------------------------- COMMON STOCKS (70.3%) AEROSPACE & DEFENSE (1.6%) 334,800 Northrop Grumman Corp. $ 17,610,480 ------------ AGRICULTURAL COMMODITIES/MILLING (1.3%) 984,300 Archer-Daniels-Midland Co. 15,187,749 ------------ AIRLINES (1.0%) 600,800 AMR Corp.* 5,064,744 633,300 Continental Airlines, Inc. (Class B)* 5,693,367 ------------ 10,758,111 ------------ APPAREL/FOOTWEAR RETAIL (1.4%) 717,500 Gap, Inc. (The) 16,287,250 ------------ BEVERAGES: NON-ALCOHOLIC (1.4%) 351,400 Coca-Cola Co. (The) 15,412,404 ------------ BIOTECHNOLOGY (2.0%) 476,600 Applera Corp. - Celera Genomics Group* 5,595,284 174,300 Celgene Corp.* 9,295,419 127,300 Gilead Sciences, Inc.* 8,228,672 ------------ 23,119,375 ------------ CHEMICALS: MAJOR DIVERSIFIED (0.7%) 186,300 Dow Chemical Co. (The) 7,431,507 ------------ COMPUTER COMMUNICATIONS (1.3%) 702,100 Cisco Systems, Inc.* 14,645,806 ------------ COMPUTER PROCESSING HARDWARE (2.4%) 419,800 Apple Computer, Inc.* 13,576,332 385,440 Dell Inc.* 13,671,557 ------------ 27,247,889 ------------ CONTAINERS/PACKAGING (0.6%) 367,100 Smurfit-Stone Container Corp.* 6,831,731 ------------ CONTRACT DRILLING (0.8%) 378,000 Diamond Offshore Drilling, Inc. 9,238,320 ------------ DEPARTMENT STORES (1.3%) 323,300 Kohl's Corp.* 14,794,208 ------------ DISCOUNT STORES (1.6%) 441,800 Costco Wholesale Corp. 17,963,588 ------------
SEE NOTES TO FINANCIAL STATEMENTS 9
NUMBER OF SHARES VALUE --------------------------------------------------------------------------------------------------------- ELECTRIC UTILITIES (1.6%) 183,650 Cinergy Corp. $ 7,024,612 371,140 Southern Co. (The) 10,866,979 ------------ 17,891,591 ------------ ELECTRICAL PRODUCTS (1.3%) 240,800 Emerson Electric Co. 14,616,560 ------------ ELECTRONIC COMPONENTS (0.5%) 489,400 Flextronics International Ltd. (Singapore)* 6,151,758 ------------ ELECTRONIC PRODUCTION EQUIPMENT (0.8%) 525,100 Applied Materials, Inc.* 8,910,947 ------------ ENVIRONMENTAL SERVICES (1.3%) 542,900 Waste Management, Inc. 15,277,206 ------------ FINANCIAL CONGLOMERATES (4.3%) 328,350 American Express Co. 16,499,587 385,300 Citigroup, Inc. 16,987,877 415,600 J.P. Morgan Chase & Co. 15,514,348 ------------ 49,001,812 ------------ FOOD: MAJOR DIVERSIFIED (1.1%) 289,400 Kellogg Co. 12,056,404 ------------ FOOD: MEAT/FISH/DAIRY (1.8%) 541,230 Dean Foods Co.* 20,014,685 ------------ INDUSTRIAL CONGLOMERATES (1.8%) 618,700 General Electric Co. 20,571,775 ------------ INFORMATION TECHNOLOGY SERVICES (1.7%) 280,500 Accenture Ltd. (Class A) (ADR) (Bermuda)* 6,908,715 137,450 International Business Machines Corp. 11,967,772 ------------ 18,876,487 ------------ INTEGRATED OIL (1.6%) 157,500 BP PLC (ADR) (United Kingdom) 8,876,700 194,600 Exxon Mobil Corp. 9,009,980 ------------ 17,886,680 ------------ MAJOR BANKS (2.8%) 176,970 Bank of America Corp. 15,044,220 221,100 KeyCorp 6,672,798 168,000 Wells Fargo & Co. 9,644,880 ------------ 31,361,898 ------------
SEE NOTES TO FINANCIAL STATEMENTS 10
NUMBER OF SHARES VALUE --------------------------------------------------------------------------------------------------------- MAJOR TELECOMMUNICATIONS (2.8%) 110,300 ALLTEL Corp. $ 5,735,600 470,000 AT&T Corp. 7,097,000 350,000 SBC Communications, Inc. 8,869,000 265,000 Verizon Communications Inc. 10,213,100 ------------ 31,914,700 ------------ MANAGED HEALTH CARE (0.3%) 49,712 UnitedHealth Group Inc. 3,126,868 ------------ MEDIA CONGLOMERATES (1.1%) 720,830 Time Warner Inc.* 12,001,820 ------------ MEDICAL SPECIALTIES (3.1%) 264,800 Bard (C.R.), Inc. 14,616,960 253,000 Fisher Scientific International, Inc.* 14,724,600 206,800 Hospira, Inc.* 5,358,188 ------------ 34,699,748 ------------ MOTOR VEHICLES (1.6%) 747,300 Honda Motor Co., Ltd. (ADR) (Japan) 18,136,971 ------------ MULTI-LINE INSURANCE (1.2%) 197,000 American International Group, Inc. 13,918,050 ------------ OIL & GAS PRODUCTION (0.8%) 243,750 Burlington Resources, Inc. 9,303,938 ------------ OILFIELD SERVICES/EQUIPMENT (1.7%) 295,500 Halliburton Co. 9,382,125 171,100 Smith International, Inc.* 9,971,708 ------------ 19,353,833 ------------ PACKAGED SOFTWARE (1.8%) 397,100 Microsoft Corp. 11,301,466 867,200 Oracle Corp.* 9,114,272 ------------ 20,415,738 ------------ PHARMACEUTICALS: MAJOR (4.8%) 228,910 Johnson & Johnson 12,651,856 178,100 Lilly (Eli) & Co. 11,348,532 170,000 Merck & Co., Inc. 7,709,500 480,400 Pfizer, Inc. 15,353,584 220,400 Wyeth 7,802,160 ------------ 54,865,632 ------------
SEE NOTES TO FINANCIAL STATEMENTS 11
NUMBER OF SHARES VALUE --------------------------------------------------------------------------------------------------------- PRECIOUS METALS (1.1%) 116,300 Barrick Gold Corp. (Canada) $ 2,223,656 85,300 Newmont Mining Corp. 3,452,091 401,200 Placer Dome Inc. (Canada) 6,427,224 ------------ 12,102,971 ------------ PROPERTY - CASUALTY INSURERS (2.7%) 316,700 ACE Ltd. (Bermuda) 12,854,853 263,700 Allstate Corp. (The) 12,414,996 154,882 St. Paul Travelers Companies, Inc. 5,741,476 ------------ 31,011,325 ------------ RAILROADS (1.2%) 143,200 Burlington Northern Santa Fe Corp. 5,080,736 279,700 CSX Corp. 8,754,610 ------------ 13,835,346 ------------ REGIONAL BANKS (0.5%) 252,900 AmSouth Bancorporation 6,203,637 ------------ SEMICONDUCTORS (1.8%) 322,800 Intel Corp. 7,869,864 542,600 Micron Technology, Inc.* 7,341,378 657,762 Taiwan Semiconductor Manufacturing Co. Ltd. (ADR) (Taiwan) 4,683,265 ------------ 19,894,507 ------------ SPECIALTY STORES (1.0%) 328,500 Bed Bath & Beyond, Inc.* 11,625,615 ------------ STEEL (0.4%) 53,800 Nucor Corp. 4,500,370 ------------ TELECOMMUNICATION EQUIPMENT (3.3%) 1,128,200 Corning Inc.* 13,944,552 862,900 Motorola, Inc. 13,745,997 790,100 Nokia Corp. (ADR) (Finland) 9,180,962 ------------ 36,871,511 ------------ TRUCKS/CONSTRUCTION/FARM MACHINERY (1.1%) 165,100 Caterpillar Inc. 12,133,199 ------------ TOTAL COMMON STOCKS (COST $625,269,982) 795,062,000 ------------
SEE NOTES TO FINANCIAL STATEMENTS 12
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------------------- CORPORATE BONDS (5.6%) ADVERTISING/MARKETING SERVICES (0.0%) $ 515 WPP Finance (UK) Corp. - 144A** (United Kingdom) 5.875% 06/15/14 $ 523,449 ------------ AEROSPACE & DEFENSE (0.1%) 335 Raytheon Co. 6.15 11/01/08 360,177 960 Systems 2001 Asset Trust - 144A** 6.664 09/15/13 1,039,545 ------------ 1,399,722 ------------ AIR FREIGHT/COURIERS (0.0%) 335 Fedex Corp. - 144A** 2.65 04/01/07 326,941 ------------ AIRLINES (0.2%) 862 American West Airlines, (Series 01-1) 7.10 04/02/21 911,808 1,103 Continental Airlines, Inc. (Series 974A) 6.90 01/02/18 1,042,681 295 Southwest Airlines Co. (Series 01-1) 5.496 11/01/06 306,770 ------------ 2,261,259 ------------ BEVERAGES: ALCOHOLIC (0.0%) 395 Miller Brewing Co. - 144A** 4.25 08/15/08 396,084 ------------ BROADCASTING (0.0%) 280 Clear Channel Communications, Inc. 7.65 09/15/10 317,062 ------------ CABLE/SATELLITE TV (0.1%) 165 Comcast Cable Communications Inc. 6.75 01/30/11 179,965 250 Comcast Corp. 6.50 01/15/15 263,538 60 Comcast Corp. 7.625 02/15/08 65,983 490 TCI Communications, Inc. 7.875 02/15/26 561,224 ------------ 1,070,710 ------------ CHEMICALS: MAJOR DIVERSIFIED (0.0%) 270 ICI Wilmington Inc. 4.375 12/01/08 267,158 ------------ CONTAINERS/PACKAGING (0.0%) 460 Sealed Air Corp - 144A** 5.625 07/15/13 459,024 ------------ DEPARTMENT STORES (0.1%) 300 Federated Department Stores, Inc. 6.625 09/01/08 326,215 215 Federated Department Stores, Inc. 6.90 04/01/29 227,527 980 May Department Stores Co., Inc. 5.95 11/01/08 1,033,358 ------------ 1,587,100 ------------ DRUGSTORE CHAINS (0.1%) 1,505 CVS Corp. 5.625 03/15/06 1,570,449 ------------ ELECTRIC UTILITIES (0.5%) 220 Appalachian Power Co. (Series H) 5.95 05/15/33 208,409
SEE NOTES TO FINANCIAL STATEMENTS 13
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------------------- $ 505 Arizona Public Service Co. 5.80 % 06/30/14 $ 511,764 530 Carolina Power & Light Co. 5.125 09/15/13 527,075 250 Cincinnati Gas & Electric Co. 5.70 09/15/12 258,156 180 Cincinnati Gas & Electric Co. (Series A) 5.40 06/15/33 158,563 125 Cincinnati Gas & Electric Co. (Series B) 5.375 06/15/33 109,700 45 Columbus Southern Power Co. 4.40 12/01/10 44,119 175 Columbus Southern Power Co. (Series D) 6.60 03/01/33 182,860 460 Consolidated Natural Gas Co. 6.25 11/01/11 493,061 60 Consolidated Natural Gas Co. (Series A) 5.00 03/01/14 58,261 140 Detroit Edison Co. 6.125 10/01/10 150,465 210 Duke Energy Corp. 3.75 03/05/08 208,631 345 Duke Energy Corp. 4.50 04/01/10 344,180 205 Entergy Gulf States, Inc. 3.60 06/01/08 199,966 285 Exelon Corp. 6.75 05/01/11 312,007 265 Ohio Power Co. (Series G) 6.60 02/15/33 275,821 520 Pacific Gas & Electric Co. 6.05 03/01/34 502,629 315 Public Service Electric & Gas Co. (Series MTNB) 5.00 01/01/13 314,322 155 South Carolina Electric & Gas Co. 5.30 05/15/33 140,790 75 Southern California Edison Co. 5.00 01/15/14 74,214 240 Texas Eastern Transmission, L.P. 7.00 07/15/32 260,772 305 TXU Energy Co. 7.00 03/15/13 335,569 70 Wisconsin Electric Power Co. 5.625 05/15/33 66,600 ------------ 5,737,934 ------------ ELECTRICAL PRODUCTS (0.0%) 520 Cooper Industries Inc. 5.25 07/01/07 544,122 ------------ ENVIRONMENTAL SERVICES (0.1%) 325 Waste Management, Inc. 5.00 03/15/14 314,500 490 Waste Management, Inc. 6.875 05/15/09 541,174 ------------ 855,674 ------------ FINANCE/RENTAL/LEASING (0.3%) 395 CIT Group Inc. 2.875 09/29/06 391,086 125 CIT Group Inc. 7.375 04/02/07 136,923 755 Countrywide Home Loans, Inc. (Series MTN) 3.25 05/21/08 731,784 50 Ford Motor Credit Co. 7.25 10/25/11 52,658 575 Ford Motor Credit Co. 7.375 10/28/09 617,583 235 International Lease Finance Corp. 3.75 08/01/07 235,027 705 MBNA Corp. 6.125 03/01/13 735,991 580 SLM Corp. 5.00 10/01/13 566,224 ------------ 3,467,276 ------------
SEE NOTES TO FINANCIAL STATEMENTS 14
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------------------- FINANCIAL CONGLOMERATES (0.8%) $ 920 Chase Manhattan Corp. 6.00 % 02/15/09 $ 982,410 275 Citicorp. 6.75 08/15/05 286,919 490 Citigroup Inc. 5.625 08/27/12 510,293 530 Citigroup Inc. 5.75 05/10/06 555,640 530 Citigroup Inc. 6.00 02/21/12 568,191 180 General Electric Capital Corp. 4.25 12/01/10 176,953 1,005 General Electric Capital Corp. (Series MTNA) 6.75 03/15/32 1,100,925 200 General Motors Acceptance Corp. 4.50 07/15/06 202,891 1,255 General Motors Acceptance Corp. 6.875 09/15/11 1,290,143 1,295 General Motors Acceptance Corp. 8.00 11/01/31 1,318,662 325 Prudential Holdings, LLC - 144A** 8.695 12/18/23 399,220 1,350 Prudential Holdings, LLC (Series B) (FSA) - 144A** 7.245 12/18/23 1,540,206 ------------ 8,932,453 ------------ FOOD RETAIL (0.0%) 290 Albertson's, Inc. 7.50 02/15/11 328,856 175 Kroger Co. 6.80 04/01/11 192,442 ------------ 521,298 ------------ FOOD: MAJOR DIVERSIFIED (0.1%) 845 Kraft Foods Inc. 5.625 11/01/11 873,194 175 Kraft Foods Inc. 6.25 06/01/12 187,092 ------------ 1,060,286 ------------ FOREST PRODUCTS (0.1%) 165 Weyerhaeuser Co. 6.00 08/01/06 173,723 825 Weyerhaeuser Co. 6.75 03/15/12 903,349 ------------ 1,077,072 ------------ GAS DISTRIBUTORS (0.0%) 105 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 101,300 ------------ HOME FURNISHINGS (0.0%) 290 Mohawk Industries, Inc. 7.20 04/15/12 324,867 ------------ HOME IMPROVEMENT CHAINS (0.0%) 100 Lowe's Companies, Inc. 6.50 03/15/29 106,581 60 Lowe's Companies, Inc. 6.875 02/15/28 66,641 ------------ 173,222 ------------ HOTELS/RESORTS/CRUISELINES (0.1%) 510 Hyatt Equities LLC - 144A** 6.875 06/15/07 543,724 760 Marriott International, Inc. (Series E) 7.00 01/15/08 828,776 ------------ 1,372,500 ------------
SEE NOTES TO FINANCIAL STATEMENTS 15
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------------------- INDUSTRIAL CONGLOMERATES (0.1%) $ 490 Honeywell International, Inc. 6.125% 11/01/11 $ 529,360 245 Hutchison Whampoa International Ltd. - 144A** (Kyrgyzstan) 5.45 11/24/10 243,805 335 Hutchison Whampoa International Ltd. - 144A** (Kyrgyzstan) 6.50 02/13/13 339,008 ------------ 1,112,173 ------------ INFORMATION TECHNOLOGY SERVICES (0.0%) 180 Electronic Data Systems Corp. 7.125 10/15/09 188,204 ------------ INSURANCE BROKERS/SERVICES (0.1%) 1,055 Farmers Exchange Capital - 144A** 7.05 07/15/28 1,036,334 ------------ INTEGRATED OIL (0.1%) 395 Amerada Hess Corp. 7.875 10/01/29 436,325 70 Petro-Canada (Canada) 4.00 07/15/13 63,344 280 Petro-Canada (Canada) 5.35 07/15/33 242,783 ------------ 742,452 ------------ INVESTMENT BANKS/BROKERS (0.1%) 320 Goldman Sachs Group Inc. 5.25 10/15/13 315,303 640 Goldman Sachs Group Inc. 6.60 01/15/12 696,938 340 Goldman Sachs Group Inc. 6.875 01/15/11 376,720 ------------ 1,388,961 ------------ MAJOR BANKS (0.2%) 195 Bank of New York (The) 5.20 07/01/07 204,229 485 FleetBoston Financial Corp. 7.25 09/15/05 509,915 305 Household Finance Corp. 4.125 12/15/08 303,337 320 Household Finance Corp. 5.875 02/01/09 340,617 225 Household Finance Corp. 6.375 10/15/11 242,865 350 Household Finance Corp. 6.40 06/17/08 379,138 280 Household Finance Corp. 6.75 05/15/11 308,876 ------------ 2,288,977 ------------ MAJOR TELECOMMUNICATIONS (0.3%) 600 Deutsche Telekom International Finance Corp. NV (Netherlands) 8.75 06/15/30 747,496 255 France Telecom S.A. (France) 9.50 03/01/31 325,609 1,295 GTE Corp. 6.94 04/15/28 1,342,467 150 Sprint Capital Corp. 8.75 03/15/32 182,297 345 Telecom Italia Capital SpA - 144A** (Luxembourg) 4.00 11/15/08 341,293 ------------ 2,939,162 ------------
SEE NOTES TO FINANCIAL STATEMENTS 16
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------------------- MANAGED HEALTH CARE (0.2%) $ 920 Aetna, Inc. 7.875% 03/01/11 $ 1,070,270 245 Anthem Insurance Companies, Inc. - 144A** 9.125 04/01/10 302,408 530 Wellpoint Health Network, Inc. 6.375 06/15/06 560,160 ------------ 1,932,838 ------------ MEDIA CONGLOMERATES (0.2%) 190 AOL Time Warner Inc. 7.70 05/01/32 211,696 800 News America Holdings, Inc. 7.30 04/30/28 879,100 310 Time Warner, Inc. 6.625 05/15/29 306,796 380 Time Warner, Inc. 7.625 04/15/31 419,316 ------------ 1,816,908 ------------ MOTOR VEHICLES (0.2%) 605 DaimlerChrysler North American Holdings Co. 7.30 01/15/12 667,769 595 DaimlerChrysler North American Holdings Co. 8.50 01/18/31 700,595 325 Ford Motor Co. 6.625 10/01/28 285,135 445 Ford Motor Co. 7.45 07/16/31 424,427 ------------ 2,077,926 ------------ MULTI-LINE INSURANCE (0.4%) 1,170 AIG SunAmerica Global Finance VI - 144A** 6.30 05/10/11 1,270,508 575 American General Finance Corp. (Series MTNF) 5.875 07/14/06 604,088 910 AXA Financial Inc. 6.50 04/01/08 994,186 95 Hartford Financial Services Group, Inc. 2.375 06/01/06 93,774 655 Hartford Financial Services Group, Inc. 7.90 06/15/10 764,289 100 MBNA Capital I (Series A) 8.278 12/01/26 108,811 510 Nationwide Mutual Insurance Co. - 144A** 8.25 12/01/31 610,251 ------------ 4,445,907 ------------ OIL & GAS PIPELINES (0.0%) 415 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A**(Qatar) 8.294 03/15/14 473,100 ------------ OIL & GAS PRODUCTION (0.2%) 125 Kerr-McGee Corp. 5.875 09/15/06 130,867 165 Kerr-McGee Corp. 6.875 09/15/11 179,503 345 Nexen Inc. (Canada) 5.05 11/20/13 334,988 245 Pemex Project Funding Master Trust 7.375 12/15/14 257,250 430 Pemex Project Funding Master Trust 8.00 11/15/11 474,075 560 Pemex Project Funding Master Trust 8.625 02/01/22 606,200 145 Pemex Project Funding Master Trust 9.125 10/13/10 168,563 ------------ 2,151,446 ------------
SEE NOTES TO FINANCIAL STATEMENTS 17
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------------------- OTHER METALS/MINERALS (0.1%) $ 550 Inco Ltd. (Canada) 7.20% 09/15/32 $ 587,102 190 Inco Ltd. (Canada) 7.75 05/15/12 217,214 ------------ 804,316 ------------ PHARMACEUTICALS: MAJOR (0.0%) 120 Schering-Plough Corp. 5.30 12/01/13 120,198 ------------ PROPERTY - CASUALTY INSURERS (0.1%) 760 Mantis Reef Ltd. - 144A** (Australia) 4.692 11/14/08 754,895 ------------ PULP & PAPER (0.1%) 385 International Paper Co. 4.25 01/15/09 380,464 305 Sappi Papier Holding AG - 144A** (Austria) 6.75 06/15/12 328,021 ------------ 708,485 ------------ REAL ESTATE DEVELOPMENT (0.1%) 1,463 World Financial Properties - 144A** 6.91 09/01/13 1,609,208 ------------ REAL ESTATE INVESTMENT TRUSTS (0.1%) 770 EOP Operating LP 6.763 06/15/07 830,227 205 Rouse Co. (The) 3.625 03/15/09 196,563 95 Rouse Co. (The) 5.375 11/26/13 93,221 ------------ 1,120,011 ------------ SAVINGS BANKS (0.1%) 470 Washington Mutual Bank 5.50 01/15/13 477,438 140 Washington Mutual Inc. 8.25 04/01/10 164,007 ------------ 641,445 ------------ TOBACCO (0.1%) 325 Altria Group, Inc. 7.00 11/04/13 336,053 360 Altria Group, Inc. 7.75 01/15/27 371,497 ------------ 707,550 ------------ WIRELESS TELECOMMUNICATIONS (0.0%) 250 AT&T Wireless Services, Inc. 8.75 03/01/31 312,092 ------------ TOTAL CORPORATE BONDS (COST $59,839,818) 63,719,550 ------------
SEE NOTES TO FINANCIAL STATEMENTS 18
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------------------- ASSET-BACKED SECURITIES (1.0%) FINANCE/RENTAL/LEASING (0.8%) $ 2,960 Chase Credit Card Master Trust 2001-4 A 5.50 % 11/17/08 $ 3,097,215 2,230 Citibank Credit Issuance Trust 2001-A1 A1 6.90 10/15/07 2,345,597 53 Harley-Davidson Motorcycle Trust 2002-1 3.02 09/15/06 53,358 1,550 MBNA Master Credit Card Trust 5.90 08/15/11 1,668,753 1,194 Nissan Auto Receivables Owner Trust 2001-C A4 4.80 02/15/07 1,205,708 275 TXU Electric Delivery Transition Bond Company LLC 2004-1 A2 4.81 11/15/12 277,073 ------------ 8,647,704 ------------ FINANCIAL CONGLOMERATES (0.2%) 2,300 American Express Credit Account 2001-2A 5.53 10/15/08 2,402,638 ------------ TOTAL ASSET-BACKED SECURITIES (COST $10,637,208) 11,050,342 ------------ FOREIGN GOVERNMENT OBLIGATIONS (0.1%) 870 United Mexican States (Mexico) 8.00 09/24/22 933,075 610 United Mexican States (Mexico) 8.30 08/15/31 660,325 ------------ TOTAL FOREIGN GOVERNMENT OBLIGATIONS (COST $1,498,302) 1,593,400 ------------ U.S. GOVERNMENT AGENCY MORTGAGE BACKED SECURITIES (3.6%) Federal Home Loan Mortgage Corp. Gold 5,921 6.50 01/01/29-11/01/33 6,198,459 381 7.50 01/01/30-08/01/32 408,764 13 8.00 07/01/30 14,409 Federal Home Loan Mortgage Corp. 2,080 5.125 11/07/13 2,067,406 2,185 7.50 11/01/29-10/01/32 2,344,725 Federal National Mortgage Assoc. 10,530 (DD) 4.25 05/15/09 10,621,906 1,178 6.50 08/01/32 1,231,028 4,060 7.00 12/01/17-01/01/33 4,300,921 5,546 7.50 07/01/29-06/01/32 5,939,560 6,711 8.00 05/01/09-01/01/32 7,290,477 ------------ TOTAL U.S. GOVERNMENT AGENCY MORTGAGE BACKED SECURITIES (COST $27,232,563) 40,417,655 ------------
SEE NOTES TO FINANCIAL STATEMENTS 19
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT OBLIGATIONS (17.3%) $ 250 U.S. Treasury Bond 5.50 % 08/15/28 $ 256,816 3,075 U.S. Treasury Bond 6.125 08/15/29 3,430,187 5,550 U.S. Treasury Bond 8.125 08/15/19 7,354,188 9,900 U.S. Treasury Bond 8.125 08/15/21 13,252,853 12,375 U.S. Treasury Note 3.50 11/15/06 12,560,637 150,000 U.S. Treasury Note 3.625 05/15/13 142,066,500 3,500 U.S. Treasury Note 3.875 02/15/13 3,383,380 7,100 U.S. Treasury Note 6.50 02/15/10 8,038,812 8,280 U.S. Treasury Strip 0.00 02/15/25 2,652,846 8,500 U.S. Treasury Strip 0.00 02/15/25 2,734,229 --------------- TOTAL U.S. GOVERNMENT OBLIGATIONS (COST $210,050,484) 195,730,448 --------------- SHORT-TERM INVESTMENTS (2.8%) U.S. GOVERNMENT OBLIGATIONS (a) (0.1%) 500 U.S. Treasury Bill *** 0.98 09/23/04 499,265 400 U.S. Treasury Bill *** 1.645 01/13/05 397,002 --------------- TOTAL U.S. GOVERNMENT OBLIGATIONS (COST $896,262) 896,267 --------------- REPURCHASE AGREEMENT (2.7%) 30,106 Joint repurchase agreement account (dated 07/30/04; proceeds $30,109,399) (b) (Cost $30,106,000) 1.355 08/02/04 30,106,000 1,278 The Bank of New York (dated 07/30/04; proceeds $1,278,554) (c) (Cost $1,278,434) 1.125 08/02/04 1,278,434 --------------- TOTAL REPURCHASE AGREEMENTS (COST $31,384,434) 31,384,434 --------------- TOTAL SHORT-TERM INVESTMENTS (COST $32,280,696) 32,280,701 TOTAL INVESTMENTS (COST $966,809,053) (d) (e) 100.7% 1,139,854,096 LIABILITIES IN EXCESS OF OTHER ASSETS (0.7) (8,288,045) ----- --------------- NET ASSETS 100.0% $ 1,131,566,051 ===== ===============
---------- ADR AMERICAN DEPOSITORY RECEIPT. FSA FINANCIAL SECURITY ASSURANCE INC. * NON-INCOME PRODUCING SECURITY. SEE NOTES TO FINANCIAL STATEMENTS 20 ** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. *** THESE SECURITIES HAVE BEEN PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS IN AN AMOUNT EQUAL TO $896,267 DD SECURITY PURCHASED ON A DELAYED DELIVERY BASIS. (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 FEDERAL HOME LOAN MORTGAGE CORP. 4.007% DUE 10/01/33 VALUED AT $1,304,003. (d) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN AN AMOUNT EQUAL TO $25,521,667 IN CONNECTION WITH SECURITIES PURCHASED ON A DELAYED DELIVERY BASIS AND OPEN FUTURE CONTRACTS. (e) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $974,724,461. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $185,980,617 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $20,850,982, RESULTING IN NET UNREALIZED APPRECIATION OF $165,129,635. FUTURES CONTRACTS OPEN AT JULY 31, 2004:
UNDERLYING NUMBER OF DESCRIPTION, DELIVERY FACE AMOUNT UNREALIZED CONTRACTS LONG/SHORT MONTH, AND YEAR AT VALUE DEPRECIATION ------------------------------------------------------------------------------------------------------------- 38 Short U.S. Treasury Notes 5 Year, September 2004 $ (4,161,000) $ (63,636) 92 Short U.S. Treasury Notes 10 Year, September 2004 (10,186,125) (260,622) 9 Short U.S. Treasury Bonds 20 Year, September 2004 (973,969) (40,848) ---------- Total unrealized depreciation $ (365,106) ==========
SEE NOTES TO FINANCIAL STATEMENTS 21 MORGAN STANLEY STRATEGIST FUND FINANCIAL STATEMENTS Statement of Assets and Liabilities JULY 31, 2004 ASSETS: Investments in securities, at value (cost $966,809,053) $ 1,139,854,096 Receivable for: Interest 3,574,268 Dividends 1,048,852 Shares of beneficial interest sold 666,997 Investments sold 163,565 Prepaid expenses and other assets 59,707 --------------- TOTAL ASSETS 1,145,367,485 --------------- LIABILITIES: Payable for: Investments purchased 10,733,365 Shares of beneficial interest redeemed 1,325,669 Distribution fee 884,063 Investment management fee 550,081 Variation margin 96,875 Payable to bank 13,138 Accrued expenses and other payables 198,243 --------------- TOTAL LIABILITIES 13,801,434 --------------- NET ASSETS $ 1,131,566,051 =============== COMPOSITION OF NET ASSETS: Paid-in-capital $ 1,133,323,872 Net unrealized appreciation 172,681,393 Accumulated undistributed net investment income 227,216 Accumulated net realized loss (174,666,430) --------------- NET ASSETS $ 1,131,566,051 =============== CLASS A SHARES: Net Assets $ 58,968,084 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 3,623,090 NET ASSET VALUE PER SHARE $ 16.28 =============== MAXIMUM OFFERING PRICE PER SHARE, (NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 17.18 =============== CLASS B SHARES: Net Assets $ 970,723,514 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 59,576,167 NET ASSET VALUE PER SHARE $ 16.29 =============== CLASS C SHARES: Net Assets $ 41,696,955 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 2,572,163 NET ASSET VALUE PER SHARE $ 16.21 =============== CLASS D SHARES: Net Assets $ 60,177,498 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 3,693,072 NET ASSET VALUE PER SHARE $ 16.29 ===============
SEE NOTES TO FINANCIAL STATEMENTS 22 STATEMENT OF OPERATIONS FOR THE YEAR ENDED JULY 31, 2004 NET INVESTMENT INCOME: INCOME Interest $ 15,083,490 Dividends (net of $139,163 foreign withholding tax) 11,560,505 --------------- TOTAL INCOME 26,643,995 --------------- EXPENSES Distribution fee (Class A shares) 143,804 Distribution fee (Class B shares) 10,534,750 Distribution fee (Class C shares) 417,795 Investment management fee 6,838,151 Transfer agent fees and expenses 1,448,416 Shareholder reports and notices 133,725 Registration fees 91,262 Professional fees 40,101 Trustees' fees and expenses 21,701 Custodian fees 6,250 Other 47,474 --------------- TOTAL EXPENSES 19,723,429 --------------- NET INVESTMENT INCOME 6,920,566 --------------- NET REALIZED AND UNREALIZED GAIN: NET REALIZED GAIN ON: Investments 107,480,393 Futures contracts 457,536 --------------- NET REALIZED GAIN 107,937,929 --------------- NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON: Investments 19,808,633 Futures contracts (1,311,850) --------------- NET APPRECIATION 18,496,783 --------------- NET GAIN 126,434,712 --------------- NET INCREASE $ 133,355,278 ===============
SEE NOTES TO FINANCIAL STATEMENTS 23 STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR ENDED ENDED JULY 31, 2004 JULY 31, 2003 -------------- -------------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 6,920,566 $ 2,985,852 Net realized gain (loss) 107,937,929 (66,373,339) Net change in unrealized appreciation/depreciation 18,496,783 158,848,307 --------------- --------------- NET INCREASE 133,355,278 95,460,820 --------------- --------------- DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME Class A shares (801,953) (867,122) Class B shares (6,130,739) (4,004,321) Class C shares (254,636) (103,363) Class D shares (1,005,940) (806,241) --------------- --------------- TOTAL DIVIDENDS (8,193,268) (5,781,047) --------------- --------------- Net decrease from transactions in shares of beneficial interest (187,139,550) (284,302,141) --------------- --------------- NET DECREASE (61,977,540) (194,622,368) NET ASSETS: Beginning of period 1,193,543,591 1,388,165,959 --------------- --------------- END OF PERIOD (INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF $227,216 AND DIVIDENDS IN EXCESS OF NET INVESTMENT INCOME OF $210,400, RESPECTIVELY) $ 1,131,566,051 $ 1,193,543,591 =============== ===============
SEE NOTES TO FINANCIAL STATEMENTS 24 MORGAN STANLEY STRATEGIST FUND NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 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 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 Stock Exchange ("NYSE") or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) futures are valued at the latest price published by the commodities exchange on which they trade; (6) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the "Investment 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. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund's Trustees or by the Investment Manager using a pricing service and/or procedures approved 25 by the Trustees of the Fund; (7) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; and (8) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily. C. REPURCHASE AGREEMENTS -- Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment 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. 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. F. FOREIGN CURRENCY TRANSLATION AND FORWARD FOREIGN CURRENCY CONTRACTS -- The books and records of the Fund are maintained in U.S. dollars as follows: (1) the foreign currency market value of investment securities, other assets and liabilities and forward foreign currency contracts ("forward contracts") are translated at the exchange rates prevailing at the end of the period; and (2) purchases, sales, income 26 and expenses are translated at the exchange rates prevailing on the respective dates of such transactions. The resultant exchange gains and losses are recorded as realized and unrealized gain/loss on foreign exchange transactions. Pursuant to U.S. federal income tax regulations, certain foreign exchange gains/losses included in realized and unrealized gain/loss are included in or are a reduction of ordinary income for federal income tax purposes. The Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of the securities. Forward contracts are valued daily at the appropriate exchange rates. The resultant unrealized exchange gains and losses are recorded as unrealized foreign currency gain or loss. The Fund records realized gains or losses on delivery of the currency or at the time the forward contract is extinguished (compensated) by entering into a closing transaction prior to delivery. G. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required. H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to shareholders are recorded on the ex-dividend date. I. USE OF ESTIMATES -- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. 2. INVESTMENT 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 27 assets of Class A; (ii) Class B -- up to 1.0% of the lesser of: (a) the average daily aggregate gross sales of the Class B shares since the effectiveness of the the Fund's first amendment 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 $16,320,783 at July 31, 2004. 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, 2004, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.24% and 1.0%, respectively. The Distributor has informed the Fund that for the year ended July 31, 2004, it received contingent deferred sales charges from certain redemptions of the Fund's Class A shares, Class B shares and Class C shares of $2,257, $1,012,948 and $7,491, respectively and received $120,359 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, 2004 aggregated $496,693,868, and $711,329,034, respectively. Included in the aforementioned are purchases and sales/maturities/prepayments of U.S. Government securities of $225,648,571 and $258,067,791, respectively. Included in the aforementioned are sales of $3,005,365 for portfolio transactions with other Morgan Stanley funds and a realized gain of $1,426,704. 28 For the year ended July 31, 2004, the Fund incurred brokerage commissions of $151,615 with Morgan Stanley & Co., Inc. an affiliate of the Investment Manager and Distributor, for portfolio transactions executed on behalf of the Fund. Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent. At July 31, 2004, the Fund had transfer agent fees and expenses payable of approximately $13,000. The Fund has an unfunded noncontributory defined benefit pension plan covering certain 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 factors which include years of service and compensation. Aggregate pension costs for the year ended July 31, 2004 included in Trustees' fees and expenses in the Statement of Operations amounted to $9,637. At July 31, 2004, the Fund had an accrued pension liability of $77,307 which is included in accrued expenses in the Statement of Assets and Liabilities. On December 2, 2003, the Trustees voted to close the plan to new participants and eliminate the future benefits growth due to increases to compensation after July 31, 2003. Effective April 1, 2004, the Fund began an unfunded Deferred Compensation Plan (the "Compensation Plan") which allows each independent Trustee to defer payment of all, or a portion, of the fees he receives for serving on the Board of Trustees. Each eligible Trustee generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund. 5. 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 interest rate and index future contracts. Forward contracts and futures contracts involve elements of market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rates underlying the forward contracts or in the value of the underlying securities. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts. 29 6. SHARES OF BENEFICIAL INTEREST Transactions in shares of beneficial interest were as follows:
FOR THE YEAR FOR THE YEAR ENDED ENDED JULY 31, 2004 JULY 31, 2003 --------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ----------- ------------- CLASS A SHARES Sold 903,778 $ 14,533,257 1,845,888 $ 24,260,526 Reinvestment of dividends 46,974 756,837 44,688 590,931 Redeemed (993,765) (16,018,424) (4,032,753) (52,770,954) ----------- ------------- ----------- ------------- Net decrease -- Class A (43,013) (728,330) (2,142,177) (27,919,497) ----------- ------------- ----------- ------------- CLASS B SHARES Sold 4,954,252 79,101,285 5,788,543 78,164,128 Reinvestment of dividends 330,204 5,346,630 267,210 3,508,089 Redeemed (16,430,935) (264,441,706) (25,138,244) (334,420,291) ----------- ------------- ----------- ------------- Net decrease -- Class B (11,146,479) (179,993,791) (19,082,491) (252,748,074) ----------- ------------- ----------- ------------- CLASS C SHARES Sold 682,246 10,833,219 594,700 7,963,172 Reinvestment of dividends 14,352 231,305 7,120 93,720 Redeemed (604,217) (9,773,538) (701,340) (9,319,392) ----------- ------------- ----------- ------------- Net increase (decrease) -- Class C 92,381 1,290,986 (99,520) (1,262,500) ----------- ------------- ----------- ------------- CLASS D SHARES Sold 493,807 7,927,291 609,164 8,132,406 Reinvestment of dividends 57,940 933,078 56,139 745,232 Redeemed (1,027,786) (16,568,784) (839,347) (11,249,708) ----------- ------------- ----------- ------------- Net decrease -- Class D (476,039) (7,708,415) (174,044) (2,372,070) ----------- ------------- ----------- ------------- Net decrease in Fund (11,573,150) $(187,139,550) (21,498,232) $(284,302,141) =========== ============= =========== =============
7. FEDERAL INCOME TAX STATUS The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital. The tax character of distributions paid was as follows:
FOR THE YEAR FOR THE YEAR ENDED ENDED JULY 31, 2004 JULY 31, 2003 ------------- ------------- Ordinary income $ 8,193,268 $ 5,781,047 =========== ===========
30 As of July 31, 2004, the tax-basis components of accumulated losses were as follows: Undistributed ordinary income $ 1,050,692 Undistributed long-term gains -- ------------- Net accumulated earnings 1,050,692 Capital loss carryforward* (167,862,299) Temporary differences (77,307) Net unrealized appreciation 165,131,093 ------------- Total accumulated losses $ (1,757,821) =============
*During the year ended July 31, 2004, the Fund utilized $103,722,216 of its net capital loss carryforward. As of July 31, 2004, the Fund had a net capital loss carryforward of $167,862,299 of which $71,039,211 will expire on July 31, 2010 and $96,823,088 will expire on July 31, 2011 to offset future capital gains to the extent provided by regulations. As of July 31, 2004, the Fund had temporary book/tax differences primarily attributable to capital loss deferrals on wash sales 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 accumulated undistributed net investment income was credited $1,710,318. 8. LEGAL MATTERS The Investment Manager, certain affiliates of the Investment Manager, certain officers of such affiliates and certain investment companies advised by the Investment Manager or its affiliates, including the Fund, are named as defendants in a number of similar class action complaints which were recently consolidated. This consolidated action also names as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint generally alleges that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Manager and certain affiliates of the Investment Manager allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Manager or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Manager or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants have moved to dismiss the action and intend to otherwise vigorously defend it. While the Fund believes that it has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter. 31 MORGAN STANLEY STRATEGIST FUND FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE YEAR ENDED JULY 31, -------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- CLASS A SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 14.72 $ 13.53 $ 16.43 $ 20.64 $ 20.16 ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income++ 0.20 0.14 0.22 0.44 0.44 Net realized and unrealized gain (loss) 1.58 1.21 (2.84) (1.55) 2.16 ---------- ---------- ---------- ---------- ---------- Total income (loss) from investment operations 1.78 1.35 (2.62) (1.11) 2.60 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions from: Net investment income (0.22) (0.16) (0.28) (0.50) (0.37) Net realized gain - - - (2.60) (1.75) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (0.22) (0.16) (0.28) (3.10) (2.12) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 16.28 $ 14.72 $ 13.53 $ 16.43 $ 20.64 ========== ========== ========== ========== ========== TOTAL RETURN+ 12.10% 10.11% (16.14)% (6.24)% 13.48% RATIOS TO AVERAGE NET ASSETS(1): Expenses 0.95% 0.93% 0.88% 0.85% 0.88% Net investment income 1.24% 0.95% 1.44% 2.41% 2.06% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 58,968 $ 53,951 $ 78,583 $ 116,383 $ 110,600 Portfolio turnover rate 42% 124% 164% 136% 187%
---------- ++ 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 32
FOR THE YEAR ENDED JULY 31, -------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- CLASS B SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 14.73 $ 13.54 $ 16.43 $ 20.65 $ 20.16 ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income++ 0.08 0.02 0.10 0.30 0.29 Net realized and unrealized gain (loss) 1.58 1.22 (2.84) (1.57) 2.18 ---------- ---------- ---------- ---------- ---------- Total income (loss) from investment operations 1.66 1.24 (2.74) (1.27) 2.47 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions from: Net investment income (0.10) (0.05) (0.15) (0.35) (0.23) Net realized gain - - - (2.60) (1.75) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (0.10) (0.05) (0.15) (2.95) (1.98) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 16.29 $ 14.73 $ 13.54 $ 16.43 $ 20.65 ========== ========== ========== ========== ========== TOTAL RETURN+ 11.24% 9.20% (16.77)% (7.05)% 12.79% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.71% 1.73% 1.67% 1.63% 1.53% Net investment income 0.48% 0.15% 0.64% 1.63% 1.41% SUPPLEMENTAL DATA: Net assets, end of period, in millions $ 971 $ 1,042 $ 1,216 $ 1,827 $ 2,044 Portfolio turnover rate 42% 124% 164% 136% 187%
---------- ++ 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 33
FOR THE YEAR ENDED JULY 31, -------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- CLASS C SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 14.66 $ 13.46 $ 16.36 $ 20.57 $ 20.11 ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income++ 0.08 0.03 0.10 0.29 0.29 Net realized and unrealized gain (loss) 1.57 1.21 (2.83) (1.55) 2.15 ---------- ---------- ---------- ---------- ---------- Total income (loss) from investment operations 1.65 1.24 (2.73) (1.26) 2.44 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions from: Net investment income (0.10) (0.04) (0.17) (0.35) (0.23) Net realized gain - - - (2.60) (1.75) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (0.10) (0.04) (0.17) (2.95) (1.98) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 16.21 $ 14.66 $ 13.46 $ 16.36 $ 20.57 ========== ========== ========== ========== ========== TOTAL RETURN+ 11.25% 9.09% (16.70)% (7.00)% 12.62% RATIOS TO AVERAGE NET ASSETS(1): Expenses 1.71% 1.73% 1.67% 1.63% 1.63% Net investment income 0.48% 0.15% 0.64% 1.63% 1.31% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 41,697 $ 36,351 $ 34,727 $ 45,612 $ 39,006 Portfolio turnover rate 42% 124% 164% 136% 187%
---------- ++ 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 34
FOR THE YEAR ENDED JULY 31, -------------------------------------------------------------- 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- CLASS D SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 14.73 $ 13.55 $ 16.45 $ 20.67 $ 20.18 ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income++ 0.24 0.16 0.26 0.48 0.48 Net realized and unrealized gain (loss) 1.58 1.21 (2.85) (1.56) 2.18 ---------- ---------- ---------- ---------- ---------- Total income (loss) from investment operations 1.82 1.37 (2.59) (1.08) 2.66 ---------- ---------- ---------- ---------- ---------- Less dividends and distributions from: Net investment income (0.26) (0.19) (0.31) (0.54) (0.42) Net realized gain - - - (2.60) (1.75) ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (0.26) (0.19) (0.31) (3.14) (2.17) ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 16.29 $ 14.73 $ 13.55 $ 16.45 $ 20.67 ========== ========== ========== ========== ========== TOTAL RETURN+ 12.37% 10.25% (15.94)% (6.07)% 13.79% RATIOS TO AVERAGE NET ASSETS(1): Expenses 0.71% 0.73% 0.67% 0.63% 0.63% Net investment income 1.48% 1.15% 1.64% 2.63% 2.31% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 60,177 $ 61,423 $ 58,834 $ 81,594 $ 80,925 Portfolio turnover rate 42% 124% 164% 136% 187%
---------- ++ 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 35 MORGAN STANLEY STRATEGIST FUND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2004, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. 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, 2004, by correspondence with the custodian and brokers. 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, 2004, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP NEW YORK, NEW YORK SEPTEMBER 16, 2004 2004 FEDERAL TAX NOTICE (UNAUDITED) During the fiscal year ended July 31, 2004, 100% 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, 2004, 28.11% 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 100% of the Fund's income dividends paid during the fiscal year ended July 31, 2004 qualified for the lower income tax rate available to individuals under the Jobs and Growth Tax Relief Reconciliation Act of 2003. 36 MORGAN STANLEY STRATEGIST FUND TRUSTEE AND OFFICER INFORMATION INDEPENDENT TRUSTEES:
NUMBER OF PORTFOLIOS TERM OF IN FUND POSITION(S) OFFICE AND COMPLEX NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE --------------------------------------- ----------- ------------ ------------------------- ------------- --------------------- Michael Bozic (63) Trustee Since Private Investor; 208 Director of Weirton c/o Kramer Levin Naftalis & Frankel LLP April 1994 Director or Trustee of Steel Corporation. Counsel to the Independent Trustees the Retail Funds (since 919 Third Avenue April 1994) and the New York, NY 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 (71) Trustee Since Managing Director of 208 Director of Franklin c/o Summit Ventures LLC January 1993 Summit Ventures LLC; Covey (time 1 Utah Center Director or Trustee of management systems), 201 S. Main Street the Retail Funds (since BMW Bank of North Salt Lake City, UT January 1993) and the America, Inc. Institutional Funds (industrial loan (since July 2003); corporation), United member of the Utah Space Alliance (joint Regional Advisory Board venture between of Pacific Corp.; Lockheed Martin and formerly United States the Boeing Company) Senator (R-Utah) and Nuskin Asia (1974-1992) and Pacific (multilevel Chairman, Senate Banking marketing); member of Committee (1980-1986), the board of various Mayor of Salt Lake City, civic and charitable Utah (1971-1974), organizations. Astronaut, Space Shuttle Discovery (April 12-19, 1985), and Vice Chairman, Huntsman Corporation (chemical company). Wayne E. Hedien (70) Trustee Since Retired; Director or 208 Director of The PMI c/o Kramer Levin Naftalis & Frankel LLP September Trustee of the Retail Group Inc. (private Counsel to the Independent Trustees 1997 Funds (since September mortgage insurance); 919 Third Avenue 1997) and the Trustee and Vice New York, NY Institutional Funds Chairman of The Field (since July 2003); Museum of Natural formerly associated with History; director of the Allstate Companies various other business (1966-1994), most and 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).
37
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 (55) Trustee Since Senior Partner, Johnson 208 Director of NVR, Inc. c/o Johnson Smick International, Inc. July 1991 Smick International, (home construction); 2099 Pennsylvania Avenue, N.W. Inc., a consulting firm; Chairman and Trustee Suite 950 Washington, D.C. Chairman of the Audit of the Financial Committee and Director Accounting Foundation or Trustee of the Retail (oversight Funds (since July 1991) organization of the and the Institutional Financial Accounting Funds (since July 2003); 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 (61) Trustee Since President, Kearns & 209 Director of Electro PMB754 July 2003 Associates LLC Rent Corporation 23852 Pacific Coast Highway (investment consulting); (equipment leasing), Malibu, CA Deputy Chairman of the The Ford Family Audit Committee and Foundation, and the Director or Trustee of UCLA Foundation. the Retail Funds (since July 2003) and the Institutional Funds (since August 1994); previously Chairman of the Audit Committee of the Institutional Funds (October 2001-July 2003); formerly CFO of the J. Paul Getty Trust. Michael E. Nugent (68) Trustee Since General Partner of 208 Director of various c/o Triumph Capital, L.P. July 1991 Triumph Capital, L.P., a business 445 Park Avenue private investment organizations. New York, NY partnership; Chairman of the Insurance Committee and Director or Trustee of the Retail Funds (since July 1991) and the Institutional Funds (since July 2001); formerly Vice President, Bankers Trust Company and BT Capital Corporation (1984-1988). Fergus Reid (71) Trustee Since Chairman of Lumelite 209 Trustee and Director c/o Lumelite Plastics Corporation July 2003 Plastics Corporation; of certain investment 85 Charles Colman Blvd. Chairman of the companies in the Pawling, NY Governance Committee and JPMorgan Funds Director or Trustee of complex managed by the Retail Funds (since J.P. Morgan July 2003) and the Investment Management Institutional Funds Inc. (since June 1992).
38 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 INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE --------------------------------------- ----------- ------------ ------------------------- ------------- --------------------- Charles A. Fiumefreddo (71) Chairman of Since Chairman and Director or 208 None c/o Morgan Stanley Trust the Board July 1991 Trustee of the Retail Harborside Financial Center, and Trustee Funds (since July 1991) Plaza Two, and the Institutional Jersey City, NJ Funds (since July 2003); formerly Chief Executive Officer of the Retail Funds (until September 2002). James F. Higgins (56) Trustee Since Director or Trustee of 208 Director of AXA c/o Morgan Stanley Trust June 2000 the Retail Funds (since Financial, Inc. and Harborside Financial Center, June 2000) and the The Equitable Life Plaza Two, Institutional Funds Assurance Society of Jersey City, NJ (since July 2003); the United States Senior Advisor of Morgan (financial 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).
---------- * 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. 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.). 39 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 (50) President Since May 1999 President and Chief Operating Officer of Morgan 1221 Avenue of the Americas Stanley Investment Management Inc.; President, New York, NY Director and Chief Executive Officer of the Investment Manager and Morgan Stanley Services; Chairman and Director of the Distributor; Chairman and Director of the Transfer Agent; Director of various Morgan Stanley subsidiaries; President of the Institutional Funds (since July 2003) and President of the Retail Funds (since May 1999); Trustee (since July 2003) and President (since December 2002) of the Van Kampen Closed-End Funds; Trustee (since May 1999) and President (since October 2002) of the Van Kampen Open-End Funds. Barry Fink (49) Vice President Since General Counsel (since May 2000) and Managing 1221 Avenue of the Americas February 1997 Director (since December 2000) of Morgan Stanley New York, NY Investment Management; Managing Director (since December 2000), Secretary (since February 1997) and Director (since July 1998) of the Investment Manager and Morgan Stanley Services; Vice President of the Retail Funds; Assistant Secretary of Morgan Stanley DW; Vice President of the Institutional Funds (since July 2003); Managing Director, Secretary and Director of the Distributor; previously Secretary (February 1997- July 2003) and General Counsel (February 1997-April 2004) of the Retail Funds; Vice President and Assistant General Counsel of the Investment Manager and Morgan Stanley Services (February 1997-December 2001). Ronald E. Robison (65) Executive Vice Since Principal Executive Officer-Office of the Funds 1221 Avenue of the Americas President and April 2003 (since November 2003); Managing Director of Morgan New York, NY Principal Stanley & Co. Incorporated, Managing Director of Executive Officer Morgan Stanley; Managing Director, Chief Administrative Officer and Director of the Investment Manager and Morgan Stanley Services; Chief Executive Officer and Director of the Transfer Agent; Managing Director and Director of the Distributor; Executive Vice President and Principal Executive Officer of the Institutional Funds (since July 2003) and the Retail Funds (since April 2003); Director of Morgan Stanley SICAV (since May 2004); previously President and Director of the Institutional Funds (March 2001-July 2003) and Chief Global Operations Officer and Managing Director of Morgan Stanley Investment Management Inc. Joseph J. McAlinden (61) Vice President Since July 1995 Managing Director and Chief Investment Officer of 1221 Avenue of the Americas the Investment Manager and Morgan Stanley Investment New York, NY Management Inc., 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 (37) Vice President Since July 2003 Executive Director of Morgan Stanley & Co. 1221 Avenue of the Americas Incorporated, Morgan Stanley Investment Management New York, NY Inc., and the Investment Manager; Vice President of the Institutional Funds (since December 1997) and the Retail Funds (since July 2003); formerly practiced law with the New York law firm of Rogers & Wells (now Clifford Chance US LLP).
40
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 J. Smith (38) Treasurer and Treasurer since Executive Director of the Investment Manager and c/o Morgan Stanley Trust Chief Financial July 2003 and Chief Morgan Stanley Services (since December 2001); Harborside Financial Center, Officer Financial Officer previously Vice President of the Retail Funds Plaza Two, since September 2002 (September 2002- July 2003), and Vice President of the Jersey City, NJ Investment Manager and Morgan Stanley Services (August 2000-November 2001) and Senior Manager at PricewaterhouseCoopers LLP (January 1998-August 2000). Thomas F. Caloia (58) Vice President Since July 2003 Executive Director (since December 2002) and c/o Morgan Stanley Trust Assistant Treasurer of the Investment Manager, the Harborside Financial Center, Distributor and Morgan Stanley Services; previously Plaza Two, Jersey City, NJ Treasurer of the Retail Funds (April 1989-July 2003); formerly First Vice President of the Investment Manager, the Distributor and Morgan Stanley Services. Mary E. Mullin (37) Secretary Since July 2003 Executive Director of Morgan Stanley & Co. 1221 Avenue of the Incorporated, Morgan Stanley Investment Management Americas Inc. and the Investment Manager; Secretary of the New York, NY 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. 41 TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael E. Nugent Fergus Reid OFFICERS Charles A. Fiumefreddo CHAIRMAN OF THE BOARD Mitchell M. Merin PRESIDENT Ronald E. Robison EXECUTIVE VICE PRESIDENT AND PRINCIPAL EXECUTIVE OFFICER Barry Fink VICE PRESIDENT Joseph J. McAlinden VICE PRESIDENT Stefanie V. Chang VICE PRESIDENT Francis J. Smith TREASURER AND CHIEF FINANCIAL OFFICER Thomas F. Caloia VICE PRESIDENT Mary E. Mullin SECRETARY TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT 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) 2004 Morgan Stanley [MORGAN STANLEY LOGO] 38585RPT-RA04-00548P-Y07/04 [GRAPHIC] MORGAN STANLEY FUNDS STRATEGIST FUND ANNUAL REPORT JULY 31, 2004 [MORGAN STANLEY LOGO] Item 2. Code of Ethics. (a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Fund or a third party. (b) No information need be disclosed pursuant to this paragraph. (c) 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. (a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
REGISTRANT COVERED ENTITIES(1) AUDIT FEES $ 32,344 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ 452(2) $ 3,225,276(2) TAX FEES $ 4,780(3) $ 610,053(4) ALL OTHER FEES $ - $ - TOTAL NON-AUDIT FEES $ 5,232 $ 3,835,329 TOTAL $ 37,576 $ 3,835,329
2003
REGISTRANT COVERED ENTITIES(1) AUDIT FEES $ 30,510 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ 830(2) $ 739,996(2) TAX FEES $ 4,664(3) $ 187,500(4) ALL OTHER FEES $ - $ -(5) TOTAL NON-AUDIT FEES $ 5,494 $ 927,496 TOTAL $ 36,004 $ 927,496
N/A- Not applicable, as not required by Item 4. (1) Covered Entities include the Adviser (excluding sub-advisors) and any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Registrant. (2) Audit-Related Fees represent assurance and related services provided that are reasonably related to the performance of the audit of the financial statements of the Covered Entities' and funds advised by the Adviser or its affiliates, specifically data verification and agreed-upon procedures related to asset securitizations and agreed-upon procedures engagements. (3) Tax Fees represent tax compliance, tax planning and tax advice services provided in connection with the preparation and review of the Registrant's tax returns. (4) Tax Fees represent tax compliance, tax planning and tax advice services provided in connection with the review of Covered Entities' tax returns. (5) All other fees represent project management for future business applications and improving business and operational processes. (e)(1) The audit committee's pre-approval policies and procedures are as follows: AUDIT COMMITTEE AUDIT AND NON-AUDIT SERVICES PRE-APPROVAL POLICY AND PROCEDURES OF THE MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS AS ADOPTED JULY 31, 2003(1) 1. STATEMENT OF PRINCIPLES The Audit Committee of the Board is required to review and, in its sole discretion, pre-approve all Covered Services to be provided by the Independent Auditors to the Fund and Covered Entities in order to assure that services performed by the Independent Auditors do not impair the auditor's independence from the Fund. The SEC has issued rules specifying the types of services that an independent auditor may not provide to its audit client, as well as the audit committee's administration of the engagement of the independent auditor. The SEC's rules establish two different approaches to pre-approving services, which the SEC considers to be equally valid. Proposed services either: may be pre-approved without consideration of specific case-by-case services by the Audit Committee ("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee believes that the combination of these two approaches in this Policy will result in an effective and efficient procedure to pre-approve services performed by the Independent Auditors. As set forth in this Policy, unless a type of service has received general pre-approval, it will require specific pre-approval by the Audit Committee (or by any member of the Audit Committee to which pre-approval authority has been delegated) if it is to be provided by the Independent Auditors. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval by the Audit Committee. The appendices to this Policy describe the Audit, Audit-related, Tax and All Other services that have the general pre-approval of the Audit Committee. The term of any general pre-approval is 12 months from the date of pre-approval, unless the Audit Committee considers and provides a different period and states otherwise. The Audit Committee will annually review and pre-approve the services that may be provided by the Independent Auditors without obtaining specific pre-approval from the Audit Committee. The Audit Committee will add to or subtract from the list of general pre-approved services from time to time, based on subsequent determinations. ---------- (1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and Procedures (the "POLICY"), adopted as of the date above, supercedes and replaces all prior versions that may have been adopted from time to time. The purpose of this Policy is to set forth the policy and procedures by which the Audit Committee intends to fulfill its responsibilities. It does not delegate the Audit Committee's responsibilities to pre-approve services performed by the Independent Auditors to management. The Fund's Independent Auditors have reviewed this Policy and believes that implementation of the Policy will not adversely affect the Independent Auditors' independence. 2. DELEGATION As provided in the Act and the SEC's rules, the Audit Committee may delegate either type of pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting. 3. AUDIT SERVICES The annual Audit services engagement terms and fees are subject to the specific pre-approval of the Audit Committee. Audit services include the annual financial statement audit and other procedures required to be performed by the Independent Auditors to be able to form an opinion on the Fund's financial statements. These other procedures include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating to the audit. The Audit Committee will approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope, Fund structure or other items. In addition to the annual Audit services engagement approved by the Audit Committee, the Audit Committee may grant general pre-approval to other Audit services, which are those services that only the Independent Auditors reasonably can provide. Other Audit services may include statutory audits and services associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4, etc.), periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings. The Audit Committee has pre-approved the Audit services in Appendix B.1. All other Audit services not listed in Appendix B.1 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 4. AUDIT-RELATED SERVICES Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Fund's financial statements and, to the extent they are Covered Services, the Covered Entities or that are traditionally performed by the Independent Auditors. Because the Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor and is consistent with the SEC's rules on auditor independence, the Audit Committee may grant general pre-approval to Audit-related services. Audit-related services include, among others, accounting consultations related to accounting, financial reporting or disclosure matters not classified as "Audit services"; assistance with understanding and implementing new accounting and financial reporting guidance from rulemaking authorities; agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters; and assistance with internal control reporting requirements under Forms N-SAR and/or N-CSR. The Audit Committee has pre-approved the Audit-related services in Appendix B.2. All other Audit-related services not listed in Appendix B.2 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 5. TAX SERVICES The Audit Committee believes that the Independent Auditors can provide Tax services to the Fund and, to the extent they are Covered Services, the Covered Entities, such as tax compliance, tax planning and tax advice without impairing the auditor's independence, and the SEC has stated that the Independent Auditors may provide such services. Pursuant to the preceding paragraph, the Audit Committee has pre-approved the Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 6. ALL OTHER SERVICES The Audit Committee believes, based on the SEC's rules prohibiting the Independent Auditors from providing specific non-audit services, that other types of non-audit services are permitted. Accordingly, the Audit Committee believes it may grant general pre-approval to those permissible non-audit services classified as All Other services that it believes are routine and recurring services, would not impair the independence of the auditor and are consistent with the SEC's rules on auditor independence. The Audit Committee has pre-approved the All Other services in Appendix B.4. Permissible All Other services not listed in Appendix B.4 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS Pre-approval fee levels or budgeted amounts for all services to be provided by the Independent Auditors will be established annually by the Audit Committee. Any proposed services exceeding these levels or amounts will require specific pre-approval by the Audit Committee. The Audit Committee is mindful of the overall relationship of fees for audit and non-audit services in determining whether to pre-approve any such services. 8. PROCEDURES All requests or applications for services to be provided by the Independent Auditors that do not require specific approval by the Audit Committee will be submitted to the Fund's Chief Financial Officer and must include a detailed description of the services to be rendered. The Fund's Chief Financial Officer will determine whether such services are included within the list of services that have received the general pre-approval of the Audit Committee. The Audit Committee will be informed on a timely basis of any such services rendered by the Independent Auditors. Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by both the Independent Auditors and the Fund's Chief Financial Officer, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC's rules on auditor independence. The Audit Committee has designated the Fund's Chief Financial Officer to monitor the performance of all services provided by the Independent Auditors and to determine whether such services are in compliance with this Policy. The Fund's Chief Financial Officer will report to the Audit Committee on a periodic basis on the results of its monitoring. Both the Fund's Chief Financial Officer and management will immediately report to the chairman of the Audit Committee any breach of this Policy that comes to the attention of the Fund's Chief Financial Officer or any member of management. 9. ADDITIONAL REQUIREMENTS The Audit Committee has determined to take additional measures on an annual basis to meet its responsibility to oversee the work of the Independent Auditors and to assure the auditor's independence from the Fund, such as reviewing a formal written statement from the Independent Auditors delineating all relationships between the Independent Auditors and the Fund, consistent with Independence Standards Board No. 1, and discussing with the Independent Auditors its methods and procedures for ensuring independence. 10. COVERED ENTITIES Covered Entities include the Fund's investment adviser(s) and any entity controlling, controlled by or under common control with the Fund's investment adviser(s) that provides ongoing services to the Fund(s). Beginning with non-audit service contracts entered into on or after May 6, 2003, the Fund's audit committee must pre-approve non-audit services provided not only to the Fund but also to the Covered Entities if the engagements relate directly to the operations and financial reporting of the Fund. This list of Covered Entities would include: MORGAN STANLEY RETAIL FUNDS Morgan Stanley Investment Advisors Inc. Morgan Stanley & Co. Incorporated Morgan Stanley DW Inc. Morgan Stanley Investment Management Morgan Stanley Investments LP Van Kampen Asset Management Inc. Morgan Stanley Services Company, Inc. Morgan Stanley Distributors Inc. Morgan Stanley Trust FSB MORGAN STANLEY INSTITUTIONAL FUNDS Morgan Stanley Investment Management Inc. Morgan Stanley Investments LP Morgan Stanley & Co. Incorporated Morgan Stanley Distribution, Inc. Morgan Stanley AIP GP LP Morgan Stanley Alternative Investment Partners LP (e)(2) Beginning with non-audit service contracts entered into on or after May 6, 2003, the audit committee also is required to pre-approve services to Covered Entities to the extent that the services are determined to have a direct impact on the operations or financial reporting of the Registrant. 100% of such services were pre-approved by the audit committee pursuant to the Audit Committee's pre-approval policies and procedures (attached hereto). (f) Not applicable. (g) See table above. (h) The audit committee of the Board of Trustees has considered whether the provision of services other than audit services performed by the auditors to the Registrant and Covered Entities is compatible with maintaining the auditors' independence in performing audit services. Item 5. Audit Committee of Listed Registrants. 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 20, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer September 20, 2004 /s/ Francis Smith Francis Smith Principal Financial Officer September 20, 2004