N-CSRS 1 a2153768zn-csrs.txt N-CSRS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-05634 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, 2005 Date of reporting period: January 31, 2005 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 SEMIANNUAL PERIOD. WE WILL PROVIDE AN OVERVIEW OF THE MARKET CONDITIONS, AND DISCUSS SOME OF THE FACTORS THAT AFFECTED PERFORMANCE DURING THE REPORTING PERIOD. IN ADDITION, THIS REPORT INCLUDES THE FUND'S FINANCIAL STATEMENTS AND A LIST OF FUND INVESTMENTS. THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING OFFERED. MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THIS FUND. FUND REPORT For the six-month period ended January 31, 2005 TOTAL RETURN FOR THE 6 MONTHS ENDED JANUARY 31, 2005
LEHMAN BROTHERS U.S. LIPPER GOVERNMENT/ FLEXIBLE S&P 500 CREDIT PORTFOLIO CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2) FUNDS INDEX(3) 8.29% 7.93% 7.92% 8.48% 8.16% 4.02% 8.27%
PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT 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 PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS DIFFERENT EXPENSES. THE FUND'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY APPLICABLE SALES CHARGES. SUCH COSTS WOULD LOWER PERFORMANCE. SEE PERFORMANCE SUMMARY FOR STANDARDIZED PERFORMANCE AND BENCHMARK INFORMATION. MARKET CONDITIONS From late summer to the early fall of 2004, both equity and fixed income markets traded within narrow ranges, reflecting a number of geopolitical uncertainties simmering around the world. Investor preoccupation centered on Iraq's future sovereignty, the sustained growth of China and other developing markets and global pressures on the world's resources and commodity supplies. In the U.S., concerns over the sluggishness of the economic recovery and the possibility of a protracted presidential election held risk tolerances in check. The stock and bond markets during these months mimicked trends that had developed in prior months, with small- and mid-capitalization stocks outperforming larger capitalization equities, cyclical industries outperforming staples and long bonds marking time in a 4 to 4 1/2 percent trading range. The backdrop shifted dramatically in the post-election period, as the reelection of President Bush and a Republican tilt to both Senate and House races reduced the possibility of major changes in domestic policy. At the same time, oil prices, which had peaked above $50 per barrel, corrected back to the low forties. Equities rallied in November and December, posting returns (as measured by the S&P 500) in excess of 7 percent for the two-month period alone. At the same time, diminishing concerns over inflation and run-away growth led to a modest rally in the long end of the U.S. Treasury market. Underlying this entire period, and somewhat ignored by the markets as a whole, was the Federal Open Market Committee's (the "Fed's") policy shift, which began in June with a 25 basis point hike in the federal funds rate. By January, 2005, investors grew increasingly aware of the Fed's policy of gradual tightening, and became somewhat more concerned with the extent and duration of the ongoing increases in short-term rates. By the end of January, the Fed had increased short-term rates by a combined 125 basis points, with no sign of slowing or moderating in the pace of rate increases. Stock markets corrected a bit in January, as investor concern surrounding the uncertainty of this policy shift, as well as the impact higher rates might have on the consumer and corporate profits, began to filter into asset class valuations. 2 PERFORMANCE ANALYSIS Morgan Stanley Strategist Fund's class A and D shares outperformed the S&P 500 Index and the Lipper Flexible Portfolio Funds Index for the six months ended January 31, 2005 -- assuming no deduction of applicable sales charges -- while the Fund's class B and C shares underperformed both benchmarks. All four share classes outperformed the Lehman Brothers U.S. Government/Credit Index. The Fund's strategic asset allocation target remained unchanged during the six month period under review. As had been the case during the first half of the fiscal year, we continued to favor equity investments over both bonds and money market instruments. The Fund's asset allocation target stood as follows: 70 percent equity (versus a neutral benchmark weight of 55 percent), 30 percent fixed income (versus 35 percent for the neutral benchmark), and zero percent cash (versus a neutral benchmark weight of 10 percent). While the Fund's overall asset allocation remained consistent over the full year, we did make significant changes within the equity portion of its portfolio. At approximately mid-year, the Fund shifted away from the deepest cyclical sectors and increased its exposure to technology (software, hardware, semiconductors, and contract manufactures) which had lagged other cyclical industries. We also added to sectors that had a lesser exposure relative to the S&P 500 Index, with the exception of financials, which remained a large underweight versus the benchmark index. All other sectors were similarly weighted to the S&P 500 Index. By the end of the period, the equity portfolio featured exposures greater than the S&P 500 Index for technology, consumer staples, industrials, basic materials and health care, equal weights in telecommunication services and consumer discretionary, and exposures below those of the index in financials, utilities and energy. The fixed income portfolio remained largely unchanged throughout the second half of 2004, with the exception of position-size adjustments made throughout the year. The fixed income allocation was made up of two distinct strategic portions. Two thirds of the portfolio featured high quality corporates, mortgage-backed securities and agency paper with an effective duration of 4.6 years and an average yield-to-maturity of 3.80 percent. The remaining third of the fixed income portfolio was made up of U.S. Treasury 10-year notes. THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL OR BE HELD BY THE FUND IN THE FUTURE. 3 TOP 10 HOLDINGS U.S. Treasury Securities 15.4% Fed. Natl. Mtge. Assoc. 2.4 Archer Daniels Midland Co. 1.7 American Express 1.7 Apple Computer, Inc. 1.6 Citigroup Inc. 1.5 General Electric Co. 1.5 Bard (C.R.), Inc. 1.5 Bank of America Corp. 1.4 Coca-Cola Co. (The) 1.4
PORTFOLIO COMPOSITION* Common Stocks 69.7% U.S. Government Obligations 15.3 Corporate Bonds 5.9 Short-Term Investments 3.7 U.S. Government Agency -- Mortgage-Backed 2.9 Asset-Backed Securities 2.3 Foreign Government Obligations 0.2
* DOES NOT INCLUDE OPEN SHORT FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $9,088,563 AND NET UNREALIZED DEPRECIATION OF $5,391. DATA AS OF JANUARY 31, 2005. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP 10 HOLDINGS ARE AS A PERCENTAGE OF NET ASSETS AND ALL PERCENTAGES FOR PORTFOLIO COMPOSITION ARE AS A PERCENTAGE OF TOTAL INVESTMENTS. THESE DATA ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A RECOMMENDATION TO BUY OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A FULL-SERVICE SECURITIES FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE ACTIVITIES, INVESTMENT BANKING, RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL ADVISORY SERVICES. INVESTMENT STRATEGY THE FUND'S "INVESTMENT ADVISER," 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 MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE 4 OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. YOU MAY OBTAIN COPIES OF A FUND'S FISCAL QUARTER FILINGS BY CONTACTING MORGAN STANLEY CLIENT RELATIONS AT (800) 869-NEWS. 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 12-MONTH PERIOD ENDED JUNE 30, 2004, IS AVAILABLE WITHOUT CHARGE, UPON REQUEST, BY CALLING (800) 869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT www.morganstanley.com. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEBSITE AT http://www.sec.gov. HOUSEHOLDING NOTICE TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS. YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS. 5 PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED JANUARY 31, 2005
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 7.13%(4) 6.30%(4) 6.35%(4) 7.38%(4) 1.51(5) 1.30(5) 5.35(5) -- 5 YEARS 1.19(4) 0.41(4) 0.40(4) 1.41(4) 0.10(5) 0.08(5) 0.40(5) -- 10 YEARS -- 8.94(4) -- -- -- 8.94(5) -- -- SINCE INCEPTION 5.71(4) 9.73(4) 4.89(4) 5.95(4) 4.95(5) 9.73(5) 4.89(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 TABLE DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PERFORMANCE FOR CLASS A, CLASS B, CLASS C, AND CLASS D SHARES WILL VARY DUE TO DIFFERENCES IN SALES CHARGES AND EXPENSES. * THE MAXIMUM FRONT-END SALES CHARGE FOR CLASS A IS 5.25%. ** THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B IS 5.0%. THE CDSC DECLINES TO 0% AFTER SIX YEARS. + THE MAXIMUM CONTINGENT DEFERRED SALES CHARGE FOR CLASS C IS 1% FOR SHARES REDEEMED WITHIN ONE YEAR OF PURCHASE. ++ CLASS D HAS NO SALES CHARGE. (1) THE STANDARD & POOR'S 500 INDEX (S&P 500(R)) IS A BROAD-BASED INDEX, THE PERFORMANCE OF WHICH IS BASED ON THE PERFORMANCE OF 500 WIDELY-HELD COMMON STOCKS CHOSEN FOR MARKET SIZE, LIQUIDITY AND INDUSTRY GROUP REPRESENTATION. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. (2) THE LEHMAN BROTHERS U.S. GOVERNMENT/CREDIT INDEX TRACKS THE PERFORMANCE OF GOVERNMENT AND CORPORATE OBLIGATIONS, INCLUDING U.S. GOVERNMENT AGENCY AND TREASURY SECURITIES AND CORPORATE AND YANKEE BONDS. THE INDEX DOES NOT INCLUDE ANY EXPENSES, FEES OR CHARGES. SUCH COSTS WOULD LOWER PERFORMANCE. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. (3) THE LIPPER FLEXIBLE PORTFOLIO FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER FLEXIBLE PORTFOLIO FUNDS CLASSIFICATION. THE INDEX, WHICH IS ADJUSTED FOR CAPITAL GAINS DISTRIBUTIONS AND INCOME DIVIDENDS, IS UNMANAGED AND SHOULD NOT BE CONSIDERED AN INVESTMENT. THERE ARE CURRENTLY 30 FUNDS REPRESENTED IN THIS INDEX. (4) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND DOES NOT REFLECT THE DEDUCTION OF ANY SALES CHARGES. (5) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AND THE DEDUCTION OF THE MAXIMUM APPLICABLE SALES CHARGE. SEE THE FUND'S CURRENT PROSPECTUS FOR COMPLETE DETAILS ON FEES AND SALES CHARGES. 6 EXPENSE EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption fees; and (2) ongoing costs, including 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 08/01/04 - 01/31/05. ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- --------------- 08/01/04 - 08/01/04 01/31/05 01/31/05 ------------- ------------- --------------- CLASS A Actual (8.29% return) $ 1,000.00 $ 1,082.90 $ 4.99 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,020.42 $ 4.84 CLASS B Actual (7.93% return) $ 1,000.00 $ 1,079.30 $ 8.91 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,016.64 $ 8.64 CLASS C Actual (7.92% return) $ 1,000.00 $ 1,079.20 $ 8.91 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,016.64 $ 8.64 CLASS D Actual (8.48% return) $ 1,000.00 $ 1,084.80 $ 3.68 Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,021.68 $ 3.57
---------- * EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.95%, 1.70%, 1.70% AND 0.70% RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 184/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). 7 MORGAN STANLEY STRATEGIST FUND PORTFOLIO OF INVESTMENTS - JANUARY 31, 2005 (UNAUDITED)
NUMBER OF SHARES VALUE ---------------------------------------------------------------------------------------------------------- COMMON STOCKS (70.2%) ADVERTISING/MARKETING SERVICES (2.1%) 821,340 Interpublic Group of Companies, Inc. (The)* $ 10,718,487 138,500 Lamar Advertising Co. (Class A)* 5,952,730 68,400 Omnicom Group, Inc. 5,806,476 -------------- 22,477,693 -------------- AEROSPACE & DEFENSE (1.6%) 228,590 Northrop Grumman Corp. 11,859,249 148,300 Raytheon Co. 5,546,420 -------------- 17,405,669 -------------- AGRICULTURAL COMMODITIES/MILLING (1.7%) 781,050 Archer-Daniels-Midland Co. 18,901,410 -------------- APPAREL/FOOTWEAR RETAIL (1.0%) 489,500 Gap, Inc. (The) 10,773,895 -------------- BEVERAGES: NON-ALCOHOLIC (1.4%) 363,570 Coca-Cola Co. (The) 15,084,519 -------------- BIOTECHNOLOGY (2.3%) 469,630 Applera Corp. - Celera Genomics Group* 6,231,990 313,800 Celgene Corp.* 8,579,292 303,940 Gilead Sciences, Inc.* 10,060,414 -------------- 24,871,696 -------------- BROADCASTING (0.2%) 300,200 Sirius Satellite Radio Inc.* 1,987,324 -------------- CHEMICALS: MAJOR DIVERSIFIED (1.2%) 172,770 Dow Chemical Co. (The) 8,586,669 132,500 Engelhard Corp. 3,981,625 -------------- 12,568,294 -------------- COMPUTER COMMUNICATIONS (1.1%) 685,230 Cisco Systems, Inc.* 12,361,549 -------------- COMPUTER PERIPHERALS (0.7%) 567,500 EMC Corp.* 7,434,250 -------------- COMPUTER PROCESSING HARDWARE (2.9%) 223,080 Apple Computer, Inc.* 17,154,852 286,700 Dell Inc.* 11,972,592 572,200 Sun Microsystems, Inc.* 2,494,792 -------------- 31,622,236 --------------
SEE NOTES TO FINANCIAL STATEMENTS 8
NUMBER OF SHARES VALUE ---------------------------------------------------------------------------------------------------------- CONTAINERS/PACKAGING (0.9%) 359,500 Smurfit-Stone Container Corp.* $ 5,406,880 72,370 Temple-Inland Inc. 4,602,732 -------------- 10,009,612 -------------- CONTRACT DRILLING (0.9%) 225,300 Diamond Offshore Drilling, Inc. 9,861,381 -------------- DEPARTMENT STORES (0.9%) 203,950 Kohl's Corp.* 9,587,690 -------------- DISCOUNT STORES (1.4%) 315,200 Costco Wholesale Corp. 14,899,504 -------------- ELECTRICAL PRODUCTS (2.0%) 220,610 Emerson Electric Co. 14,833,816 193,800 Rayovac Corp.* 7,281,066 -------------- 22,114,882 -------------- ELECTRONIC COMPONENTS (0.6%) 483,220 Flextronics International Ltd. (Singapore)* 6,837,563 -------------- ELECTRONIC PRODUCTION EQUIPMENT (0.8%) 520,040 Applied Materials, Inc.* 8,268,636 -------------- ENVIRONMENTAL SERVICES (1.0%) 367,610 Waste Management, Inc. 10,660,690 -------------- FINANCIAL CONGLOMERATES (4.0%) 280,400 American Express Co. 14,959,340 306,600 Citigroup, Inc. 15,038,730 364,540 JP Morgan Chase & Co. 13,608,278 -------------- 43,606,348 -------------- FOOD: MAJOR DIVERSIFIED (1.2%) 219,900 Del Monte Foods Co.* 2,480,472 246,000 Kellogg Co. 10,981,440 -------------- 13,461,912 -------------- FOOD: MEAT/FISH/DAIRY (1.2%) 383,790 Dean Foods Co.* 13,520,922 -------------- FOREST PRODUCTS (0.6%) 240,050 Louisiana-Pacific Corp. 6,145,280 -------------- HOUSEHOLD/PERSONAL CARE (1.8%) 125,050 Colgate-Palmolive Co. 6,570,127
9
NUMBER OF SHARES VALUE ---------------------------------------------------------------------------------------------------------- 140,970 Gillette Co. (The) $ 7,149,998 112,790 Procter & Gamble Co. (The) 6,003,812 -------------- 19,723,937 -------------- INDUSTRIAL CONGLOMERATES (1.4%) 421,720 General Electric Co. 15,236,744 -------------- INFORMATION TECHNOLOGY SERVICES (1.3%) 145,840 International Business Machines Corp. 13,624,373 -------------- INTEGRATED OIL (1.8%) 123,140 BP PLC (ADR) (United Kingdom) 7,341,607 138,970 Exxon Mobil Corp. 7,170,852 91,400 Royal Dutch Petroleum Co. (NY Registered Shares) (Netherlands) 5,344,158 -------------- 19,856,617 -------------- INTERNET RETAIL (0.4%) 91,350 Amazon.com, Inc.* 3,948,147 -------------- INTERNET SOFTWARE/SERVICES (0.9%) 422,600 Siebel Systems, Inc.* 3,680,846 178,550 Yahoo! Inc.* 6,286,745 -------------- 9,967,591 -------------- MAJOR BANKS (2.7%) 328,180 Bank of America Corp. 15,217,707 218,400 KeyCorp 7,298,928 117,600 Wells Fargo & Co. 7,208,880 -------------- 29,725,515 -------------- MAJOR TELECOMMUNICATIONS (2.1%) 413,000 AT&T Corp. 7,925,470 435,400 MCI Inc. 8,398,866 117,000 SBC Communications, Inc. 2,779,920 110,530 Verizon Communications Inc. 3,933,763 -------------- 23,038,019 -------------- MEDIA CONGLOMERATES (1.3%) 621,010 Time Warner, Inc.* 11,178,180 84,000 Viacom, Inc. (Class A) 3,160,920 -------------- 14,339,100 -------------- MEDICAL SPECIALTIES (3.7%) 234,270 Bard (C.R.), Inc. 15,883,506 221,940 Fisher Scientific International, Inc.* 14,015,511
SEE NOTES TO FINANCIAL STATEMENTS 10
NUMBER OF SHARES VALUE ---------------------------------------------------------------------------------------------------------- 189,900 Hospira, Inc.* $ 5,486,211 96,790 Medtronic, Inc. 5,080,507 -------------- 40,465,735 -------------- MOTOR VEHICLES (1.7%) 180,700 General Motors Corp. 6,651,567 463,240 Honda Motor Co., Ltd. (ADR) (Japan) 12,160,050 -------------- 18,811,617 -------------- OIL & GAS PRODUCTION (0.6%) 156,530 Burlington Resources, Inc. 6,841,926 -------------- OILFIELD SERVICES/EQUIPMENT (1.3%) 202,320 Halliburton Co. 8,321,422 91,300 Smith International, Inc.* 5,404,960 -------------- 13,726,382 -------------- PACKAGED SOFTWARE (2.7%) 394,200 Microsoft Corp. 10,359,576 859,300 Oracle Corp.* 11,832,561 344,140 Sybase, Inc.* 6,700,406 -------------- 28,892,543 -------------- PHARMACEUTICALS: MAJOR (3.8%) 206,840 Johnson & Johnson 13,382,548 176,900 Lilly (Eli) & Co. 9,595,056 410,670 Pfizer, Inc. 9,921,787 218,320 Wyeth 8,652,022 -------------- 41,551,413 -------------- PRECIOUS METALS (0.6%) 71,240 Newmont Mining Corp. 2,962,872 233,340 Placer Dome Inc. (Canada) 3,978,447 -------------- 6,941,319 -------------- PROPERTY - CASUALTY INSURERS (0.8%) 178,600 Allstate Corp. (The) 9,008,584 -------------- RAILROADS (0.9%) 74,950 Burlington Northern Santa Fe Corp. 3,611,091 148,780 CSX Corp. 5,946,737 -------------- 9,557,828 -------------- REGIONAL BANKS (0.4%) 177,860 AmSouth Bancorporation 4,435,828 --------------
SEE NOTES TO FINANCIAL STATEMENTS 11
NUMBER OF SHARES VALUE ---------------------------------------------------------------------------------------------------------- SEMICONDUCTORS (2.3%) 277,151 Freescale Semiconductor Inc. (Class B)* $ 4,841,828 318,830 Intel Corp. 7,157,733 716,740 Micron Technology, Inc.* 7,461,263 657,962 Taiwan Semiconductor Manufacturing Co. Ltd. (ADR) (Taiwan) 5,757,167 -------------- 25,217,991 -------------- SPECIALTY STORES (0.8%) 228,000 Bed Bath & Beyond Inc.* 9,186,120 -------------- TELECOMMUNICATION EQUIPMENT (3.2%) 1,100,550 Corning Inc.* 12,040,017 707,250 Motorola, Inc. 11,132,115 783,770 Nokia Corp. (ADR) (Finland) 11,976,006 -------------- 35,148,138 -------------- TOBACCO (0.8%) 140,000 Altria Group, Inc. 8,936,200 -------------- TRUCKS/CONSTRUCTION/FARM MACHINERY (1.2%) 151,460 Caterpillar Inc. 13,495,086 -------------- TOTAL COMMON STOCKS (COST $584,766,761) 766,139,708 -------------- PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE ---------- ------ -------- CORPORATE BONDS (6.0%) ADVERTISING/MARKETING SERVICES (0.1%) $ 515 WPP Finance Corp. - 144A** (United Kingdom) 5.875% 06/15/14 548,142 -------------- AEROSPACE & DEFENSE (0.2%) 350 Northrop Grumman Corp. 4.079 11/16/06 352,338 199 Raytheon Co. 6.15 11/01/08 213,057 55 Raytheon Co. 8.30 03/01/10 64,856 902 Systems 2001 Asset Trust - 144A** (Kyrgyzstan) 6.664 09/15/13 994,656 -------------- 1,624,907 -------------- AIR FREIGHT/COURIERS (0.0%) 335 Fedex Corp. 2.65 04/01/07 327,197 --------------
SEE NOTES TO FINANCIAL STATEMENTS 12
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------------------- AIRLINES (0.1%) $ 854 America West Airlines, Inc. (Series 01-1) 7.10% 04/02/21 $ 911,962 295 Southwest Airlines Co. (Series 01-1) 5.496 11/01/06 302,771 -------------- 1,214,733 -------------- BEVERAGES: ALCOHOLIC (0.1%) 545 Miller Brewing Co. - 144A** 4.25 08/15/08 548,344 -------------- BROADCASTING (0.0%) 280 Clear Channel Communications, Inc. 7.65 09/15/10 316,933 -------------- CABLE/SATELLITE TV (0.1%) 135 Comcast Cable Communications Inc. 6.75 01/30/11 151,256 250 Comcast Corp. 6.50 01/15/15 279,336 60 Comcast Corp. 7.625 02/15/08 65,757 455 Cox Communications, Inc. - 144A** 4.625 01/15/10 453,560 490 TCI Communications, Inc. 7.875 02/15/26 614,333 -------------- 1,564,242 -------------- CHEMICALS: MAJOR DIVERSIFIED (0.0%) 270 ICI Wilmington Inc. 4.375 12/01/08 271,532 -------------- CONTAINERS/PACKAGING (0.0%) 520 Sealed Air Corp. - 144A** 5.625 07/15/13 540,888 -------------- DEPARTMENT STORES (0.1%) 300 Federated Department Stores, Inc. 6.625 09/01/08 324,005 980 May Department Stores Co., Inc. 5.95 11/01/08 1,036,154 -------------- 1,360,159 -------------- DRUGSTORE CHAINS (0.1%) 1,505 CVS Corp. 5.625 03/15/06 1,539,507 -------------- ELECTRIC UTILITIES (0.7%) 160 Appalachian Power Co. (Series H) 5.95 05/15/33 168,028 505 Arizona Public Service Co. 5.80 06/30/14 543,283 530 Carolina Power & Light Co. 5.125 09/15/13 546,957 250 Cincinnati Gas & Electric Co. 5.70 09/15/12 266,513 125 Cincinnati Gas & Electric Co. (Series B) 5.375 06/15/33 124,468 45 Columbus Southern Power Co. 4.40 12/01/10 44,671 175 Columbus Southern Power Co. (Series D) 6.60 03/01/33 202,528 300 Consolidated Natural Gas Co. 5.00 12/01/14 302,554 60 Consolidated Natural Gas Co. (Series A) 5.00 03/01/14 60,613 460 Consolidated Natural Gas Co. (Series C) 6.25 11/01/11 507,495 310 Consumers Energy Co. 4.80 02/17/09 316,712 140 Detroit Edison Co. 6.125 10/01/10 152,627
SEE NOTES TO FINANCIAL STATEMENTS 13
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------------------- $ 210 Duke Energy Corp. 3.75% 03/05/08 $ 209,140 345 Duke Energy Corp. 4.50 04/01/10 348,607 340 Entergy Gulf States, Inc. 2.80++ 12/01/09 340,081 205 Entergy Gulf States, Inc. 3.60 06/01/08 201,423 285 Exelon Corp. 6.75 05/01/11 318,576 655 FPL Group Capital Inc. 3.25 04/11/06 653,957 310 Ohio Edison Co. 5.45 05/01/15 317,082 265 Ohio Power Co. (Series G) 6.60 02/15/33 307,086 440 Pacific Gas & Electric Co. 6.05 03/01/34 474,623 105 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 102,557 315 Public Service Electric & Gas Co. (Series MTNB) 5.00 01/01/13 323,706 155 South Carolina Electric & Gas Co. 5.30 05/15/33 156,259 75 Southern California Edison Co. 5.00 01/15/14 76,742 240 Texas Eastern Transmission, L.P. 7.00 07/15/32 285,100 305 TXU Energy Co. 7.00 03/15/13 343,987 185 Wisconsin Electric Power Co. 3.50 12/01/07 183,891 70 Wisconsin Electric Power Co. 5.625 05/15/33 74,010 -------------- 7,953,276 -------------- ELECTRICAL PRODUCTS (0.1%) 520 Cooper Industries Inc. 5.25 07/01/07 536,396 -------------- FINANCE/RENTAL/LEASING (0.3%) 395 CIT Group Inc. 2.875 09/29/06 390,216 125 CIT Group Inc. 7.375 04/02/07 134,302 755 Countrywide Home Loans, Inc. (Series MTN) 3.25 05/21/08 736,004 105 Ford Motor Credit Co. 7.25 10/25/11 111,881 100 MBNA Capital I (Series A) 8.278 12/01/26 110,650 705 MBNA Corp. 6.125 03/01/13 762,741 395 SLM Corp. 4.00 01/15/10 390,572 580 SLM Corp. (Series MTNA) 5.00 10/01/13 592,574 -------------- 3,228,940 -------------- FINANCIAL CONGLOMERATES (0.7%) 920 Chase Manhattan Corp. 6.00 02/15/09 978,780 275 Citicorp 6.75 08/15/05 280,454 660 Citigroup Inc. 5.625 08/27/12 705,369 530 Citigroup Inc. 5.75 05/10/06 545,296 530 Citigroup Inc. 6.00 02/21/12 580,852
SEE NOTES TO FINANCIAL STATEMENTS 14
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------------------- $ 225 Ford Motor Credit Co. 7.375% 10/28/09 $ 239,828 180 General Electric Capital Corp. 4.25 12/01/10 179,810 55 General Electric Capital Corp. 4.75 09/15/14 55,405 905 General Electric Capital Corp. (Series MTNA) 6.75 03/15/32 1,088,868 200 General Motors Acceptance Corp. 4.50 07/15/06 199,264 1,380 General Motors Acceptance Corp. 6.875 09/15/11 1,387,572 1,220 General Motors Acceptance Corp. 8.00 11/01/31 1,238,045 540 Prudential Holdings, LLC (Series B) (FSA) - 144A** 7.245 12/18/23 657,283 -------------- 8,136,826 -------------- FOOD RETAIL (0.0%) 200 Albertson's, Inc. 7.50 02/15/11 231,160 -------------- FOOD: MAJOR DIVERSIFIED (0.1%) 575 Kraft Foods Inc. 5.625 11/01/11 610,773 150 Kraft Foods Inc. 6.25 06/01/12 165,289 -------------- 776,062 -------------- FOREST PRODUCTS (0.0%) 165 Weyerhaeuser Co. 6.00 08/01/06 170,754 170 Weyerhaeuser Co. 6.75 03/15/12 192,999 -------------- 363,753 -------------- GAS DISTRIBUTORS (0.1%) 325 Nisource Finance Corp. 2.915++ 11/23/09 325,354 415 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A** (Qatar) 8.294 03/15/14 494,909 -------------- 820,263 -------------- HOME FURNISHINGS (0.0%) 290 Mohawk Industries, Inc. (Series D) 7.20 04/15/12 331,469 -------------- HOME IMPROVEMENT CHAINS (0.0%) 100 Lowe's Companies, Inc. 6.50 03/15/29 117,055 60 Lowe's Companies, Inc. 6.875 02/15/28 72,793 -------------- 189,848 -------------- HOTELS/RESORTS/CRUISELINES (0.1%) 510 Hyatt Equities LLC - 144A** 6.875 06/15/07 534,047 760 Marriott International, Inc. (Series E) 7.00 01/15/08 823,562 -------------- 1,357,609 --------------
SEE NOTES TO FINANCIAL STATEMENTS 15
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------------------- HOUSEHOLD/PERSONAL CARE (0.0%) $ 355 Clorox Co. (The) - 144A** 2.544%++ 12/14/07 $ 355,157 -------------- INDUSTRIAL CONGLOMERATES (0.1%) 245 Hutchison Whampoa International Ltd. - 144A** (Kyrgyzstan) 5.45 11/24/10 254,909 335 Hutchison Whampoa International Ltd. - 144A** (Kyrgyzstan) 6.50 02/13/13 364,792 -------------- 619,701 -------------- INSURANCE BROKERS/SERVICES (0.2%) 1,055 Farmers Exchange Capital - 144A** 7.05 07/15/28 1,120,933 805 Marsh & McLennan Companies, Inc. 5.375 07/15/14 790,376 -------------- 1,911,309 -------------- INTEGRATED OIL (0.1%) 395 Amerada Hess Corp. 7.875 10/01/29 485,820 70 Petro-Canada (Canada) 4.00 07/15/13 66,104 280 Petro-Canada (Canada) 5.35 07/15/33 271,482 -------------- 823,406 -------------- INVESTMENT BANKS/BROKERS (0.1%) 360 Goldman Sachs Group Inc. 5.25 10/15/13 371,303 640 Goldman Sachs Group Inc. 6.60 01/15/12 715,555 265 Goldman Sachs Group Inc. 6.875 01/15/11 298,750 -------------- 1,385,608 -------------- MAJOR BANKS (0.2%) 250 Bank of New York Co., Inc. (The) (Series BKNT) 3.80 02/01/08 250,029 195 Bank of New York Co., Inc. (The) 5.20 07/01/07 201,787 485 FleetBoston Financial Corp. 7.25 09/15/05 497,320 280 HSBC Finance Corp. 6.75 05/15/11 314,637 325 Huntington National Bank (Series BKNT) 4.375 01/15/10 325,926 -------------- 1,589,699 -------------- MAJOR TELECOMMUNICATIONS (0.3%) 555 Deutsche Telekom International Finance Corp. NV (Netherlands) 8.75 06/15/30 753,070 255 France Telecom S.A. (France) 9.25++ 03/01/31 355,576 1,040 GTE Corp. 6.94 04/15/28 1,193,824 150 Sprint Capital Corp. 8.75 03/15/32 203,778 405 Telecom Italia Capital SpA - 144A** (Luxembourg) 4.00 01/15/10 395,902
SEE NOTES TO FINANCIAL STATEMENTS 16
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------------------- $ 345 Telecom Italia Capital SpA (Luxembourg) 4.00% 11/15/08 $ 342,580 95 Verizon Global Funding Corp. 7.75 12/01/30 120,481 -------------- 3,365,211 -------------- MANAGED HEALTH CARE (0.2%) 920 Aetna, Inc. 7.875 03/01/11 1,078,579 530 WellPoint Health Networks Inc. 6.375 06/15/06 550,035 -------------- 1,628,614 -------------- MEDIA CONGLOMERATES (0.2%) 465 Historic TW Inc. 6.625 05/15/29 513,035 800 News America Holdings, Inc. 7.30 04/30/28 938,032 320 Time Warner, Inc. 7.625 04/15/31 395,418 190 Time Warner, Inc. 7.70 05/01/32 237,448 -------------- 2,083,933 -------------- MOTOR VEHICLES (0.2%) 595 DaimlerChrysler North American Holdings Co. 8.50 01/18/31 764,435 445 Ford Motor Co. 7.45 07/16/31 445,230 660 General Motors Corp. 8.375 07/15/33 666,407 -------------- 1,876,072 -------------- MULTI-LINE INSURANCE (0.4%) 1,265 AIG Sun America Global Finance VI - 144A** 6.30 05/10/11 1,380,828 575 American General Finance Corp. (Series MTNF) 5.875 07/14/06 593,758 910 AXA Financial Inc. 6.50 04/01/08 979,821 95 Hartford Financial Services Group, Inc. 2.375 06/01/06 93,131 235 International Lease Finance Corp. 3.75 08/01/07 234,151 510 Nationwide Mutual Insurance Co. - 144A** 8.25 12/01/31 652,609 -------------- 3,934,298 -------------- OIL & GAS PRODUCTION (0.2%) 125 Kerr-McGee Corp. 5.875 09/15/06 129,110 95 Kerr-McGee Corp. 6.625 10/15/07 101,182 125 Kerr-McGee Corp. 7.875 09/15/31 157,829 345 Nexen Inc. (Canada) 5.05 11/20/13 344,513 245 Pemex Project Funding Master Trust 7.375 12/15/14 274,400 430 Pemex Project Funding Master Trust 8.00 11/15/11 495,575 560 Pemex Project Funding Master Trust 8.625 02/01/22 666,400
SEE NOTES TO FINANCIAL STATEMENTS 17
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------------------- $ 145 Pemex Project Funding Master Trust 9.125% 10/13/10 $ 173,275 -------------- 2,342,284 -------------- PROPERTY - CASUALTY INSURERS (0.1%) 760 Mantis Reef Ltd. - 144A** (Australia) 4.692 11/14/08 760,496 -------------- PULP & PAPER (0.0%) 305 Sappi Papier Holding AG - 144A** (Austria) 6.75 06/15/12 339,338 -------------- RAILROADS (0.1%) 310 Burlington North Santa Fe Railway Co. 4.575 01/15/21 311,486 230 CSX Corp. 2.75 02/15/06 227,743 125 CSX Corp. 9.00 08/15/06 134,543 200 Norfolk Southern Corp. 7.35 05/15/07 215,340 100 Union Pacific Corp. - 144A** 5.214 09/30/14 101,578 180 Union Pacific Corp. 6.65 01/15/11 201,184 140 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 150,366 -------------- 1,342,240 -------------- REAL ESTATE DEVELOPMENT (0.1%) 1,405 World Financial Properties - 144A** 6.91 09/01/13 1,539,391 -------------- REAL ESTATE INVESTMENT TRUSTS (0.1%) 770 EOP Operating LP 6.763 06/15/07 815,880 -------------- REGIONAL BANKS (0.1%) 740 Marshall & Isley Corp. (Series BKNT) 3.80 02/08/08 739,227 -------------- SAVINGS BANKS (0.2%) 305 Household Finance Corp. 4.125 12/15/08 305,667 320 Household Finance Corp. 5.875 02/01/09 340,660 225 Household Finance Corp. 6.375 10/15/11 248,511 350 Household Finance Corp. 6.40 06/17/08 376,292 100 Sovereign Bank (Series CD) 4.00 02/01/08 100,067 470 Washington Mutual Bank 5.50 01/15/13 492,959 260 Washington Mutual Inc. 8.25 04/01/10 303,117 -------------- 2,167,273 -------------- TOBACCO (0.1%) 325 Altria Group, Inc. 7.00 11/04/13 355,867 360 Altria Group, Inc. 7.75 01/15/27 416,227 -------------- 772,094 --------------
SEE NOTES TO FINANCIAL STATEMENTS 18
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------------------- TRUCKS/CONSTRUCTION/FARM MACHINERY (0.1%) $ 635 Caterpillar Financial Services Corp. (Series MTNF) 2.409%++ 08/20/07 $ 635,285 -------------- 190 Caterpillar Financial Services Corp. (Series MTNF) 3.625 11/15/07 189,217 -------------- 824,502 -------------- WIRELESS TELECOMMUNICATIONS (0.0%) 250 AT&T Wireless Services, Inc. 8.75 03/01/31 344,911 -------------- TOTAL CORPORATE BONDS (COST $61,832,173) 65,342,830 -------------- ASSET-BACKED SECURITIES (2.3%) FINANCE/RENTAL/LEASING 2,300 American Express Credit Account Master Trust 2001-2 A 5.53 10/15/08 2,356,705 1,500 American Express Credit Account Master Trust 2002-3 A 2.59++ 12/15/09 1,504,236 544 Asset Backed Funding Certificates 2004-HE1 A1 2.66++ 06/25/22 544,274 650 Capital Auto Receivables Asset Trust 2003-2 A3A 1.44 02/15/07 644,533 850 Capital Auto Receivables Asset Trust 2003-3 A3B 2.56++ 01/15/08 851,187 2,960 Chase Credit Card Master Trust 2001-4 A 5.50 11/17/08 3,045,086 2,230 Citibank Credit Card Issuance Trust 2000-A1 A1 6.90 10/15/07 2,288,411 1,200 Citibank Credit Card Issuance Trust 2002-A2 A2 1.741++ 02/15/07 1,200,552 900 GE Capital Credit Card Master Note Trust 2004-2 A 2.52++ 09/15/10 900,967 850 GE Dealer Floorplan Master Note Trust 2004-1 A 2.55++ 07/20/08 850,550 1,150 Harley Davidson Motorcycle Trust 2005-1 A2 3.76 12/17/12 1,149,832 1,300 MBNA Master Credit Card Trust 2.55++ 02/15/10 1,305,096 1,550 MBNA Master Credit Card Trust 5.90 08/15/11 1,665,352 527 Nissan Auto Receivables Owner Trust 2001-C A4 4.80 02/15/07 528,423
SEE NOTES TO FINANCIAL STATEMENTS 19
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------------------- $ 955 Residential Asset Securities Corp. 2004-KSB AI1 2.69%++ 10/25/22 $ 955,535 1,475 SLM Student Loan Trust 2004-6 A2 2.74++ 01/25/13 1,477,494 1,600 SLM Student Loan Trust 2004-9 A2 2.72++ 10/25/12 1,600,728 275 TXU Electric Delivery Trans 2004-1 A2 4.81 11/17/14 282,025 1,550 USAA Auto Owner Trust 2004-3 A3 3.16 02/17/09 1,540,307 900 Wachovia Auto Owner Trust 2004-B A2 2.40 05/21/07 895,682 -------------- TOTAL ASSET-BACKED SECURITIES (COST $25,346,960) 25,586,975 -------------- FOREIGN GOVERNMENT OBLIGATIONS (0.2%) 870 United Mexican States (Mexico) 8.00 09/24/22 1,031,820 610 United Mexican States (Mexico) 8.30 08/15/31 741,760 280 United Mexican States (Mexico) 8.375 01/14/11 329,700 -------------- TOTAL FOREIGN GOVERNMENT OBLIGATIONS (COST $1,826,062) 2,103,280 -------------- U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES (3.0%) Federal Home Loan Mortgage Corp. Gold 1,415 6.50 05/01/29 - 12/01/32 1,483,808 263 7.50 01/01/30 - 08/01/32 282,478 13 8.00 07/01/30 14,267 Federal Home Loan Mortgage Corp. 2,080 5.125 11/07/13 2,095,586 1,707 7.50 11/01/29 - 03/01/32 1,833,765 Federal National Mortgage Assoc. 11,030 (DD) 4.25 05/15/09 11,185,303 1,938 6.50 12/01/29 - 08/01/33 2,029,929 3,467 7.00 12/01/17 - 01/01/33 3,673,585 4,031 7.50 07/01/29 - 06/01/32 4,320,891 4,744 8.00 05/01/09 - 01/01/32 5,149,463 TOTAL U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES (COST $31,722,783) 32,069,075 -------------- U.S. GOVERNMENT OBLIGATIONS (15.4%) 250 U.S. Treasury Bond 5.50 08/15/28 279,521 6,100 U.S. Treasury Bond 6.125 08/15/29 7,399,587 5,550 U.S. Treasury Bond 8.125 08/15/19 7,696,074 9,900 U.S. Treasury Bond 8.125 08/15/21 13,969,058 25,125 U.S. Treasury Note 3.50 11/15/06 25,250,650 6,850 U.S. Treasury Note 3.875 02/15/13 6,781,774 7,000 U.S. Treasury Note 4.25 08/15/13 7,088,053
SEE NOTES TO FINANCIAL STATEMENTS 20
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ---------------------------------------------------------------------------------------------------------- $ 7,100 U.S. Treasury Note 6.50% 02/15/10 $ 8,007,749 90,000 U.S. Treasury Note 3.625 05/15/13 87,686,730 8,500 U.S. Treasury Strip 0.00 02/15/25 3,260,022 755 U.S. Treasury Strip 0.00 02/15/25 288,436 --------------- TOTAL U.S. GOVERNMENT OBLIGATIONS (COST $162,955,722) 167,707,654 --------------- SHORT-TERM INVESTMENTS (3.7%) U.S. GOVERNMENT OBLIGATION (a) (0.0%) 500 U.S. Treasury Bill*** 1.90 03/24/05 498,658 --------------- REPURCHASE AGREEMENT (3.7%) 40,233 Joint repurchase agreement account (dated 01/31/05; proceeds $40,235,777) (b) (COST $40,233,000) 2.485 02/01/05 40,233,000 --------------- TOTAL SHORT-TERM INVESTMENTS (COST $40,731,658) 40,731,658 --------------- TOTAL INVESTMENTS (COST $909,182,119) (c) (d) 100.8% 1,099,681,180 LIABILITIES IN EXCESS OF OTHER ASSETS (0.8) (8,764,292) ----- --------------- NET ASSETS 100.0% $ 1,090,916,888 ===== ===============
---------- ADR AMERICAN DEPOSITORY RECEIPT. FSA FINANCIAL SECURITY ASSURANCE INC. * NON-INCOME PRODUCING SECURITY. ** RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. *** A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS IN AN AMOUNT EQUAL TO $54,300. DD SECURITY PURCHASED ON A DELAYED DELIVERY BASIS. + SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS WITH AN APPROXIMATE PRINCIPAL AMOUNT AND NO DEFINITE MATURITY DATE; THE ACTUAL PRINCIPAL AMOUNT AND MATURITY DATE WILL BE DETERMINED UPON SETTLEMENT. ++ VARIABLE RATE SECURITY; RATE SHOWN IS THE RATE IN EFFECT AT JANUARY 31, 2005. (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) SECURITIES HAVE BEEN DESIGNATED AS COLLATERAL IN A AMOUNT EQUAL TO $19,247,366 IN CONNECTION WITH SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS, A DELAYED DELIVERY BASIS AND OPEN FUTURES CONTRACTS. (d) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES APPROXIMATES THE AGGREGATE COST FOR BOOK PURPOSES. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $205,375,440 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $14,876,379, RESULTING IN NET UNREALIZED APPRECIATION OF $190,499,061. SEE NOTES TO FINANCIAL STATEMENTS 21 FUTURES CONTRACTS OPEN AT JANUARY 31, 2005:
UNREALIZED NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE APPRECIATION CONTRACTS LONG/SHORT MONTH, AND YEAR AMOUNT AT VALUE (DEPRECIATION) ---------------------------------------------------------------------------------------------------------- 44 Short U.S Treasury Notes 5 Year, $ (4,807,000) $ 16,989 March 2005 32 Short U.S Treasury Notes 10 Year, (3,592,500) (14,238) March 2005 6 Short U.S Treasury Bonds 20 Year, (689,063) (8,142) March 2005 -------------- Net unrealized depreciation $ (5,391) ==============
SEE NOTES TO FINANCIAL STATEMENTS 22 MORGAN STANLEY STRATEGIST FUND FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JANUARY 31, 2005 (UNAUDITED) ASSETS: Investments in securities, at value (cost $909,182,119) $ 1,099,681,180 Receivable for: Interest 3,447,071 Investments sold 3,281,274 Shares of beneficial interest sold 523,858 Dividends 432,717 Prepaid expenses and other assets 68,432 ----------------- TOTAL ASSETS 1,107,434,532 ----------------- LIABILITIES: Payable for: Investments purchased 13,197,267 Shares of beneficial interest redeemed 1,784,139 Distribution fee 840,612 Investment advisory fee 391,650 Administration fee 74,600 Accrued expenses and other payables 229,376 ----------------- TOTAL LIABILITIES 16,517,644 ----------------- NET ASSETS $ 1,090,916,888 ================= COMPOSITION OF NET ASSETS: Paid-in-capital $ 1,011,885,213 Net unrealized appreciation 190,495,882 Accumulated undistributed net investment income 271,278 Accumulated net realized loss (111,735,485) ----------------- NET ASSETS $ 1,090,916,888 ================= CLASS A SHARES: Net Assets $ 62,862,816 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 3,592,978 NET ASSET VALUE PER SHARE $ 17.50 ================= MAXIMUM OFFERING PRICE PER SHARE, (NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 18.47 ================= CLASS B SHARES: Net Assets $ 923,437,334 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 52,718,428 NET ASSET VALUE PER SHARE $ 17.52 ================= CLASS C SHARES: Net Assets $ 43,699,015 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 2,507,840 NET ASSET VALUE PER SHARE $ 17.42 ================= CLASS D SHARES: Net Assets $ 60,917,723 Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 3,477,616 NET ASSET VALUE PER SHARE $ 17.52 =================
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JANUARY 31, 2005 (UNAUDITED) NET INVESTMENT INCOME: INCOME Interest $ 6,881,877 Dividends (net of $10,588 foreign withholding tax) 6,666,155 ----------------- TOTAL INCOME 13,548,032 ----------------- EXPENSES Distribution fee (Class A shares) 79,950 Distribution fee (Class B shares) 4,783,952 Distribution fee (Class C shares) 214,930 Investment advisory fee 2,775,230 Transfer agent fees and expenses 696,915 Administration fee 225,410 Shareholder reports and notices 80,695 Professional fees 41,959 Registration fees 31,076 Trustees' fees and expenses 12,171 Custodian fees 10,814 Other 52,886 ----------------- TOTAL EXPENSES 9,005,988 ----------------- NET INVESTMENT INCOME 4,542,044 ----------------- NET REALIZED AND UNREALIZED GAIN (LOSS): NET REALIZED GAIN/LOSS ON: Investments 63,684,078 Futures contracts (753,133) ----------------- NET REALIZED GAIN 62,930,945 ----------------- NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON: Investments 17,454,774 Futures contracts 359,715 ----------------- NET APPRECIATION 17,814,489 ----------------- NET GAIN 80,745,434 ----------------- NET INCREASE $ 85,287,478 =================
SEE NOTES TO FINANCIAL STATEMENTS 23 STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JANUARY 31, 2005 JULY 31, 2004 ----------------- ----------------- (UNAUDITED) INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income $ 4,542,044 $ 6,920,566 Net realized gain 62,930,945 107,937,929 Net change in unrealized appreciation 17,814,489 18,496,783 ----------------- ----------------- NET INCREASE 85,287,478 133,355,278 ----------------- ----------------- DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENTS INCOME: Class A shares (472,045) (801,953) Class B shares (3,349,624) (6,130,739) Class C shares (156,507) (254,636) Class D shares (519,806) (1,005,940) ----------------- ----------------- TOTAL DIVIDENDS (4,497,982) (8,193,268) ----------------- ----------------- Net decrease from transactions in shares of beneficial interest (121,438,659) (187,139,550) ----------------- ----------------- NET DECREASE (40,649,163) (61,977,540) NET ASSETS: Beginning of period 1,131,566,051 1,193,543,591 ----------------- ----------------- END OF PERIOD (INCLUDING ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME OF $271,278 AND $227,216, RESPECTIVELY) $ 1,090,916,888 $ 1,131,566,051 ================= =================
SEE NOTES TO FINANCIAL STATEMENTS 24 MORGAN STANLEY STRATEGIST FUND NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 2005 (UNAUDITED) 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 Adviser") determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Trustees. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund's Trustees or by the Investment Adviser using a pricing service and/or procedures approved 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 Adviser, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, U.S. Treasury or federal agency obligations. The Fund may also invest directly with institutions in repurchase agreements. The Fund's custodian receives the collateral, which is marked-to-market daily to determine that the value of the collateral does not decrease below the repurchase price plus accrued interest. D. MULTIPLE CLASS ALLOCATIONS -- Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class. E. FUTURES CONTRACTS -- A futures contract is an agreement between two parties to buy and sell financial instruments or contracts based on financial indices at a set price on a future date. Upon entering into such a contract, the Fund is required to pledge to the broker cash, U.S. Government securities or other liquid portfolio securities equal to the minimum initial margin requirements of the applicable futures exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments known as variation margin are recorded by the Fund as unrealized gains and losses. Upon closing of the contract, the Fund realizes a gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. F. FOREIGN CURRENCY TRANSLATION AND FORWARD FOREIGN CURRENCY CONTRACTS -- The books and records of the Fund are maintained in U.S. dollars as follows: (1) the foreign currency market value of investment securities, other assets and liabilities and forward foreign currency contracts ("forward contracts") are translated at the exchange rates prevailing at the end of the period; and (2) purchases, sales, income and expenses are translated at the exchange rates prevailing on the respective dates of such 26 transactions. The resultant exchange gains and losses are recorded as realized and unrealized gain/loss on foreign exchange transactions. Pursuant to U.S. federal income tax regulations, certain foreign exchange gains/losses included in realized and unrealized gain/loss are included in or are a reduction of ordinary income for federal income tax purposes. The Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of the securities. Forward contracts are valued daily at the appropriate exchange rates. The resultant unrealized exchange gains and losses are recorded as unrealized foreign currency gain or loss. The Fund records realized gains or losses on delivery of the currency or at the time the forward contract is extinguished (compensated) by entering into a closing transaction prior to delivery. G. FEDERAL INCOME TAX POLICY -- It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Accordingly, no federal income tax provision is required. H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Dividends and distributions to shareholders are recorded on the ex-dividend date. I. USE OF ESTIMATES -- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. 2. INVESTMENT ADVISORY/ADMINISTRATION AGREEMENTS Effective November 1, 2004, pursuant to an Investment Advisory Agreement, the Fund pays the Investment Adviser an advisory fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.42% to the portion of the daily net assets not exceeding $1.5 billion; and 0.395% to the portion of the daily net assets exceeding $1.5 billion. Effective November 1, 2004, pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% to the Fund's daily net assets. Prior to November 1, 2004, the Fund had retained the Investment Adviser to provide administrative services and to manage the investment of the Fund's assets pursuant to an investment management agreement pursuant to which the Fund paid the Investment Adviser a monthly management fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of 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 27 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 Adviser. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B -- up to 1.0% of the lesser of: (a) the average daily aggregate gross sales of the Class B shares since the inception of the Plan on November 8, 1989 (not including reinvestment of dividend or capital gain distributions) less the average daily aggregate net asset value of the Class B shares redeemed since the Plan's inception upon which a contingent deferred sales charge has been imposed or waived; or (b) the average daily net assets of Class B attributable to shares issued, net of related shares redeemed, since the Plan's inception; and (iii) Class C -- up to 1.0% of the average daily net assets of Class C. In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $12,422,899 at January 31, 2005. In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the six months ended January 31, 2005, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.25% and 1.0%, respectively. The Distributor has informed the Fund that for the six months ended January 31, 2005, it received contingent deferred sales charges from certain redemptions of the Fund's Class B shares and Class C shares of $423,438 and $4,433, respectively and received $31,349 in front-end sales charges from 28 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 six months ended January 31, 2005 aggregated $323,129,901 and $453,356,832, respectively. Included in the aforementioned are purchases and sales/maturities/prepayments of U.S. Government securities of $137,086,390 and $181,449,846, respectively. Included in the aforementioned are sales of $2,190,936 for portfolio transactions with other Morgan Stanley funds including a realized gain of $790,539. For the six months ended January 31, 2005, the Fund incurred brokerage commissions of $119,518 with Morgan Stanley & Co., Inc. an affiliate of the Investment Adviser, Administrator and Distributor, for portfolio transactions executed on behalf of the Fund. Morgan Stanley Trust, an affiliate of the Investment Adviser and Distributor, is the Fund's transfer agent. At January 31, 2005, the Fund had transfer agent fees and expenses payable of approximately $47,000. 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 six months ended January 31, 2005 included in Trustees' fees and expenses in the Statement of Operations amounted to $4,872. At January 31, 2005, the Fund had an accrued pension liability of $77,640 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. 29 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 future contracts involve elements of market risk in excess of the amounts reflected in the Statement of Asset 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 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. 6. SHARES OF BENEFICIAL INTEREST Transactions in shares of beneficial interest were as follows:
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JANUARY 31, 2005 JULY 31, 2004 ------------------------------- ------------------------------- (UNAUDITED) SHARES AMOUNT SHARES AMOUNT -------------- -------------- -------------- -------------- CLASS A SHARES Sold 473,690 $ 7,819,395 903,778 $ 14,533,257 Reinvestment of dividends and distributions 26,275 448,073 46,974 756,837 Redeemed (530,077) (9,053,251) (993,765) (16,018,424) -------------- -------------- -------------- -------------- Net decrease -- Class A (30,112) (785,783) (43,013) (728,330) -------------- -------------- -------------- -------------- CLASS B SHARES Sold 1,178,505 20,021,661 4,954,252 79,101,285 Reinvestment of dividends and distributions 170,419 2,908,929 330,204 5,346,630 Redeemed (8,206,663) (138,902,880) (16,430,935) (264,441,706) -------------- -------------- -------------- -------------- Net decrease -- Class B (6,857,739) (115,972,290) (11,146,479) (179,993,791) -------------- -------------- -------------- -------------- CLASS C SHARES Sold 230,710 3,900,006 682,246 10,833,219 Reinvestment of dividends and distributions 8,365 142,250 14,352 231,305 Redeemed (303,398) (5,097,511) (604,217) (9,773,538) -------------- -------------- -------------- -------------- Net increase (decrease) -- Class C (64,323) (1,055,255) 92,381 1,290,986 -------------- -------------- -------------- -------------- CLASS D SHARES Sold 134,255 2,306,572 493,807 7,927,291 Reinvestment of dividends and distributions 28,138 480,317 57,940 933,078 Redeemed (377,849) (6,412,220) (1,027,786) (16,568,784) -------------- -------------- -------------- -------------- Net decrease -- Class D (215,456) (3,625,331) (476,039) (7,708,415) -------------- -------------- -------------- -------------- Net decrease in Fund (7,167,630) $ (121,438,659) (11,573,150) $ (187,139,550) ============== ============== ============== ==============
30 7. FEDERAL INCOME TAX STATUS The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital. As of 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. 8. LEGAL MATTERS The Investment Adviser, certain affiliates of the Investment Adviser, certain officers of such affiliates and certain investment companies advised by the Investment Adviser or its affiliates, including the Fund, are named as defendants in a consolidated class action. This consolidated action also names as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint generally alleges that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Adviser and certain affiliates of the Investment Adviser allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Adviser or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Adviser or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants have moved to dismiss the action and intend to otherwise vigorously defend it. On March 10, 2005, Plaintiffs sought leave to supplement their complaint to assert claims on behalf of other investors. While the Fund and Adviser believe that each has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter. 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 SIX FOR THE YEAR ENDED JULY 31, MONTHS ENDED -------------------------------------------------------------- JANUARY 31, 2005 2004 2003 2002 2001 2000 ---------------- ---------- ---------- ---------- ---------- ---------- (UNAUDITED) CLASS A SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 16.28 $ 14.72 $ 13.53 $ 16.43 $ 20.64 $ 20.16 ------------- ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income++ 0.12 0.20 0.14 0.22 0.44 0.44 Net realized and unrealized gain (loss) 1.23 1.58 1.21 (2.84) (1.55) 2.16 ------------- ---------- ---------- ---------- ---------- ---------- Total income (loss) from investment operations 1.35 1.78 1.35 (2.62) (1.11) 2.60 ------------- ---------- ---------- ---------- ---------- ---------- Less dividends and distributions from: Net investment income (0.13) (0.22) (0.16) (0.28) (0.50) (0.37) Net realized gain - - - - (2.60) (1.75) ------------- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (0.13) (0.22) (0.16) (0.28) (3.10) (2.12) ------------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 17.50 $ 16.28 $ 14.72 $ 13.53 $ 16.43 $ 20.64 ============= ========== ========== ========== ========== ========== TOTAL RETURN+ 8.29% 12.10% 10.11% (16.14)% (6.24)% 13.48% RATIOS TO AVERAGE NET ASSETS(3): Expenses 0.95%(1)(2) 0.95% 0.93% 0.88% 0.85% 0.88% Net investment income 1.46%(1)(2) 1.24% 0.95% 1.44% 2.41% 2.06% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 62,863 $ 58,968 $ 53,951 $ 78,583 $ 116,383 $ 110,600 Portfolio turnover rate 30% 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) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 32
FOR THE SIX FOR THE YEAR ENDED JULY 31, MONTHS ENDED -------------------------------------------------------------- JANUARY 31, 2005 2004 2003 2002 2001 2000 ---------------- ---------- ---------- ---------- ---------- ---------- (UNAUDITED) CLASS B SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 16.29 $ 14.73 $ 13.54 $ 16.43 $ 20.65 $ 20.16 ------------- ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income++ 0.06 0.08 0.02 0.10 0.30 0.29 Net realized and unrealized gain (loss) 1.23 1.58 1.22 (2.84) (1.57) 2.18 ------------- ---------- ---------- ---------- ---------- ---------- Total income (loss) from investment operations 1.29 1.66 1.24 (2.74) (1.27) 2.47 ------------- ---------- ---------- ---------- ---------- ---------- Less dividends and distributions from: Net investment income (0.06) (0.10) (0.05) (0.15) (0.35) (0.23) Net realized gain - - - - (2.60) (1.75) ------------- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (0.06) (0.10) (0.05) (0.15) (2.95) (1.98) ------------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 17.52 $ 16.29 $ 14.73 $ 13.54 $ 16.43 $ 20.65 ============= ========== ========== ========== ========== ========== TOTAL RETURN+ 7.93% 11.24% 9.20% (16.77)% (7.05)% 12.79% RATIOS TO AVERAGE NET ASSETS(3): Expenses 1.70%(1)(2) 1.71% 1.73% 1.67% 1.63% 1.53% Net investment income 0.71%(1)(2) 0.48% 0.15% 0.64% 1.63% 1.41% SUPPLEMENTAL DATA: Net assets, end of period, in millions $ 923 $ 971 $ 1,042 $ 1,216 $ 1,827 $ 2,044 Portfolio turnover rate 30% 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) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 33
FOR THE SIX FOR THE YEAR ENDED JULY 31, MONTHS ENDED -------------------------------------------------------------- JANUARY 31, 2005 2004 2003 2002 2001 2000 ---------------- ---------- ---------- ---------- ---------- ---------- (UNAUDITED) CLASS C SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 16.21 $ 14.66 $ 13.46 $ 16.36 $ 20.57 $ 20.11 ------------- ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income++ 0.06 0.08 0.03 0.10 0.29 0.29 Net realized and unrealized gain (loss) 1.21 1.57 1.21 (2.83) (1.55) 2.15 ------------- ---------- ---------- ---------- ---------- ---------- Total income (loss) from investment operations 1.27 1.65 1.24 (2.73) (1.26) 2.44 ------------- ---------- ---------- ---------- ---------- ---------- Less dividends and distributions from: Net investment income (0.06) (0.10) (0.04) (0.17) (0.35) (0.23) Net realized gain - - - - (2.60) (1.75) ------------- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (0.06) (0.10) (0.04) (0.17) (2.95) (1.98) ------------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 17.42 $ 16.21 $ 14.66 $ 13.46 $ 16.36 $ 20.57 ============= ========== ========== ========== ========== ========== TOTAL RETURN+ 7.92% 11.25% 9.09% (16.70)% (7.00)% 12.62% RATIOS TO AVERAGE NET ASSETS(3): Expenses 1.70%(1)(2) 1.71% 1.73% 1.67% 1.63% 1.63% Net investment income 0.71%(1)(2) 0.48% 0.15% 0.64% 1.63% 1.31% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 43,699 $ 41,697 $ 36,351 $ 34,727 $ 45,612 $ 39,006 Portfolio turnover rate 30% 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) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 34
FOR THE SIX FOR THE YEAR ENDED JULY 31, MONTHS ENDED -------------------------------------------------------------- JANUARY 31, 2005 2004 2003 2002 2001 2000 ---------------- ---------- ---------- ---------- ---------- ---------- (UNAUDITED) CLASS D SHARES SELECTED PER SHARE DATA: Net asset value, beginning of period $ 16.29 $ 14.73 $ 13.55 $ 16.45 $ 20.67 $ 20.18 ------------- ---------- ---------- ---------- ---------- ---------- Income (loss) from investment operations: Net investment income++ 0.15 0.24 0.16 0.26 0.48 0.48 Net realized and unrealized gain (loss) 1.23 1.58 1.21 (2.85) (1.56) 2.18 ------------- ---------- ---------- ---------- ---------- ---------- Total income (loss) from investment operations 1.38 1.82 1.37 (2.59) (1.08) 2.66 ------------- ---------- ---------- ---------- ---------- ---------- Less dividends and distributions from: Net investment income (0.15) (0.26) (0.19) (0.31) (0.54) (0.42) Net realized gain - - - - (2.60) (1.75) ------------- ---------- ---------- ---------- ---------- ---------- Total dividends and distributions (0.15) (0.26) (0.19) (0.31) (3.14) (2.17) ------------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 17.52 $ 16.29 $ 14.73 $ 13.55 $ 16.45 $ 20.67 ============= ========== ========== ========== ========== ========== TOTAL RETURN+ 8.48% 12.37% 10.25% (15.94)% (6.07)% 13.79% RATIOS TO AVERAGE NET ASSETS(3): Expenses 0.70%(1)(2) 0.71% 0.73% 0.67% 0.63% 0.63% Net investment income 1.71%(1)(2) 1.48% 1.15% 1.64% 2.63% 2.31% SUPPLEMENTAL DATA: Net assets, end of period, in thousands $ 60,918 $ 60,177 $ 61,423 $ 58,834 $ 81,594 $ 80,925 Portfolio turnover rate 30% 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) NOT ANNUALIZED. (2) ANNUALIZED. (3) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC EXPENSES. SEE NOTES TO FINANCIAL STATEMENTS 35 TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael E. Nugent Fergus Reid OFFICERS Charles A. Fiumefreddo CHAIRMAN OF THE BOARD Mitchell M. Merin PRESIDENT Ronald E. Robison EXECUTIVE VICE PRESIDENT AND PRINCIPAL EXECUTIVE OFFICER Joseph J. McAlinden VICE PRESIDENT Barry Fink VICE PRESIDENT Amy R. Doberman VICE PRESIDENT Carsten Otto CHIEF COMPLIANCE OFFICER Stefanie V. Chang VICE PRESIDENT Francis J. Smith TREASURER AND CHIEF FINANCIAL OFFICER Thomas F. Caloia VICE PRESIDENT Mary E. Mullin SECRETARY TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT ADVISER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 The financial statements included herein have been taken from the records of the Fund without examination by the independent auditors and accordingly they do not express an opinion thereon. This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. (C) 2005 Morgan Stanley [MORGAN STANLEY LOGO] 38585RPT-RA05-00201P-Y01/05 [GRAPHIC] MORGAN STANLEY FUNDS MORGAN STANLEY STRATEGIST FUND SEMIANNUAL REPORT JANUARY 31, 2005 [MORGAN STANLEY LOGO] Item 2. Code of Ethics. Not applicable for semiannual reports. Item 3. Audit Committee Financial Expert. Not applicable for semiannual reports. Item 4. Principal Accountant Fees and Services Not applicable for semiannual reports. Item 5. Audit Committee of Listed Registrants. Not applicable for semiannual reports. Item 6. Refer to Item 1. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable for semiannual reports. Item 8. Portfolio Managers of Closed-End Management Investment Companies Applicable only to reports filed by closed-end funds. Item 9. Closed-End Fund Repurchases Applicable to reports filed by closed-end funds. Item 10. Submission of Matters to a Vote of Security Holders Not applicable. Item 11. Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits (a) Code of Ethics - Not applicable for semiannual reports. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Morgan Stanley Strategist Fund /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer March 22, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer March 22, 2005 /s/ Francis Smith Francis Smith Principal Financial Officer March 22, 2005