-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NHDue5pSTacMQyaiwl1M7VmxiQ+in1FCzXGE5lVko/PnkbjbUn/EDZyhTn9nhQ/P 0qlFmp+NLWxvT4cWQVjlMQ== 0001047469-06-009310.txt : 20060707 0001047469-06-009310.hdr.sgml : 20060707 20060707114124 ACCESSION NUMBER: 0001047469-06-009310 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060430 FILED AS OF DATE: 20060707 DATE AS OF CHANGE: 20060707 EFFECTIVENESS DATE: 20060707 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY LTD DURATION FUND CENTRAL INDEX KEY: 0000913534 IRS NUMBER: 133745320 STATE OF INCORPORATION: MA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-07117 FILM NUMBER: 06950254 BUSINESS ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 BUSINESS PHONE: (212) 869-6397 MAIL ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY LIMITED DURATION FUND DATE OF NAME CHANGE: 20011227 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY SHORT TERM BOND FUND DATE OF NAME CHANGE: 20010618 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY DEAN WITTER SHORT TERM BOND FUND DATE OF NAME CHANGE: 19980622 0000913534 S000004070 MORGAN STANLEY LTD DURATION FUND C000011386 MORGAN STANLEY LTD DURATION FUND msldx N-CSR 1 a2170875zn-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: 811-07117 Morgan Stanley Limited Duration 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: April 30, 2006 Date of reporting period: April 30, 2006 Item 1 - Report to Shareholders Welcome, Shareholder: In this report, you'll learn about how your investment in Morgan Stanley Limited Duration 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. Please see the prospectus for more complete information on investment risks. Fund Report For the year ended April 30, 2006 TOTAL RETURN FOR THE 12 MONTHS ENDED APRIL 30, 2006 LIPPER SHORT MORGAN LEHMAN BROTHERS INVESTMENT STANLEY LIMITED U.S. CREDIT INDEX GRADE BOND DURATION FUND (1-5 YEAR)(1) FUNDS INDEX(2) 2.29% 1.89% 2.34% THE FUND'S TOTAL RETURN ASSUMES THE REINVESTMENT OF ALL DISTRIBUTIONS. SEE PERFORMANCE SUMMARY FOR STANDARDIZED PERFORMANCE AND BENCHMARK INFORMATION. MARKET CONDITIONS During the 12-month review period, fixed-income markets were influenced by a number of factors. Throughout the period, the specter of sharply higher energy prices stoked inflationary fears and prompted concerns about the pace and sustainability of economic growth. The misfortunes of the auto industry also loomed large. Early in 2005, two icons of American industry, General Motors and Ford, were downgraded from investment-grade to below-investment grade credit status. The moves had a significant effect on both the investment-grade and high-yield bond markets, leading to a sharp rise in volatility versus U.S. Treasuries. In late summer, the Gulf Coast hurricanes resulted in unprecedented devastation. While some observers initially believed that the U.S. economy would suffer lingering aftereffects, the economic impact was less severe and far reaching than many had originally anticipated. Positive economic momentum continued, although waning somewhat in the final months of 2005 before ramping up significantly in the first quarter of 2006. In fact, the Federal Open Market Committee (the "Fed") has revised its growth and inflation projections upward for all of 2006. As many had expected, the Fed raised the federal funds target rate in 25 basis point increments at each of its meetings, bringing the rate to 4.75 percent at the close of the reporting period. Although most measures of core inflation were at or above the high end of the Fed's acceptable inflation range, the Fed's view was that the U.S. economy remains on solid footing with relatively low core inflation. Investors continued to speculate about the central bank's future course of action and if the current tightening cycle might be nearer an end. Overall, U.S. Treasury yields increased across the maturity spectrum. During the majority of the period, the yield curve was relatively flat, as short-and intermediate-term bonds were more responsive to the Fed's actions and stronger-than-expected economic data. (The yield curve tracks the difference between the yields of short-term and long-term bonds.) Long-term yields rates also rose; however, and toward the end of the period, the yield curve steepened. Within the mortgage sector, higher-coupon, longer-dated mortgage-backed issues outperformed lower-coupons issues for much of the period. As is typical during periods of rises in interest rates, prepayment speeds on mortgages slowed, resulting in the attractiveness of the higher yield offered by these issues. Meanwhile, U.S. investment-grade corporate bonds underperformed other major bond market sectors. Within the investment-grade universe, returns were unevenly distributed, with a few key names driving performance within each sector. 2 Aaa- and Baa-rated issues posted the highest returns, while A-rated issues lagged. Among the corporate sectors, financials posted the best return. The industrials sector lagged most significantly, mostly due to poor performance by the automotive manufacturers and parts producers sub-sectors. PERFORMANCE ANALYSIS Morgan Stanley Limited Duration Fund outperformed the Lehman Brothers U.S. Credit Index (1-5 Year) and underperformed the Lipper Short Investment Grade Bond Funds Index for the 12 months ended April 30, 2006. Throughout the reporting period, we kept the Fund's overall interest-rate exposure well below that of its benchmark, the Lehman Brothers U.S. Credit Index (1-5 Year). This posture served the Fund well as interest rates rose across the yield curve, especially in the short-term and intermediate-term portions of the curve. A focus on high-coupon, slow prepaying mortgage-backed securities benefited performance as these issues outperformed their lower-coupon counterparts. As is typical during periods of rising interest rates, prepayment speeds on mortgages slowed, which enhanced the appeal of these higher-yielding issues. This positioning was most favorable during the early portion of the reporting period. In the latter months, however, higher-coupon mortgage-backed issues slowed their pace. Against this backdrop, the yield advantage provided by the Fund's higher-coupon holdings offset the underperformance of its underweight in lower- and current-coupon issues, resulting in an overall neutral impact on performance. A defensive, underweighted approach toward corporate credit proved helpful as most credit spreads widened. Additionally, within the corporate credit area, favorable sector and security selection decisions further benefited relative performance. The Fund maintained a modest focus on certain medium-quality credits, such as those in the paper and forest products area. Selected life insurance and asset-backed issues remained the focus of the Fund's higher-quality activities. THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM AS DISCUSSED HEREIN OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE FUND IN THE FUTURE. 3 PORTFOLIO COMPOSITION* Corporate Bonds 50.8% Mortgage-Backed Securities 19.0 Asset-Backed Securities 11.9 Private Issues -- CMOs 10.9 Short-Term Investments 4.4 U.S. Government Agencies -- CMOs 3.0 LONG-TERM CREDIT ANALYSIS Aaa/AAA 50.8% Aa/AA 14.9 A/A 19.7 Baa/BBB 14.5 Ba/BB 0.1 * DOES NOT INCLUDE OUTSTANDING LONG FUTURES CONTRACTS WITH AN UNDERLYING FACE AMOUNT OF $29,948,954 WITH UNREALIZED DEPRECIATION OF $62,680. DATA AS OF APRIL 30, 2006. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR PORTFOLIO COMPOSITION ARE AS A PERCENTAGE OF TOTAL INVESTMENTS AND ALL PERCENTAGES FOR LONG-TERM CREDIT ANALYSIS ARE AS A PERCENTAGE OF TOTAL LONG-TERM 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 WILL NORMALLY INVEST AT LEAST 65 PERCENT OF ITS ASSETS IN SECURITIES ISSUED OR GUARANTEED AS TO PRINCIPAL AND INTEREST BY THE U.S. GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES (INCLUDING ZERO COUPON SECURITIES), INVESTMENT GRADE MORTGAGE-BACKED SECURITIES, INCLUDING COLLATERALIZED MORTGAGE OBLIGATIONS, AND INVESTMENT GRADE CORPORATE AND OTHER TYPES OF BONDS. IN SELECTING PORTFOLIO INVESTMENTS TO PURCHASE OR SELL, THE "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS INC., CONSIDERS BOTH DOMESTIC AND INTERNATIONAL ECONOMIC DEVELOPMENTS, INTEREST RATE LEVELS, THE STEEPNESS OF THE YIELD CURVE AND OTHER FACTORS, AND SEEKS TO MAINTAIN AN OVERALL AVERAGE DURATION FOR THE FUND'S PORTFOLIO OF THREE YEARS OR LESS. 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. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM N-CSRS AND FORM N-CSR, RESPECTIVELY. MORGAN STANLEY ALSO DELIVERS THE 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 4 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 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. PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD YOU MAY OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICY AND PROCEDURES WITHOUT CHARGE, UPON REQUEST, BY CALLING TOLL FREE (800) 869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT WWW.MORGANSTANLEY.COM. IT IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV. YOU MAY OBTAIN INFORMATION REGARDING HOW THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JUNE 30 WITHOUT CHARGE 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 WEB SITE 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 PERFORMANCE OF $10,000 INVESTMENT [CHART] April 1996 April 1997 April 1998 April 1999 April 2000 April 2001 April 2002 April 2003 April 2004 April 2005 April 2006 ENDING VALUE - ------------ Lehman Brothers U.S. Lipper Short Investment Fund++ Credit Index (1-5 year)(1) Grade Bond Funds Index(2) - ------ -------------------------- ------------------------- $15,482 $17,732 $15,662 6 ANNUAL AVERAGE TOTAL RETURNS--PERIOD ENDED APRIL 30, 2006 (SINCE 01/10/94) SYMBOL MSLDX 1 YEAR 2.29%(3) 5 YEARS 2.96(3) 10 YEARS 4.47(3) SINCE INCEPTION 4.44(3) 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 MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT WWW.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. (1) THE LEHMAN BROTHERS U.S. CREDIT INDEX (1-5 YEAR) INCLUDES U.S. CORPORATE AND SPECIFIED FOREIGN DEBENTURES AND SECURED NOTES WITH MATURITIES OF ONE TO FIVE YEARS. 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 LIPPER SHORT INVESTMENT GRADE BOND FUNDS INDEX IS AN EQUALLY WEIGHTED PERFORMANCE INDEX OF THE LARGEST QUALIFYING FUNDS (BASED ON NET ASSETS) IN THE LIPPER SHORT INVESTMENT GRADE BOND 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. (3) FIGURE SHOWN ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS. THERE ARE NO SALES CHARGES. ++ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON APRIL 30, 2006. 7 Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including redemption fees; and (2) ongoing costs, including advisory 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 11/01/05 - 04/30/06. 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), redemption fees or exchange fees.
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- --------------- 11/01/05 - 11/01/05 04/30/06 04/30/06 ------------- ------------- --------------- Actual (1.62% return) $1,000.00 $1,016.20 $4.00 Hypothetical (5% annual return before expenses) $1,000.00 $1,020.83 $4.01
- ---------- * EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.80% MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 181/365 (TO REFLECT THE ONE-HALF YEAR PERIOD). IF THE FUND HAD BORNE ALL OF ITS EXPENSES THAT WERE WAIVED BY THE INVESTMENT ADVISER AND ADMINISTRATOR, THE ANNUALIZED EXPENSES RATIOS FOR THE ONE HALF YEAR PERIOD WOULD HAVE BEEN 0.88% 8 Investment Advisory Agreement Approval NATURE, EXTENT AND QUALITY OF SERVICES The Board reviewed and considered the nature and extent of the investment advisory services provided by the Investment Adviser under the Advisory Agreement, including portfolio management, investment research and fixed income securities trading. The Board also reviewed and considered the nature and extent of the non-advisory, administrative services provided by the Fund's Administrator under the Administration Agreement, including accounting, clerical, bookkeeping, compliance, business management and planning, and the provision of supplies, office space and utilities at the Investment Adviser's expense. (The Investment Adviser and the Administrator together are referred to as the "Adviser" and the Advisory and Administration Agreements together are referred to as the "Management Agreement.") The Board also compared the nature of the services provided by the Adviser with similar services provided by non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper"). The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser who provide the administrative and advisory services to the Fund. The Board determined that the Adviser's portfolio managers and key personnel are well qualified by education and/or training and experience to perform the services in an efficient and professional manner. The Board concluded that the nature and extent of the advisory and administrative services provided were necessary and appropriate for the conduct of the business and investment activities of the Fund. The Board also concluded that the overall quality of the advisory and administrative services was satisfactory. PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS On a regular basis, the Board reviews the performance of all funds in the Morgan Stanley Fund Complex, including the Fund, compared to their peers, paying specific attention to the underperforming funds. In addition, the Board specifically reviewed the Fund's performance for the one-, three- and five-year periods ended November 30, 2005, as shown in a report provided by Lipper (the "Lipper Report"), compared to the performance of comparable funds selected by Lipper (the "performance peer group"). The Board also discussed with the Adviser the performance goals and the actual results achieved in managing the Fund. When a fund underperforms its performance peer group, the Board discusses with the Adviser the causes of the underperformance and, where necessary, specific changes to the fund's investment strategy or investment personnel. The Board concluded that the Fund can reasonably be expected to be competitive with that of its performance peer group based on recent action taken or proposed to be taken by the Adviser with respect to the Fund's investment strategy and/or investment personnel. FEES RELATIVE TO OTHER PROPRIETARY FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT STRATEGIES The Board reviewed the advisory and administrative fees (together, the "management fee") rate paid by the Fund under the Management Agreement. The Board noted that the management fee rate was higher than the management fee rates charged by the Adviser to other proprietary funds it manages with investment strategies 9 comparable to those of the Fund. The Board also noted that in November 2004, the Fund reduced the management fee rate and that the Fund had not had the benefit of a full year under the reduced fee. The Board determined that it would reevaluate the management fee rate once the Fund had had the benefit of the reduced management fee rate for a full year. FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS The Board reviewed the management fee rate and total expense ratio of the Fund as compared to the average management fee rate and average total expense ratio for the funds, selected by Lipper (the "expense peer group"), managed by other advisers with investment strategies comparable to those of the Fund, as shown in the Lipper Report. The Board concluded that the Fund's management fee rate and total expense ratio were competitive with those of its expense peer group. BREAKPOINTS AND ECONOMIES OF SCALE The Board reviewed the structure of the Fund's management fee schedule under the Management Agreement and noted that it includes breakpoints. The Board also reviewed the level of the Fund's management fee and noted that the fee, as a percentage of the Fund's net assets, would decrease as net assets increase because the management fee includes breakpoints. The Board concluded that the Fund's management fee would reflect economies of scale as assets increase. PROFITABILITY OF ADVISER AND AFFILIATES The Board considered information concerning the costs incurred and profits realized by the Adviser and affiliates during the last year from their relationship with the Fund and during the last two years from their relationship with the Morgan Stanley Fund Complex and reviewed with the Adviser the cost allocation methodology used to determine the profitability of the Adviser and affiliates. Based on its review of the information it received, the Board concluded that the profits earned by the Adviser and affiliates were not excessive in light of the advisory, administrative and other services provided to the Fund. FALL-OUT BENEFITS The Board considered so-called "fall-out benefits" derived by the Adviser and affiliates from their relationship with the Fund and the Morgan Stanley Fund Complex, such as "float" benefits derived from handling of checks for purchases and sales of Fund shares, through a broker-dealer affiliate of the Adviser. The Board concluded that the float benefits were relatively small. 10 SOFT DOLLAR BENEFITS The Board considered whether the Adviser realizes any benefits from commissions paid to brokers who execute securities transactions for the Fund ("soft dollars"). The Board noted that the Fund invests only in fixed income securities, which do not generate soft dollars. ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS The Board considered whether the Adviser is financially sound and has the resources necessary to perform its obligations under the Management Agreement. The Board noted that the Adviser's operations remain profitable, although increased expenses in recent years have reduced the Adviser's profitability. The Board concluded that the Adviser has the financial resources necessary to fulfill its obligations under the Management Agreement. HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER The Board also reviewed and considered the historical relationship between the Fund and the Adviser, including the organizational structure of the Adviser, the policies and procedures formulated and adopted by the Adviser for managing the Fund's operations and the Board's confidence in the competence and integrity of the senior managers and key personnel of the Adviser. The Board concluded that it is beneficial for the Fund to continue its relationship with the Adviser. OTHER FACTORS AND CURRENT TRENDS The Board considered the controls and procedures adopted and implemented by the Adviser and monitored by the Fund's Chief Compliance Officer and concluded that the conduct of business by the Adviser indicates a good faith effort on its part to adhere to high ethical standards in the conduct of the Fund's business. GENERAL CONCLUSION After considering and weighing all of the above factors, the Board concluded that it would be in the best interest of the Fund and its shareholders to approve renewal of the Management Agreement for another year. 11 Morgan Stanley Limited Duration Fund PORTFOLIO OF INVESTMENTS -- APRIL 30, 2006
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------- Corporate Bonds (50.6%) AEROSPACE & DEFENSE (0.5%) $435 McDonnell Douglas Corp. 6.875% 11/01/06 $ 437,942 330 Northrop Grumman Corp. 4.079 11/16/06 327,903 65 Raytheon Co. 6.15 11/01/08 66,170 55 Raytheon Co. 6.75 08/15/07 55,738 ---------- 887,753 ---------- AIR FREIGHT/COURIERS (0.2%) 385 Fedex Corp. 2.65 04/01/07 375,079 ---------- AIRLINES (0.3%) 435 Southwest Airlines Co. (Series 01-1) 5.496 11/01/06 435,852 ---------- AUTO PARTS: O.E.M. (0.3%) 530 Johnson Controls, Inc. 5.00 11/15/06 528,321 ---------- BEVERAGES: ALCOHOLIC (0.3%) 460 Miller Brewing Co. - 144A* 4.25 08/15/08 448,467 ---------- BUILDING PRODUCTS (0.1%) 200 Masco Corp. 4.625 08/15/07 197,477 ---------- CABLE/SATELLITE TV (0.9%) 710 Comcast Cable Communications, Inc. 6.875 06/15/09 736,179 427 Cox Communications Inc. 5.45+ 12/14/07 429,431 250 Cox Communications Inc. 7.75 08/15/06 251,382 ---------- 1,416,992 ---------- CASINO/GAMING (0.3%) 455 Harrahs Operating Co. Inc. 7.125 06/01/07 462,221 ---------- CHEMICALS: MAJOR DIVERSIFIED (0.2%) 275 ICI Wilmington Inc. 4.375 12/01/08 264,945 ---------- CONTAINERS/PACKAGING (0.1%) 145 Sealed Air Corp. - 144A* 6.95 05/15/09 150,422 ---------- DEPARTMENT STORES (0.6%) 160 Federated Department Stores, Inc. 6.30 04/01/09 163,288 820 May Department Stores Co., Inc. 3.95 07/15/07 803,112 ---------- 966,400 ---------- DRUGSTORE CHAINS (0.1%) 100 CVS Corp. 3.875 11/01/07 97,832 ----------
SEE NOTES TO FINANCIAL STATEMENTS 12
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------- ELECTRIC UTILITIES (8.3%) $ 415 Ameren Corp. 4.263% 05/15/07 $ 409,853 385 Appalachian Power Co. (Series G) 3.60 05/15/08 371,423 475 Baltimore Gas & Electric Co. 6.625 03/15/08 485,118 1,175 Carolina Power & Light Company Inc. 6.80 08/15/07 1,194,203 480 CC Funding Trust I 6.90 02/16/07 484,925 710 Columbus Southern Power Co. 4.40 12/01/10 674,416 2,120 Consolidated Natural Gas Co. (Series B) 5.375 11/01/06 2,119,678 270 Consumers Energy Co. 4.80 02/17/09 264,581 350 Dominion Resources Inc. 5.687 05/15/08 350,879 1,055 DTE Energy Co. 6.45 06/01/06 1,055,860 335 Duke Energy Corp. 3.75 03/05/08 325,798 185 Entergy Gulf States, Inc. 3.60 06/01/08 177,246 295 Entergy Gulf States, Inc. 5.22+ 12/01/09 291,990 605 FPL Group Capital Inc. 5.551 02/16/08 605,921 1,090 Pacific Gas & Electric Co. 3.60 03/01/09 1,038,188 165 Panhandle Eastern Pipe Line Co. (Series B) 2.75 03/15/07 161,198 595 Peco Energy Co. 3.50 05/01/08 573,838 1,935 Public Service Electric & Gas Co. 5.065+ 06/23/06 1,934,687 450 Southwestern Public Service Co. (Series A) 6.20 03/01/09 458,056 345 Wisconsin Electric Power Co. 3.50 12/01/07 335,480 ----------- 13,313,338 ----------- ELECTRICAL PRODUCTS (0.3%) 480 Cooper Industries Inc. 5.25 07/01/07 477,645 ----------- ENVIRONMENTAL SERVICES (0.2%) 360 WMX Technologies, Inc. 7.00 10/15/06 362,609 ----------- FINANCE/RENTAL/LEASING (3.4%) 840 American Honda Finance Corp. - 144A* 3.85 11/06/08 810,807 545 CIT Group, Inc. 2.875 09/29/06 540,027 695 CIT Group, Inc. 4.75 08/15/08 685,758 710 Countrywide Home Loans, Inc. (Series MTN) 3.25 05/21/08 680,886 355 MBNA Corp. 5.14+ 05/05/08 358,013 1,360 Nationwide Buildings Society - 144A* (United Kingdom) 2.625 01/30/07 1,333,918 500 Residential Capital Corp. 6.125 11/21/08 498,136 600 SLM Corp. 4.00 01/15/10 569,179 ----------- 5,476,724 ----------- FINANCIAL CONGLOMERATES (4.4%) 920 Bank One NA Illinois 4.81+ 05/05/06 919,986 145 Chase Manhattan Corp. 7.00 11/15/09 151,842
SEE NOTES TO FINANCIAL STATEMENTS 13
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------- $1,780 Citigroup Global Markets Inc. 5.00+% 12/12/06 $1,781,426 595 Citigroup Inc. 5.50 08/09/06 595,666 715 General Electric Capital Corp. 4.25 12/01/10 680,689 535 General Electric Capital Corp. 5.375 03/15/07 535,721 815 ING Security Life Institutional - 144A* 2.70 02/15/07 796,139 1,045 Pricoa Global Funding I - 144A* 3.90 12/15/08 1,006,559 610 Prudential Insurance Co. - 144A* 6.375 07/23/06 611,502 ---------- 7,079,530 FOOD RETAIL (1.3%) ---------- 1,780 Kroger Co. 7.625 09/15/06 1,792,957 290 Safeway Inc. 7.50 09/15/09 306,576 ---------- 2,099,533 ---------- FOOD: MAJOR DIVERSIFIED (1.3%) 565 General Mills Inc. 3.875 11/30/07 551,809 190 Heinz (H.J.) Co. - 144A* 6.428 12/01/08 193,189 1,270 Kraft Foods Inc. 5.25 06/01/07 1,266,516 ---------- 2,011,514 ---------- FOREST PRODUCTS (0.0%) 57 Weyerhaeuser Co. 6.125 03/15/07 57,226 ---------- GAS DISTRIBUTORS (0.9%) 320 Nisource Finance Corp. 5.344+ 11/23/09 321,380 44 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A*(Qatar) 7.628 09/15/06 44,441 1,025 Sempra Energy 4.75 05/15/09 1,003,657 ---------- 1,369,478 ---------- HOME FURNISHINGS (0.3%) 450 Mohawk Industries, Inc. (Class C) 6.50 04/15/07 454,149 ---------- HOTELS/RESORTS/CRUISELINES (0.5%) 545 Hyatt Equities LLC - 144A* 6.875 06/15/07 551,608 210 Starwood Hotels & Resorts Worldwide, Inc. 7.375+ 05/01/07 214,725 ---------- 766,333 ---------- HOUSEHOLD/PERSONAL CARE (0.3%) 510 Clorox Co. (The) 5.025+ 12/14/07 510,721 ---------- INDUSTRIAL CONGLOMERATES (0.2%) 270 Textron Financial Corp. 4.125 03/03/08 264,146 ---------- INSURANCE BROKERS/SERVICES (0.8%) 1,265 Marsh & McLennan Companies Inc. 5.375 03/15/07 1,261,415 ----------
SEE NOTES TO FINANCIAL STATEMENTS 14
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------- INTEGRATED OIL (0.8%) $1,228 Conoco Funding Co. (Canada) 5.45% 10/15/06 $1,228,501 ---------- INVESTMENT BANKS/BROKERS (1.2%) 1,055 Goldman Sachs Group Inc. (The) 4.125 01/15/08 1,035,282 917 Lehman Brothers Holdings, Inc. 8.25 06/15/07 946,085 ---------- 1,981,367 ---------- INVESTMENT MANAGERS (1.2%) 1,240 TIAA Global Markets - 144A* 3.875 01/22/08 1,209,538 750 TIAA Global Markets - 144A* 5.00 03/01/07 747,087 ---------- 1,956,625 ---------- LIFE/HEALTH INSURANCE (2.8%) 1,540 Genworth Financial, Inc. 5.06+ 06/15/07 1,543,095 585 John Hancock Financial Services, Inc. 5.625 12/01/08 589,892 450 John Hancock Global Funding II - 144A* 5.625 06/27/06 450,227 1,255 Met Life Global Funding I - 144A* 3.375 10/05/07 1,218,244 355 Monumental Global Funding II - 144A* 3.85 03/03/08 345,466 350 Monumental Global Funding II - 144A* 4.375 07/30/09 339,282 ---------- 4,486,206 ---------- MAJOR BANKS (4.9%) 1,290 ABN Amro Bank (Netherlands) 4.80+ 05/11/07 1,291,491 800 Bank of America Corp. 3.375 02/17/09 760,813 265 Bank of America Corp. 4.75 10/15/06 264,381 80 Bank of America Corp. 5.25 02/01/07 80,011 285 Bank of New York Co., Inc. (The) 5.20 07/01/07 284,380 955 Branch Banking & Trust Corp. 4.90+ 06/04/07 956,154 500 Huntington National Bank 2.75 10/16/06 494,362 895 Key Bank NA 7.125 08/15/06 899,232 315 Popular North America Inc. (Series MTN) 5.65 04/15/09 314,400 1,420 Suntrust Bank Atlanta 7.25 09/15/06 1,429,423 180 Wachovia Corp. 3.625 02/17/09 172,155 880 Wachovia Corp. 4.95 11/01/06 878,349 ---------- 7,825,151 ---------- MAJOR TELECOMMUNICATIONS (0.9%) 325 Deutsche Telekom International Finance Corp. (Netherlands) 8.00+ 06/15/10 353,580 385 Telecom Italia Capital SpA (Luxembourg) 4.00 11/15/08 371,474 740 Verizon Global Funding Corp. 6.125 06/15/07 745,884 ---------- 1,470,938 ----------
SEE NOTES TO FINANCIAL STATEMENTS 15
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------- MANAGED HEALTH CARE (0.7%) $ 480 UnitedHealth Group Inc. 4.125% 08/15/09 $ 461,403 685 WellPoint Health Networks Inc. 6.375 06/15/06 685,964 ---------- 1,147,367 ---------- MEDIA CONGLOMERATES (0.4%) 340 Time Warner, Inc. 6.15 05/01/07 342,485 300 Viacom Inc. - 144A* 5.75 04/30/11 298,236 ---------- 640,721 ---------- MEDICAL SPECIALTIES (0.4%) 605 Baxter International Inc. 5.196 02/16/08 602,530 ---------- MOTOR VEHICLES (0.9%) 295 DaimlerChrysler North American Holdings Co. 4.05 06/04/08 286,480 345 DaimlerChrysler North American Holdings Co. 5.33+ 03/13/09 345,375 860 DaimlerChrysler North American Holdings Co. 6.40 05/15/06 860,271 ---------- 1,492,126 ---------- MULTI-LINE INSURANCE (1.6%) 1,265 American General Finance Corp. (Series MTNF) 5.875 07/14/06 1,266,948 125 AXA Financial, Inc. 6.50 04/01/08 127,459 340 Hartford Financial Services Group, Inc. (The) 2.375 06/01/06 339,258 500 International Lease Finance Corp. 3.75 08/01/07 489,466 310 International Lease Finance Corp. 4.625 06/02/08 305,318 ---------- 2,528,449 ---------- OIL & GAS PIPELINES (0.3%) 555 Enbridge Energy Partners, LP 4.00 01/15/09 530,630 ---------- OTHER CONSUMER SERVICES (0.4%) 565 Cendant Corp. 6.25 01/15/08 571,621 ---------- OTHER METALS/MINERALS (0.2%) 245 Brascan Corp. (Canada) 8.125 12/15/08 259,859 ---------- PROPERTY - CASUALTY INSURERS (1.7%) 845 Allstate Finance Global Funding II - 144A* 2.625 10/22/06 834,295 815 Mantis Reef Ltd. - 144A* (Australia) 4.692 11/14/08 792,022 255 Platinum Underwriters Holdings, Ltd. (Series B) (Bermuda) 6.371 11/16/07 253,950 405 St. Paul Travelers Companies, Inc. (The) 5.01 08/16/07 402,795 500 XLLIAC Global Funding - 144A* 4.80 08/10/10 483,339 ---------- 2,766,401 ----------
SEE NOTES TO FINANCIAL STATEMENTS 16
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------- PULP & PAPER (0.4%) $ 365 International Paper Co. 3.80% 04/01/08 $ 353,878 375 Sappi Papier Holding AG - 144A* (Austria) 6.75 06/15/12 357,066 ---------- 710,944 ---------- RAILROADS (1.3%) 385 Burlington North Santa Fe Railway Co. 6.125 03/15/09 392,605 270 Norfolk Southern Corp. 7.35 05/15/07 275,842 285 Union Pacific Corp. 3.625 06/01/10 264,601 1,120 Union Pacific Corp. (Series MTNE) 6.79 11/09/07 1,143,664 ---------- 2,076,712 ---------- REAL ESTATE DEVELOPMENT (0.5%) 430 World Financial Properties - 144A* 6.91 09/01/13 450,439 379 World Financial Properties - 144A* 6.95 09/01/13 398,059 ---------- 848,498 ---------- REAL ESTATE INVESTMENT TRUSTS (0.5%) 440 EOP Operating LP 6.763 06/15/07 445,952 330 Simon Property Group LP 6.375 11/15/07 334,520 ---------- 780,472 ---------- REGIONAL BANKS (0.8%) 845 US Bancorp (Series MTNN) 5.10 07/15/07 840,914 525 US Bank NA (Series BKNT) 2.85 11/15/06 518,513 ---------- 1,359,427 ---------- SAVINGS BANKS (1.4%) 420 Household Finance Corp. 4.125 12/15/08 407,877 1,010 Household Finance Corp. 6.40 06/17/08 1,030,852 150 Sovereign Bank (Series CD) 4.00 02/01/08 146,744 255 Washington Mutual Inc. 7.50 08/15/06 256,634 310 Washington Mutual Inc. 8.25 04/01/10 336,110 ---------- 2,178,217 ---------- TRUCKS/CONSTRUCTION/FARM MACHINERY (0.8%) 500 Caterpillar Financial Services Corp. (Series MTNF) 3.625 11/15/07 487,707 525 John Deere Capital Corp. 3.375 10/01/07 510,932 360 John Deere Capital Corp. 4.50 08/22/07 356,210 ---------- 1,354,849 ---------- WIRELESS TELECOMMUNICATIONS (0.4%) 580 Vodafone Group PLC (United Kingdom) 5.05+ 12/28/07 580,401 ---------- Total Corporate Bonds (COST $82,581,707) 81,114,134 ----------
SEE NOTES TO FINANCIAL STATEMENTS 17
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------------- U.S. Government Agencies -- Mortgage-Backed Securities (18.9%) $1,309 Federal Home Loan Mortgage Corp. 7.50% 10/01/26 - 08/01/32 $ 1,365,915 950 Federal Home Loan Mortgage Corp. ARM 3.536 07/01/34 929,009 1,517 Federal Home Loan Mortgage Corp. ARM 4.158 08/01/34 1,502,593 18 Federal Home Loan Mortgage Corp. PC Gold 6.50 07/01/29 - 09/01/29 18,214 2,013 Federal Home Loan Mortgage Corp. PC Gold 7.50 01/01/30 - 07/01/32 2,100,178 985 Federal National Mortgage Assoc. 6.50 01/01/29 - 07/01/32 1,005,561 5,872 Federal National Mortgage Assoc. 7.00 02/01/26 - 12/01/35 6,045,395 400 Federal National Mortgage Assoc. 7.00 *** 411,250 758 Federal National Mortgage Assoc. 7.50 09/01/29 - 09/01/32 789,898 998 Federal National Mortgage Assoc. ARM. 3.566 07/01/34 985,647 517 Federal National Mortgage Assoc. ARM. 3.765 06/01/34 515,365 1,347 Federal National Mortgage Assoc. ARM. 4.112 09/01/34 1,333,677 1,568 Federal National Mortgage Assoc. ARM. 4.189 05/01/35 1,552,985 1,342 Federal National Mortgage Assoc. ARM. 4.324 04/01/35 1,323,324 1,292 Federal National Mortgage Assoc. ARM. 4.355 05/01/35 1,273,167 1,170 Federal National Mortgage Assoc. ARM. 4.506 04/01/35 1,155,214 1,305 Federal National Mortgage Assoc. ARM. 4.724 07/01/33 1,305,300 1,405 Federal National Mortgage Assoc. ARM. 4.767 07/01/35 1,373,621 1,947 Federal National Mortgage Assoc. ARM 4.777 09/01/35 1,908,183 1,444 Government National Mortgage Assoc. II 4.375+ 06/20/22 - 05/20/23 1,443,395 1,634 Government National Mortgage Assoc. II 4.50+ 08/20/29 - 09/20/29 1,636,355 337 Government National Mortgage Assoc. II 5.125+ 10/20/24 - 12/20/24 339,491 ------------ Total U.S. Government Agencies -- Mortgage-Backed Securities (COST $30,777,427) 30,313,737 ============ Asset-Backed Securities (11.8%) FINANCE/RENTAL/LEASING 1,800 Capital Auto Receivables Asset Trust 2006-1 A3 5.03 10/15/09 1,792,784 600 Capital One Multi-Asset Execution Trust 2005-A2 A2 4.05 02/15/11 587,799 1,675 Capital One Prime Auto Receivables Trust 2006-1 A3 4.99 09/15/10 1,668,811 1,800 Chase Manhattan Auto Owner Trust 2004-A A4 2.83 09/15/10 1,746,363 1,450 CNH Equipment Trust 2005-A A3 4.02 04/15/09 1,431,676 1,600 Daimler Chrysler Auto Trust 2005-B A3 4.04 09/08/09 1,580,832 656 Harley-Davidson Motorcycle Trust 2002-2 A2 3.09 06/15/10 648,503 2,801 Harley-Davidson Motorcycle Trust 2003-3 A2 2.76 05/15/11 2,758,782 725 Hertz Vehicle Financing LLC 2005-2A A2 4.93 02/25/10 717,198 1,500 Nissan Auto Receivables Owner Trust 2004-A A4 2.76 07/15/09 1,455,278 1,500 Nissan Auto Receivables Owner Trust 2005-B A3 3.99 07/15/09 1,480,360 2,150 USAA Auto Owner Trust 2005-3 A3 4.55 02/16/10 2,130,717
SEE NOTES TO FINANCIAL STATEMENTS 18
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------------- $ 1,000 Wachovia Auto Owner Trust 2005-B A3 4.79% 04/20/10 $ 993,527 ------------ Total Asset-Backed Securities (COST $19,273,815) 18,992,630 ------------ Private Issues -- Collateralized Mortgage Obligations (10.9%) 696 Bear Stearns Series 2003-3 3A 5.309+ 10/25/33 697,610 4,060 CountryWide Alt Ln Tst - 2005-81 X1 IO 1.368+ 02/25/37 227,110 5,488 CountryWide Alt Ln Tst - 2006-0A1 2X IO 1.055+ 03/20/46 283,812 7,237 CountryWide Home Loans - 2004-25 1X IO 1.562+ 02/25/35 176,400 989 CountryWide Alt Ln Tst - 2006-0A1 1A2 5.223+ 03/20/46 989,565 138 DSLA Nim Corp. - 2006-1 N1 5.926+ 04/20/46 137,926 3,048 Greenpoint Mortgage Funding Trust - 2005-AR3 X1 IO 1.627+ 08/25/45 100,477 900 Greenpoint Mortgage Funding Trust - 2006-AR2 4A1 6.959+ 03/25/36 923,624 5,034 Greenpoint Mortgage Funding Trust - 2005-AR4 X4 IO 1.532+ 10/25/45 162,822 2 Harborview Mortgage Loan Trust - 2006-1 PO1 PO 0.00 03/19/37 1,610 10,439 Harborview Mortgage Loan Trust - 2005-16 X3 IO 1.38+ 01/19/36 368,618 5,270 Harborview Mortgage Loan Trust - 2005-3 X2 IO 0.798+ 06/19/35 138,346 5,322 Harborview Mortgage Loan Trust - 2006-1 X1 IO 1.424+ 03/19/37 276,103 3,825 Harborview Mortgage Loan Trust - 2005-16 X1 IO 1.712+ 01/19/36 136,151 6,470 Harborview Mortgage Loan Trust - 2005-2 X IO 1.102+ 05/19/35 169,829 970 Harborview Mortgage Loan - 2006-1 2A1A 5.15+ 03/19/37 970,225 1,968 Harborview Mortgage Loan Trust - 2005-16 4A1A 5.888+ 01/19/36 2,010,712 111 Harborview Nim Corp. 2006-BU1 N1 5.926+ 02/20/46 111,288 918 Luminent Mortgage Trust - 2006-1 A1 5.199+ 04/25/36 919,108 891 Luminent Mortgage Trust - 2006-2 A1B 5.239+ 02/25/46 891,885 555 Residential Accredit Loans Inc. - 2006-Q01 1A1 5.219+ 02/25/46 554,678 473 Residential Accredit Loans Inc. - 2006-Q01 2A1 5.229+ 02/25/46 475,416 903 Structured Asset Mortgage Investment Inc. - 2006-AR1 2A2 5.269+ 02/25/36 905,734 1,127 Structured Asset Mortgage Investment Inc. - 2006-AR2 A2 5.269+ 02/25/36 1,129,746 6,431 Washington Mutual Mortgage Pass-Through Certificates 2004-AR10 X IO 0.576+ 07/25/44 120,576 3,697 Washington Mutual Mortgage Pass-Through Certificates 2004-AR8 X IO 0.584+ 06/25/44 69,315 9,137 Washington Mutual Mortgage Pass-Through Certificates 2004-AR12 X IO 0.601+ 10/25/44 159,892 1,657 Washington Mutual Mortgage Pass-Through Certificates 2005-AR15 A1B3 5.299+ 11/25/45 1,667,777 754 Washington Mutual Mortgage Pass-Through Certificates 2005-AR8 2AB3 5.319+ 07/25/45 758,540 1,866 Washington Mutual Mortgage Pass-Through Certificates 2005-AR13 A1B3 5.319+ 10/25/45 1,875,939 ------------ Total Private Issues -- Collateralized Mortgage Obligations (COST $17,501,138) 17,410,834 ------------
SEE NOTES TO FINANCIAL STATEMENTS 19
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - --------------------------------------------------------------------------------------------------------------- U.S. Government Agencies -- Collateralized Mortgage Obligations (3.0%) $1,597 Federal Home Loan Mortgage Corp. 2182 ZC 7.50% 09/15/29 $ 1,672,455 1,946 Federal National Mortgage Assoc. 2005 - 27 NA (PAC) 5.50 01/25/24 1,945,207 1,100 Federal National Mortgage Assoc. 2005 - 27 NA (PAC) 6.50 06/25/35 1,136,192 ------------ Total U.S. Government Agencies -- Collateralized Mortgage Obligations (COST $4,917,802) 4,753,854 ------------ Short-Term Investments (4.4%) U.S. Government Obligation (a) (0.1%) 200 U.S. Treasury Bill** (COST $198,272) 4.26 07/13/06 198,272 ------------ Repurchase Agreement (4.3%) 6,838 Joint repurchase agreement account (dated 04/28/06; proceeds $6,840,721) (b) (COST $6,838,000) 4.775 05/01/06 6,838,000 ------------ Total Short-Term Investments (COST $7,036,272) 7,036,272 ------------ Total Investments (COST $162,088,161)(C)(D) 99.6% 159,621,461 Other Assets in Excess of Liabilities 0.4 578,859 ------------ Net Assets 100.0% $160,200,320 ============
- ---------- ARM ADJUSTABLE RATE MORTGAGE. INTEREST RATE IN EFFECT AS OF APRIL 30, 2006. IO INTEREST ONLY SECURITY. PAC PLANNED AMORTIZATION CLASS. PC PARTICIPATION CERTIFICATE. PO PRINCIPAL ONLY SECURITY. * RESALE IS RESTRICTED TO QUALIFIED INSTITUTIONAL INVESTORS. ** A PORTION OF THIS SECURITY HAS BEEN PHYSICALLY SEGREGATED IN CONNECTION WITH OPEN FUTURES CONTRACTS IN THE AMOUNT OF $55,125. *** SECURITY WAS 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. + FLOATING RATE SECURITY; RATE SHOWN IS THE RATE IN EFFECT AT APRIL 30, 2006. (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 AN AMOUNT EQUAL TO $30,368,133 IN CONNECTION WITH SECURITIES PURCHASED ON A FORWARD COMMITMENT BASIS AND OPEN FUTURES CONTRACTS. (D) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $164,069,246. THE AGGREGATE GROSS UNREALIZED APPRECIATION IS $104,713 AND THE AGGREGATE GROSS UNREALIZED DEPRECIATION IS $4,552,498, RESULTING IN NET UNREALIZED DEPRECIATION OF $4,447,785. SEE NOTES TO FINANCIAL STATEMENTS 20 FUTURES CONTRACTS OPEN AT APRIL 30, 2006: NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE DEPRECIATION - ------------------------------------------------------------------------------- 147 Long U.S. Treasury Note 2 year, June 2006 $29,948,954 $(62,680) ======== SEE NOTES TO FINANCIAL STATEMENTS 21 Morgan Stanley Limited Duration Fund FINANCIAL STATEMENTS Statement of Assets and Liabilities APRIL 30, 2006 Assets: Investments in securities, at value (cost $162,088,161) $159,621,461 Receivable for: Interest 1,403,680 Investments sold 303,795 Principal paydowns 100,023 Shares of beneficial interest sold 40,702 Variation margin 22,969 Prepaid expenses and other assets 20,252 ------------ Total Assets 161,512,882 ------------ Liabilities: Payable for: Investments purchased 741,944 Shares of beneficial interest redeemed 355,577 Investment advisory fee 69,132 Dividends to shareholders 35,350 Administration fee 10,781 Transfer agent fee 10,245 Accrued expenses and other payables 89,533 ------------ Total Liabilities 1,312,562 ------------ Net Assets $160,200,320 ------------ Composition of Net Assets: Paid-in-capital $190,680,229 Net unrealized depreciation (2,529,380) Dividends in excess of net investment income (1,878,696) Accumulated net realized loss (26,071,833) ------------ Net Assets $160,200,320 ============ Net Asset Value Per Share, 17,759,262 shares outstanding (UNLIMITED SHARES AUTHORIZED OF $.01 PAR VALUE) $ 9.02 ============ Statement of Operations FOR THE YEAR ENDED APRIL 30, 2006 Net Investment Income: Interest Income $ 9,785,672 ----------- Expenses Investment advisory fee 1,355,785 Transfer agent fees and expenses 307,050 Administration fee 208,582 Professional fees 94,375 Shareholder reports and notices 66,084 Custodian fees 46,245 Registration fees 34,842 Trustees' fees and expenses 3,575 Other 42,051 ----------- Total Expenses 2,158,589 Less: amounts waived/reimbursed (72,490) Less: expense offset (276) ----------- Net Expenses 2,085,823 ----------- Net Investment Income 7,699,849 ----------- Net Realized and Unrealized Gain (Loss): Net Realized Gain (Loss) on: Investments (3,042,686) Futures contracts 76,166 ----------- Net Realized Loss (2,966,520) ----------- Net Change in Unrealized Appreciation/ Depreciation on: Investments 677,389 Futures contracts (3,346) ----------- Net Appreciation 674,043 ----------- Net Loss (2,292,477) ----------- Net Increase $ 5,407,372 =========== SEE NOTES TO FINANCIAL STATEMENTS 22 Statements of Changes in Net Assets
FOR THE YEAR FOR THE YEAR ENDED ENDED APRIL 30, 2006 APRIL 30, 2005 -------------- -------------- Increase (Decrease) in Net Assets: Operations: Net investment income $ 7,699,849 $ 11,464,957 Net realized loss (2,966,520) (1,312,107) Net change in unrealized appreciation/depreciation 674,043 (5,091,390) ------------- ------------- Net Increase 5,407,372 5,061,460 Dividends to Shareholders from Net Investment Income (10,065,548) (16,474,040) Net decrease from transactions in shares of beneficial interest (191,265,877) (120,871,693) ------------- ------------- Net Decrease (195,924,053) (132,284,273) Net Assets: Beginning of period 356,124,373 488,408,646 ------------- ------------- End of Period (INCLUDING DIVIDENDS IN EXCESS OF NET INVESTMENT INCOME OF $1,878,696 AND $3,499,479, RESPECTIVELY) $ 160,200,320 $ 356,124,373 ============= =============
SEE NOTES TO FINANCIAL STATEMENTS 23 Morgan Stanley Limited Duration Fund NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2006 1. Organization and Accounting Policies Morgan Stanley Limited Duration Fund (the "Fund") is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The Fund's investment objective is to provide a high level of current income consistent with the preservation of capital. The Fund was organized as a Massachusetts business trust on October 22, 1993 and commenced operations on January 10, 1994. Effective August 29, 2005, the Board of Trustees of the Fund approved the implementation of a 2% redemption fee, which is paid directly to the Fund, for shares redeemed within seven days of purchase, subject to certain exceptions. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading. The following is a summary of significant accounting policies: A. Valuation of Investments -- (1) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; (2) 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; (3) futures are valued at the latest price published by the commodities exchange on which they trade; (4) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") determines that the market quotations are not reflective of 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; and (5) 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. 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. 24 D. 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. E. 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. F. Dividends and Distributions to Shareholders -- Dividends and distributions to shareholders are recorded on the ex-dividend date. G. 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 Pursuant to an Investment Advisory Agreement with the Investment Adviser, the Fund pays 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: 0.52% of the portion of the daily net assets not exceeding $1 billion; 0.47% to the portion of the daily net assets exceeding $1 billion but not exceeding $2 billion and 0.42% of the portion of the daily net assets in excess of $2 billion. 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. Effective November 18, 2005, the Investment Adviser has agreed to cap the Fund's operating expenses for one year by assuming the Fund's "other expenses" and/or waiving the Fund's advisory fees, and the Administrator has agreed to waive the Fund's administrative fees, to the extent such operating expenses on an annualized basis exceed 0.80% of the average daily net assets of the Fund. 25 3. 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 April 30, 2006 were $135,828,528 and $311,733,340, respectively. Included in the aforementioned are purchases and sales/prepayments of U.S. Government securities of $83,568,905 and $128,306,201, respectively. Also, included in the aforementioned transactions were sales of $78,788,048 with MSIF Trust Limited Duration Fund, including net realized losses of $1,829,534. Morgan Stanley Trust, an affiliate of the Investment Adviser and Administrator, is the Fund's transfer agent. The Fund has 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. 4. Shares of Beneficial Interest Transactions in shares of beneficial interest were as follows:
FOR THE YEAR FOR THE YEAR ENDED ENDED APRIL 30, 2006 APRIL 30, 2005 --------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ------------ ------------- Sold 3,479,165 $ 31,694,608 13,944,535 $ 129,742,246 Reinvestment of dividends 795,079 7,229,149 1,321,375 12,255,388 ----------- ------------- ----------- ------------- 4,274,244 38,923,757 15,265,910 141,997,634 Redeemed (25,350,341) (230,189,634) (28,350,418) (262,869,327) ----------- ------------- ----------- ------------- Net decrease (21,076,097) $(191,265,877) (13,084,508) $(120,871,693) =========== ============= =========== =============
5. Expense Offset The expense offset represents a reduction of the custodian and transfer agent fees and expenses for earnings on cash balances maintained by the Fund. 26 6. Purposes of and Risks Relating to Certain Financial Instruments To hedge against adverse interest rate and market risks on portfolio positions or anticipated positions in U.S. Government securities, the Fund may enter into interest rate futures contracts ("futures contracts"). These futures contracts involve elements of market risk in excess of the amount reflected in the Statement and Assets and Liabilities. The Fund bears the risk of an unfavorable change in the value of the underlying securities. Risk may also arise upon entering into contracts from the potential inability of counterparties to meet the terms of their contacts. 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 APRIL 30, 2006 APRIL 30, 2005 -------------- -------------- Ordinary income $ 10,100,099 $ 16,513,968 As of April 30, 2006, the tax-basis components of accumulated losses were as follows: Undistributed ordinary income $ 136,388 Undistributed long-term gains -- Net accumulated earnings 136,388 Capital loss carryforward* (21,831,288) Post-October losses (4,301,244) Temporary differences (35,980) Net unrealized depreciation (4,447,785) ------------ Total accumulated losses $(30,479,909) ============ *As of April 30, 2006, the Fund had a net capital loss carryforward of $21,831,288 of which $20,504 will expire on April 30, 2007, $51,242 will expire on April 30, 2008, $2,035,052 will expire on April 30, 2009, $1,582,163 will expire on April 30, 2011, $2,183,130 will expire on April 30, 2012, 27 $11,744,997 will expire on April 30, 2013 and $4,214,200 will expire on April 30, 2014 to offset future capital gains to the extent provided by regulations. As of April 30, 2006, the Fund had temporary book/tax differences primarily attributable to post-October losses (capital losses incurred after October 31 within the taxable year which are deemed to arise on the first business day of the Fund's next taxable year), and book amortization of premiums on debt securities and permanent book/tax differences primarily attributable to losses on paydowns, tax adjustments on debt securities sold by the Fund and an expired capital loss carryforward. To reflect reclassifications arising from the permanent differences, paid-in-capital was charged $1,838,203, accumulated net realized loss was charged $2,148,279 and dividends in excess of net investment income was credited $3,986,482. 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, filed in the United States District Court Southern District of New York on April 16, 2004, 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. On March 9, 2005, Plaintiffs sought leave to supplement their complaint to assert claims on behalf of other investors, which motion defendants opposed. On April 14, 2006, the Court granted defendants' motion to dismiss in its entirety. Additionally, the Court denied Plaintiff's motion to supplement their complaint. This matter is now concluded. 28 Morgan Stanley Limited Duration Fund FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE YEAR ENDED APRIL 30, ---------------------------------------------------------------- 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Selected Per Share Data: Net asset value, beginning of period $ 9.17 $ 9.41 $ 9.68 $ 9.59 $ 9.44 -------- -------- -------- -------- -------- Income (loss) from investment operations: Net investment income 0.16 0.19 0.17 0.24 0.41 Net realized and unrealized gain (loss) 0.05 (0.08) (0.07) 0.13 0.19 -------- -------- -------- -------- -------- Total income from investment operations 0.21 0.11 0.10 0.37 0.60 -------- -------- -------- -------- -------- Less dividends from net investment income: (0.36) (0.35) (0.37) (0.28) (0.45) -------- -------- -------- -------- -------- Net asset value, end of period $ 9.02 $ 9.17 $ 9.41 $ 9.68 $ 9.59 ======== ======== ======== ======== ======== Total Return+ 2.29% 1.20% 0.99% 3.93% 6.50% Ratios to Average Net Assets: Expenses(before expense offset) 0.80%(2) 0.76%(1) 0.85%(1) 0.84%(2) 0.80%(2) Net investment income 2.95% 2.63% 1.75% 1.90% 3.94% Supplemental Data: Net assets, end of period, in thousands $160,200 $356,124 $488,409 $429,409 $166,631 Portfolio turnover rate 54% 82% 240% 217% 327%
- ---------- + CALCULATED BASED ON THE NET ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD. (1) DOES NOT REFLECT THE EFFECT OF EXPENSE OFFSET OF 0.01%. (2) IF THE FUND HAD BORNE ALL EXPENSES THAT WERE ASSUMED OR WAIVED BY THE INVESTMENT ADVISER AND ADMINISTRATOR, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME RATIOS WOULD HAVE BEEN AS FOLLOWS: EXPENSE NET INVESTMENT PERIOD ENDED RATIO INCOME RATIO - -------------- ------- -------------- APRIL 30, 2006 0.83% 2.93% APRIL 30, 2003 0.87 1.86 APRIL 30, 2002 0.92 3.82 SEE NOTES TO FINANCIAL STATEMENTS 29 Morgan Stanley Limited Duration Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Trustees of Morgan Stanley Limited Duration Fund: We have audited the accompanying statement of assets and liabilities of Morgan Stanley Limited Duration Fund (the "Fund"), including the portfolio of investments, as of April 30, 2006, 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. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of April 30, 2006 by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. 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 Limited Duration Fund as of April 30, 2006, 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 JUNE 20, 2006 30 Morgan Stanley Limited Duration 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 HELD BY INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** TRUSTEE - ------------------------ ----------- ------------ ----------------------------- ------------- ---------------------------- Michael Bozic (65) Trustee Since Private Investor; Director or 197 Director of various business c/o Kramer Levin April 1994 Trustee of the Retail Funds organizations. Naftalis & Frankel LLP (since April 1994) and the Counsel to the Institutional Funds (since Independent Trustees July 2003); formerly Vice 1177 Avenue of the Chairman of Kmart Corporation Americas New York, NY (December 1998-October 2000), 10036 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 (73) Trustee Since Consultant; Director or 197 Director of Franklin Covey 1031 N. Chartwell Court January 1993 Trustee of the Retail Funds (time management systems), Salt Lake City, UT 84103 (since January 1993) and the BMW Bank of North America, Institutional Funds (since Inc. (industrial loan July 2003); member of the corporation), Escrow Bank Utah Regional Advisory Board USA (industrial loan of Pacific Corp. (utility corporation), United Space company); formerly Managing Alliance (joint venture Director of Summit Ventures between Lockheed Martin and LLC (2000-2004) (lobbying and the Boeing Company) and consulting firm); United Nuskin Asia Pacific States Senator (R-Utah) (multilevel marketing); (1974-1992) and Chairman, member of the board of Senate Banking Committee various civic and charitable (1980-1986), Mayor of Salt organizations. Lake City, Utah (1971-1974), Astronaut, Space Shuttle Discovery (April 12-19, 1985), and Vice Chairman, Huntsman Corporation (chemical company). Wayne E. Hedien (72) Trustee Since Retired; Director or Trustee 197 Director of The PMI Group c/o Kramer Levin September of the Retail Funds (since Inc. (private mortgage Naftalis & Frankel LLP 1997 September 1997) and the insurance); Trustee and Vice Counsel to the Institutional Funds (since Chairman of The Field Museum Independent Trustees July 2003); formerly of Natural History; director 1177 Avenue of the associated with the Allstate of various other business Americas New York, NY Companies (1966-1994), most and charitable 10036 recently as Chairman of The organizations. Allstate Corporation (March 1993-December 1994) and Chairman and Chief Executive Officer of its wholly-owned subsidiary, Allstate Insurance Company (July 1989-December 1994).
31
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 HELD BY INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** TRUSTEE - ------------------------ ----------- ------------ ----------------------------- ------------- ---------------------------- Dr.Manuel H. Johnson Trustee Since Senior Partner, Johnson Smick 197 Director of NVR, Inc. (home (57) July 1991 International, Inc., a construction); Director of c/o Johnson Smick Group, consulting firm; Chairman of KFX Energy; Director of RBS Inc. 888 16th Street, NW the Audit Committee and Greenwich Capital Holdings Suite 740 Washington, Director or Trustee of the (financial holding company). D.C. 20006 Retail Funds (since July 1991) and the Institutional Funds (since July 2003); Co-Chairman and a founder of the Group of Seven Council (G7C), an international economic commission; formerly Vice Chairman of the Board of Governors of the Federal Reserve System and Assistant Secretary of the U.S. Treasury. Joseph J. Kearns (63) Trustee Since President, Kearns & 198 Director of Electro Rent c/o Kearns & Associates July 2003 Associates LLC (investment Corporation (equipment LLC PMB754 23852 Pacific consulting); Deputy Chairman leasing), The Ford Family Coast Highway Malibu, CA of the Audit Committee and Foundation, and the UCLA 90265 Director or Trustee of the Foundation. 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 (69) Trustee Since General Partner of Triumph 197 None. c/o Triumph Capital, July 1991 Capital, L.P., a private L.P. 445 Park Avenue New investment partnership; York, NY 10022 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 (73) Trustee Since Chairman of Lumelite Plastics 198 Trustee and Director of c/o Lumelite Plastics July 2003 Corporation; Chairman of the certain investment companies Corporation 85 Charles Governance Committee and in the JPMorgan Funds Colman Blvd. Pawling, NY Director or Trustee of the complex managed by J.P. 12564 Retail Funds (since July Morgan Investment Management 2003) and the Institutional Inc. Funds (since June 1992).
32 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 HELD BY INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** TRUSTEE - ------------------------ ----------- ------------ ----------------------------- ------------- ---------------------------- Charles A. Fiumefreddo Chairman of Since Chairman and Director or 197 None. (72) the Board July 1991 Trustee of the Retail Funds c/o Morgan Stanley Trust and Trustee (since July 1991) and the Harborside Financial Institutional Funds (since Center, Plaza Two, July 2003); formerly Chief Jersey City, NJ 07311 Executive Officer of the Retail Funds (until September 2002). James F. Higgins (58) Trustee Since Director or Trustee of the 197 Director of AXA Financial, c/o Morgan Stanley Trust June 2000 Retail Funds (since June Inc. and The Equitable Life Harborside Financial 2000) and the Institutional Assurance Society of the Center, Plaza Two, Funds (since July 2003); United States (financial Jersey City, NJ 07311 Senior Advisor of Morgan services). Stanley; Director of Dean Witter Realty Inc.
- ---------- * THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT ADVISER") (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 ADVISER AND ANY FUNDS THAT HAVE AN INVESTMENT ADVISER THAT IS AN AFFILIATED PERSON OF THE INVESTMENT ADVISER (INCLUDING, BUT NOT LIMITED TO, MORGAN STANLEY INVESTMENT MANAGEMENT INC.). 33 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** - --------------------------- ----------------- ------------------ -------------------------------------------- Ronald E. Robison (67) President and Since May 2003 President (since September 2005) and 1221 Avenue of the Americas Principal Principal Executive Officer (since New York, NY 10020 Executive Officer May 2003) of funds in the Fund Complex; President (since September 2005) and Principal Executive Officer (since May 2003) of the Van Kampen Funds; Managing Director, Director and/or Officer of the Investment Adviser and various entities affiliated with the Investment Adviser; Director of Morgan Stanley SICAV (since May 2004). Formerly, Executive Vice President (July 2003 to September 2005) of funds in the Fund Complex and the Van Kampen Funds; President and Director of the Institutional Funds (March 2001 to July 2003); Chief Global Operating Officer of Morgan Stanley Investment Management Inc.; Chief Administrative Officer of Morgan Stanley Investment Advisors Inc.; Chief Administrative Officer of Morgan Stanley Services Company Inc. J. David Germany (51) Vice President Since Managing Director and (since December 2005) 25 Cabot Square February 2006 Chief Investment Officer - Global Fixed Canary Wharf, London Income of Morgan Stanley Investment United Kingdom E144QA Management; Managing Director and Director of Morgan Stanley Investment Management Ltd.; Vice President (since February 2006) of the Retail and Institutional Funds. Dennis F. Shea (52) Vice President Since Managing Director and (since February 2006) 1221 Avenue of the Americas February 2006 Chief Investment Officer - Global Equity New York, NY 10020 of Morgan Stanley Investment Management; Vice President (since February 2006) of the Retail and Institutional Funds. Formerly, Managing Director and Director of Global Equity Research at Morgan Stanley. Barry Fink (51) Vice President Since Managing Director and General Counsel of 1221 Avenue of the Americas February 1997 Morgan Stanley Investment Management; New York, NY 10020 Managing Director of the Investment Adviser and various entities affiliated with the Investment Adviser; Vice President of the Retail Funds and (since July 2003) the Institutional Funds. Formerly, Secretary, General Counsel and/or Director of the Investment Adviser and various entities affiliated with the Investment Adviser; Secretary and General Counsel of the Retail Funds. Amy R. Doberman (44) Vice President Since July 2004 Managing Director and General Counsel, 1221 Avenue of the Americas U.S. Investment Management of Morgan New York, NY 10020 Stanley Investment Management (since July 2004); Vice President of the Retail Funds and the Institutional Funds (since July 2004); Vice President of the Van Kampen Funds (since August 2004); Secretary (since February 2006) and Managing Director (since July 2004) of the Investment Adviser and various entities affiliated with the Investment Adviser. Formerly, Managing Director and General Counsel - Americas, UBS Global Asset Management (July 2000 to July 2004). Carsten Otto (42) Chief Compliance Since October 2004 Managing Director and U.S. Director of 1221 Avenue of the Americas Officer Compliance for Morgan Stanley Investment New York, NY 10020 Management (since October 2004); Managing Director and Chief Compliance Officer of Morgan Stanley Investment Management. Formerly, Assistant Secretary and Assistant General Counsel of the Retail Funds. Stefanie V. Chang Yu (39) Vice President Since July 2003 Executive Director of the Investment 1221 Avenue of the Americas Adviser and various entities affiliated New York, NY 10020 with the Investment Adviser; Vice President of the Retail Funds (since July 2002) and the Institutional Funds (since December 1997). Formerly, Secretary of various entities affiliated with the Investment Adviser.
34
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 (40) Treasurer and Treasurer (since Executive Director of the Investment c/o Morgan Stanley Trust Chief Financial July 2003) and Adviser and various entities affiliated Harborside Financial Center, Officer Chief Financial with the Investment Adviser; Treasurer and Plaza Two, Officer (since Chief Financial Officer of the Retail Funds Jersey City, NJ 07311 September 2002) (since July 2003). Formerly, Vice President of the Retail Funds (September 2002 to July 2003). Mary E. Mullin (39) Secretary Since July 2003 Executive Director of the Investment 1221 Avenue of the Americas Adviser and various entities affiliated New York, NY 10020 with the Investment Adviser; Secretary of the Retail Funds (since July 2003) and the Institutional Funds (since June 1999).
- ---------- * 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. 2006 FEDERAL TAX NOTICE (UNAUDITED) Of the Fund's ordinary dividends paid during the fiscal year ended April 30, 2006, 2.40% 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. 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 Ronald E. Robison PRESIDENT AND PRINCIPAL EXECUTIVE OFFICER J. David Germany VICE PRESIDENT Dennis F. Shea VICE PRESIDENT Barry Fink VICE PRESIDENT Amy R. Doberman VICE PRESIDENT Carsten Otto CHIEF COMPLIANCE OFFICER Stefanie V. Chang Yu VICE PRESIDENT Francis J. Smith TREASURER AND CHIEF FINANCIAL OFFICER 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 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) 2006 Morgan Stanley [MORGAN STANLEY LOGO] MORGAN STANLEY FUNDS Morgan Stanley Limited Duration Fund Annual Report April 30, 2006 [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) The Fund has not amended its Code of Ethics during the period covered by the shareholder report presented in Item 1. (d) Not applicable. (e) Not applicable. (f) (1) The Fund's Code of Ethics is attached hereto as Exhibit 12 A. (2) Not applicable. (3) Not applicable. Item 3. Audit Committee Financial Expert. The Fund's Board of Trustees has determined that 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: 2006 REGISTRANT COVERED ENTITIES(1) AUDIT FEES $35,125 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ 540(2) $ 5,190,300(2) TAX FEES $ 5,475(3) $ 2,044,491(4) ALL OTHER FEES $ -- $ -- TOTAL NON-AUDIT FEES $ 6,015 $ 7,234,791 TOTAL $41,140 $ 7,234,791 2005 REGISTRANT COVERED ENTITIES(1) AUDIT FEES $33,458 N/A NON-AUDIT FEES AUDIT-RELATED FEES $ 452(2) $3,215,745(2) TAX FEES $ 7,495(3) $ 24,000(4) ALL OTHER FEES $ -- $ -- TOTAL NON-AUDIT FEES $ 7,947 $3,239,745 TOTAL $41,405 $3,239,745 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: APPENDIX A AUDIT COMMITTEE AUDIT AND NON-AUDIT SERVICES PRE-APPROVAL POLICY AND PROCEDURES OF THE MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS AS ADOPTED AND AMENDED JULY 23, 2004,(1) 1. STATEMENT OF PRINCIPLES The Audit Committee of the Board is required to review and, in its sole discretion, pre-approve all Covered Services to be provided by the Independent Auditors to the Fund and Covered Entities in order to assure that services performed by the Independent Auditors do not impair the auditor's independence from the Fund. The SEC has issued rules specifying the types of services that an independent auditor may not provide to its audit client, as well as the audit committee's administration of the engagement of the independent auditor. The SEC's rules establish two different approaches to pre-approving services, which the SEC considers to be equally valid. Proposed services either: may be pre-approved without consideration of specific case-by-case services by the Audit Committee ("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee believes that the combination of these two approaches in this Policy will result in an effective and efficient procedure to pre-approve services performed by the Independent Auditors. As set forth in this Policy, unless a type of service has received general pre-approval, it will require specific pre-approval by the Audit Committee (or by any member of the Audit Committee to which pre-approval authority has been delegated) if it is to be provided by the Independent Auditors. Any proposed services exceeding pre-approved cost levels or budgeted amounts will also require specific pre-approval by the Audit Committee. The appendices to this Policy describe the Audit, Audit-related, Tax and All Other services that have the general pre-approval of the Audit Committee. The term of any general pre-approval is 12 months from the date of pre-approval, unless the Audit Committee considers and provides a different period and states otherwise. The Audit Committee will annually review and pre-approve the services that may be provided by the Independent Auditors without obtaining specific pre-approval from the Audit Committee. The Audit Committee will add to or subtract from the list of general pre-approved services from time to time, based on subsequent determinations. - ---------- (1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and Procedures (the "POLICY"), adopted as of the date above, supersedes and replaces all prior versions that may have been adopted from time to time. The purpose of this Policy is to set forth the policy and procedures by which the Audit Committee intends to fulfill its responsibilities. It does not delegate the Audit Committee's responsibilities to pre-approve services performed by the Independent Auditors to management. The Fund's Independent Auditors have reviewed this Policy and believes that implementation of the Policy will not adversely affect the Independent Auditors' independence. 2. DELEGATION As provided in the Act and the SEC's rules, the Audit Committee may delegate either type of pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting. 3. AUDIT SERVICES The annual Audit services engagement terms and fees are subject to the specific pre-approval of the Audit Committee. Audit services include the annual financial statement audit and other procedures required to be performed by the Independent Auditors to be able to form an opinion on the Fund's financial statements. These other procedures include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating to the audit. The Audit Committee will approve, if necessary, any changes in terms, conditions and fees resulting from changes in audit scope, Fund structure or other items. In addition to the annual Audit services engagement approved by the Audit Committee, the Audit Committee may grant general pre-approval to other Audit services, which are those services that only the Independent Auditors reasonably can provide. Other Audit services may include statutory audits and services associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4, etc.), periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings. The Audit Committee has pre-approved the Audit services in Appendix B.1. All other Audit services not listed in Appendix B.1 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 4. AUDIT-RELATED SERVICES Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of the Fund's financial statements and, to the extent they are Covered Services, the Covered Entities or that are traditionally performed by the Independent Auditors. Because the Audit Committee believes that the provision of Audit-related services does not impair the independence of the auditor and is consistent with the SEC's rules on auditor independence, the Audit Committee may grant general pre-approval to Audit-related services. Audit-related services include, among others, accounting consultations related to accounting, financial reporting or disclosure matters not classified as "Audit services"; assistance with understanding and implementing new accounting and financial reporting guidance from rulemaking authorities; agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters; and assistance with internal control reporting requirements under Forms N-SAR and/or N-CSR. The Audit Committee has pre-approved the Audit-related services in Appendix B.2. All other Audit-related services not listed in Appendix B.2 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 5. TAX SERVICES The Audit Committee believes that the Independent Auditors can provide Tax services to the Fund and, to the extent they are Covered Services, the Covered Entities, such as tax compliance, tax planning and tax advice without impairing the auditor's independence, and the SEC has stated that the Independent Auditors may provide such services. Pursuant to the preceding paragraph, the Audit Committee has pre-approved the Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 6. ALL OTHER SERVICES The Audit Committee believes, based on the SEC's rules prohibiting the Independent Auditors from providing specific non-audit services, that other types of non-audit services are permitted. Accordingly, the Audit Committee believes it may grant general pre-approval to those permissible non-audit services classified as All Other services that it believes are routine and recurring services, would not impair the independence of the auditor and are consistent with the SEC's rules on auditor independence. The Audit Committee has pre-approved the All Other services in Appendix B.4. Permissible All Other services not listed in Appendix B.4 must be specifically pre-approved by the Audit Committee (or by any member of the Audit Committee to which pre-approval has been delegated). 7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS Pre-approval fee levels or budgeted amounts for all services to be provided by the Independent Auditors will be established annually by the Audit Committee. Any proposed services exceeding these levels or amounts will require specific pre-approval by the Audit Committee. The Audit Committee is mindful of the overall relationship of fees for audit and non-audit services in determining whether to pre-approve any such services. 8. PROCEDURES All requests or applications for services to be provided by the Independent Auditors that do not require specific approval by the Audit Committee will be submitted to the Fund's Chief Financial Officer and must include a detailed description of the services to be rendered. The Fund's Chief Financial Officer will determine whether such services are included within the list of services that have received the general pre-approval of the Audit Committee. The Audit Committee will be informed on a timely basis of any such services rendered by the Independent Auditors. Requests or applications to provide services that require specific approval by the Audit Committee will be submitted to the Audit Committee by both the Independent Auditors and the Fund's Chief Financial Officer, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC's rules on auditor independence. The Audit Committee has designated the Fund's Chief Financial Officer to monitor the performance of all services provided by the Independent Auditors and to determine whether such services are in compliance with this Policy. The Fund's Chief Financial Officer will report to the Audit Committee on a periodic basis on the results of its monitoring. Both the Fund's Chief Financial Officer and management will immediately report to the chairman of the Audit Committee any breach of this Policy that comes to the attention of the Fund's Chief Financial Officer or any member of management. 9. ADDITIONAL REQUIREMENTS The Audit Committee has determined to take additional measures on an annual basis to meet its responsibility to oversee the work of the Independent Auditors and to assure the auditor's independence from the Fund, such as reviewing a formal written statement from the Independent Auditors delineating all relationships between the Independent Auditors and the Fund, consistent with Independence Standards Board No. 1, and discussing with the Independent Auditors its methods and procedures for ensuring independence. 10. COVERED ENTITIES Covered Entities include the Fund's investment adviser(s) and any entity controlling, controlled by or under common control with the Fund's investment adviser(s) that provides ongoing services to the Fund(s). Beginning with non-audit service contracts entered into on or after May 6, 2003, the Fund's audit committee must pre-approve non-audit services provided not only to the Fund but also to the Covered Entities if the engagements relate directly to the operations and financial reporting of the Fund. This list of Covered Entities would include: MORGAN STANLEY RETAIL FUNDS Morgan Stanley Investment Advisors Inc. Morgan Stanley & Co. Incorporated Morgan Stanley DW Inc. Morgan Stanley Investment Management Inc. Morgan Stanley Investment Management Limited Morgan Stanley Investment Management Private Limited Morgan Stanley Asset & Investment Trust Management Co., Limited Morgan Stanley Investment Management Company Van Kampen Asset Management Morgan Stanley Services Company, Inc. Morgan Stanley Distributors Inc. Morgan Stanley Trust FSB MORGAN STANLEY INSTITUTIONAL FUNDS Morgan Stanley Investment Management Inc. Morgan Stanley Investment Advisors Inc. Morgan Stanley Investment Management Limited Morgan Stanley Investment Management Private Limited Morgan Stanley Asset & Investment Trust Management Co., Limited Morgan Stanley Investment Management Company Morgan Stanley & Co. Incorporated Morgan Stanley Distribution, Inc. Morgan Stanley AIP GP LP Morgan Stanley Alternative Investment Partners LP (e)(2) Beginning with non-audit service contracts entered into on or after May 6, 2003, the audit committee also is required to pre-approve services to Covered Entities to the extent that the services are determined to have a direct impact on the operations or financial reporting of the Registrant. 100% of such services were pre-approved by the audit committee pursuant to the Audit Committee's pre-approval policies and procedures (attached hereto). (f) Not applicable. (g) See table above. (h) The audit committee of the Board of Trustees has considered whether the provision of services other than audit services performed by the auditors to the Registrant and Covered Entities is compatible with maintaining the auditors' independence in performing audit services. Item 5. Audit Committee of Listed Registrants. (a) The Fund has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act whose members are: Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J. Kearns, Michael Nugent and Fergus Reid. (b) Not applicable. Item 6. Schedule of Investments Refer to Item 1. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Applicable only to reports filed by closed-end funds. Item 8. Portfolio Managers of Closed-End Management Investment Companies Applicable only to reports filed by closed-end funds. Item 9. Closed-End Fund Repurchases Applicable only to reports filed by closed-end funds. Item 10. Submission of Matters to a Vote of Security Holders Not applicable. Item 11. Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits (a) The Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Morgan Stanley Limited Duration Fund /s/ Ronald E. Robison - --------------------------- Ronald E. Robison Principal Executive Officer June 20, 2006 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 June 20, 2006 /s/ Francis Smith - --------------------------- Francis Smith Principal Financial Officer June 20, 2006 EX-99.CODEETH 2 a2170875zex-99_codeeth.txt EX-99.CODEETH EXHIBIT 12 A CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS ADOPTED SEPTEMBER 28, 2004, AS AMENDED SEPTEMBER 20, 2005 I. This Code of Ethics (the "Code") for the investment companies within the Morgan Stanley complex identified in Exhibit A (collectively, "Funds" and each, a "Fund") applies to each Fund's Principal Executive Officer, President, Principal Financial Officer and Treasurer (or persons performing similar functions) ("Covered Officers" each of whom are set forth in Exhibit B) for the purpose of promoting: - honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. - full, fair, accurate, timely and understandable disclosure in reports and documents that a company files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Fund; - compliance with applicable laws and governmental rules and regulations; - prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and - accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. Any question about the application of the Code should be referred to the General Counsel or his/her designee (who is set forth in Exhibit C). II. COVERED OFFICERS SHOULD HANDLE ETHICALLY ACTUAL AND APPARENT CONFLICTS OF INTEREST OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes, or appears to interfere, with the interests of, or his service to, the Fund. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the Fund. Certain conflicts of interest arise out of the relationships between Covered Officers and the Fund and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Fund because of their status as "affiliated persons" (as defined in the Investment Company Act) of the Fund. The Fund's and its investment adviser's compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside the parameters of this Code, unless or until the General Counsel determines that any violation of such programs and procedures is also a violation of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts may arise from, or as a result of, the contractual relationship between the Fund and its investment adviser of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Fund or for the investment adviser, or for both), be involved in establishing policies and implementing decisions that will have different effects on the Fund and its investment adviser. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Fund and the investment adviser and is consistent with the performance by the Covered Officers of their duties as officers of the Fund. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Funds' Boards of Directors/Trustees ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Fund. Each Covered Officer must not: - use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally (directly or indirectly); - cause the Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Fund; or - use material non-public knowledge of portfolio transactions made or contemplated for, or actions proposed to be taken by, the Fund to trade personally or cause others to trade personally in contemplation of the market effect of such transactions. Each Covered Officer must, at the time of signing this Code, report to the General Counsel all affiliations or significant business relationships outside the Morgan Stanley complex and must update the report annually. Conflict of interest situations should always be approved by the General Counsel and communicated to the relevant Fund or Fund's Board. Any activity or relationship that would present such a conflict for a Covered Officer would likely also present a conflict for the Covered Officer if an immediate member of the Covered Officer's family living in the same household engages in such an activity or has such a relationship. Examples of these include: - service or significant business relationships as a director on the board of any public or private company; - accepting directly or indirectly, anything of value, including gifts and gratuities in excess of $100 per year from any person or entity with which the Fund has current or prospective business dealings, not including occasional meals or tickets for theatre or sporting events or other similar entertainment; provided it is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety; - any ownership interest in, or any consulting or employment relationship with, any of the Fund's service providers, other than its investment adviser, principal underwriter, or any affiliated person thereof; and - a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Fund for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. III. DISCLOSURE AND COMPLIANCE - Each Covered Officer should familiarize himself/herself with the disclosure and compliance requirements generally applicable to the Funds; - each Covered Officer must not knowingly misrepresent, or cause others to misrepresent, facts about the Fund to others, whether within or outside the Fund, including to the Fund's Directors/Trustees and auditors, or to governmental regulators and self-regulatory organizations; - each Covered Officer should, to the extent appropriate within his area of responsibility, consult with other officers and employees of the Funds and their investment advisers with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and - it is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. IV. REPORTING AND ACCOUNTABILITY Each Covered Officer must: - upon adoption of the Code (thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Boards that he has received, read and understands the Code; - annually thereafter affirm to the Boards that he has complied with the requirements of the Code; - not retaliate against any other Covered Officer, other officer or any employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; and - notify the General Counsel promptly if he/she knows or suspects of any violation of this Code. Failure to do so is itself a violation of this Code. The General Counsel is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any waivers(2) sought by a Covered Officer must be considered by the Board of the relevant Fund or Funds. The Funds will follow these procedures in investigating and enforcing this Code: - the General Counsel will take all appropriate action to investigate any potential violations reported to him; - if, after such investigation, the General Counsel believes that no violation has occurred, the General Counsel is not required to take any further action; - any matter that the General Counsel believes is a violation will be reported to the relevant Fund's Audit Committee; - if the directors/trustees/managing general partners who are not "interested persons" as defined by the Investment Company Act (the "Independent Directors/Trustees/Managing General Partners") of the relevant Fund concur that a violation has occurred, they will consider appropriate action, which may include review of, and appropriate modifications to, applicable - ---------- (2) Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics." policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer or other appropriate disciplinary actions; - the Independent Directors/Trustees/Managing General Partners of the relevant Fund will be responsible for granting waivers of this Code, as appropriate; and - any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, the Funds' investment advisers, principal underwriters, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code unless any provision of this Code conflicts with any applicable federal or state law, in which case the requirements of such law will govern. The Funds' and their investment advisers' and principal underwriters' codes of ethics under Rule 17j-1 under the Investment Company Act and Morgan Stanley's Code of Ethics are separate requirements applying to the Covered Officers and others, and are not part of this Code. VI. AMENDMENTS Any amendments to this Code, other than amendments to Exhibits A, B or C, must be approved or ratified by a majority vote of the Board of each Fund, including a majority of Independent Directors/Trustees/Managing General Partners. VII. CONFIDENTIALITY All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the Independent Directors/Trustees/Managing General Partners of the relevant Fund or Funds and their counsel, the relevant Fund or Funds and their counsel and the relevant investment adviser and its counsel. VIII. INTERNAL USE The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Fund, as to any fact, circumstance, or legal conclusion I have read and understand the terms of the above Code. I recognize the responsibilities and obligations incurred by me as a result of my being subject to the Code. I hereby agree to abide by the above Code. - ------------------------- Date:_____________________ EXHIBIT A FUND LIST AT SEPTEMBER 20, 2005 RETAIL FUNDS OPEN-END RETAIL FUNDS TAXABLE MONEY MARKET FUNDS 1. Active Assets Government Securities Trust ("AA GOVERNMENT") 2. Active Assets Institutional Government Securities Trust ("AA INSTITUTIONAL GOVERNMENT") 3. Active Assets Institutional Money Trust ("AA INSTITUTIONAL MONEY") 4. Active Assets Money Trust ("AA MONEY") 5. Morgan Stanley Liquid Asset Fund Inc. ("LIQUID ASSET") 6. Morgan Stanley U.S. Government Money Market Trust ("GOVERNMENT MONEY") TAX-EXEMPT MONEY MARKET FUNDS 7. Active Assets California Tax-Free Trust ("AA CALIFORNIA") 8. Active Assets Tax-Free Trust ("AA TAX-FREE") 9. Morgan Stanley California Tax-Free Daily Income Trust ("CALIFORNIA TAX-FREE DAILY") 10. Morgan Stanley New York Municipal Money Market Trust ("NEW YORK MONEY") 11. Morgan Stanley Tax-Free Daily Income Trust ("TAX-FREE DAILY") EQUITY FUNDS 12. Morgan Stanley Aggressive Equity Fund ("AGGRESSIVE EQUITY")+ 13. Morgan Stanley Allocator Fund ("ALLOCATOR FUND")+ 14. Morgan Stanley American Opportunities Fund ("AMERICAN OPPORTUNITIES")+ 15. Morgan Stanley Biotechnology Fund ("BIOTECHNOLOGY FUND")+ 16. Morgan Stanley Capital Opportunities Trust ("CAPITAL OPPORTUNITIES")+ 17. Morgan Stanley Developing Growth Securities Trust ("DEVELOPING GROWTH")+ 18. Morgan Stanley Dividend Growth Securities Inc. ("DIVIDEND GROWTH")+ 19. Morgan Stanley Equally-Weighted S&P 500 Fund ("EQUALLY-WEIGHTED S&P 500")+ 20. Morgan Stanley European Equity Fund Inc. ("EUROPEAN EQUITY")+ 21. Morgan Stanley Financial Services Trust ("FINANCIAL SERVICES")+ 22. Morgan Stanley Fundamental Value Fund ("FUNDAMENTAL VALUE")+ 23. Morgan Stanley Global Advantage Fund ("GLOBAL ADVANTAGE")+ 24. Morgan Stanley Global Dividend Growth Securities ("GLOBAL DIVIDEND GROWTH")+ 25. Morgan Stanley Global Utilities Fund ("GLOBAL UTILITIES")+ 26. Morgan Stanley Growth Fund ("GROWTH FUND")+ 27. Morgan Stanley Health Sciences Trust ("HEALTH SCIENCES")+ 28. Morgan Stanley Income Builder Fund ("INCOME BUILDER")+ 29. Morgan Stanley Information Fund ("INFORMATION FUND")+ 30. Morgan Stanley International Fund ("INTERNATIONAL FUND")+ 31. Morgan Stanley International SmallCap Fund ("INTERNATIONAL SMALLCAP")+ 32. Morgan Stanley International Value Equity Fund ("INTERNATIONAL VALUE")+ 33. Morgan Stanley Japan Fund ("JAPAN FUND")+ 34. Morgan Stanley KLD Social Index Fund ("KLD SOCIAL INDEX")+ 35. Morgan Stanley Mid-Cap Value Fund (MID-CAP VALUE")+ 36. Morgan Stanley Multi-Asset Class Fund ("MULTI-ASSET CLASS")+ 37. Morgan Stanley Nasdaq-100 Index Fund ("NASDAQ-100")+ 38. Morgan Stanley Natural Resource Development Securities Inc. ("NATURAL RESOURCE")+ 39. Morgan Stanley Pacific Growth Fund Inc. ("PACIFIC GROWTH")+ 40. Morgan Stanley Real Estate Fund ("REAL ESTATE")+ 41. Morgan Stanley Small-Mid Special Value Fund (SMALL-MID SPECIAL VALUE")+ 42. Morgan Stanley S&P 500 Index Fund ("S&P500 INDEX")+ 43. Morgan Stanley Special Growth Fund ("SPECIAL GROWTH")+ 44. Morgan Stanley Special Value Fund ("SPECIAL VALUE")+ 45. Morgan Stanley Total Market Index Fund ("TOTAL MARKET INDEX")+ 46. Morgan Stanley Total Return Trust ("TOTAL RETURN")+ 47. Morgan Stanley Utilities Fund ("UTILITIES FUND")+ 48. Morgan Stanley Value Fund ("VALUE FUND")+ BALANCED FUNDS 49. Morgan Stanley Balanced Growth Fund ("BALANCED GROWTH")+ 50. Morgan Stanley Balanced Income Fund ("BALANCED INCOME")+ ASSET ALLOCATION FUND 51. Morgan Stanley Strategist Fund ("STRATEGIST FUND")+ TAXABLE FIXED-INCOME FUNDS 52. Morgan Stanley Convertible Securities Trust ("CONVERTIBLE SECURITIES")+ 53. Morgan Stanley Flexible Income Trust ("FLEXIBLE INCOME")+ 54. Morgan Stanley Income Trust ("INCOME TRUST")+ 55. Morgan Stanley High Yield Securities Inc. ("HIGH YIELD SECURITIES")+ 56. Morgan Stanley Limited Duration Fund ("LIMITED DURATION FUND") 57. Morgan Stanley Mortgage Securities Trust ("MORTGAGE SECURITIES")+ 58. Morgan Stanley Limited Duration U.S. Treasury Trust ("LIMITED DURATION TREASURY") 59. Morgan Stanley Total Return Income Securities Fund ("TOTAL RETURN INCOME")+ 60. Morgan Stanley U.S. Government Securities Trust ("GOVERNMENT SECURITIES")+ TAX-EXEMPT FIXED-INCOME FUNDS 61. Morgan Stanley California Tax-Free Income Fund ("CALIFORNIA TAX-FREE")+ 62. Morgan Stanley Limited Term Municipal Trust ("LIMITED TERM MUNICIPAL") 63. Morgan Stanley New York Tax-Free Income Fund ("NEW YORK TAX-FREE")+ 64. Morgan Stanley Tax-Exempt Securities Trust ("TAX-EXEMPT SECURITIES")+ SPECIAL PURPOSE FUNDS 65. Morgan Stanley Select Dimensions Investment Series ("SELECT DIMENSIONS") - American Opportunities Portfolio - Balanced Growth Portfolio - Capital Opportunities Portfolio - Developing Growth Portfolio - Dividend Growth Portfolio - Equally-Weighted S&P 500 Portfolio - Flexible Income Portfolio - Global Equity Portfolio - Growth Portfolio - Money Market Portfolio - Utilities Portfolio 66. Morgan Stanley Variable Investment Series ("VARIABLE INVESTMENT") - Aggressive Equity Portfolio - Dividend Growth Portfolio - Equity Portfolio - European Equity Portfolio - Global Advantage Portfolio - Global Dividend Growth Portfolio - High Yield Portfolio - Income Builder Portfolio - Information Portfolio - Limited Duration Portfolio - Money Market Portfolio - Income Plus Portfolio - S&P 500 Index Portfolio - Strategist Portfolio - Utilities Portfolio CLOSED-END RETAIL FUNDS TAXABLE FIXED-INCOME CLOSED-END FUNDS 67. Morgan Stanley Government Income Trust ("GOVERNMENT INCOME") 68. Morgan Stanley Income Securities Inc. ("INCOME SECURITIES") 69. Morgan Stanley Prime Income Trust ("PRIME INCOME") TAX-EXEMPT FIXED-INCOME CLOSED-END FUNDS 70. Morgan Stanley California Insured Municipal Income Trust ("CALIFORNIA INSURED MUNICIPAL") 71. Morgan Stanley California Quality Municipal Securities ("CALIFORNIA QUALITY MUNICIPAL") 72. Morgan Stanley Insured California Municipal Securities ("INSURED CALIFORNIA SECURITIES") 73. Morgan Stanley Insured Municipal Bond Trust ("INSURED MUNICIPAL BOND") 74. Morgan Stanley Insured Municipal Income Trust ("INSURED MUNICIPAL INCOME") 75. Morgan Stanley Insured Municipal Securities ("INSURED MUNICIPAL SECURITIES") 76. Morgan Stanley Insured Municipal Trust ("INSURED MUNICIPAL TRUST") 77. Morgan Stanley Municipal Income Opportunities Trust ("MUNICIPAL OPPORTUNITIES") 78. Morgan Stanley Municipal Income Opportunities Trust II ("MUNICIPAL OPPORTUNITIES II") 79. Morgan Stanley Municipal Income Opportunities Trust III ("MUNICIPAL OPPORTUNITIES III") 80. Morgan Stanley Municipal Premium Income Trust ("MUNICIPAL PREMIUM") 81. Morgan Stanley New York Quality Municipal Securities ("NEW YORK QUALITY MUNICIPAL") 82. Morgan Stanley Quality Municipal Income Trust ("QUALITY MUNICIPAL INCOME") 83. Morgan Stanley Quality Municipal Investment Trust ("QUALITY MUNICIPAL INVESTMENT") 84. Morgan Stanley Quality Municipal Securities ("QUALITY MUNICIPAL SECURITIES") +- Denotes Retail Multi-Class Fund INSTITUTIONAL FUNDS OPEN-END INSTITUTIONAL FUNDS 1. Morgan Stanley Institutional Fund, Inc. ("INSTITUTIONAL FUND INC.") ACTIVE PORTFOLIOS: - Active International Allocation Portfolio - Emerging Markets Portfolio - Emerging Markets Debt Portfolio - Equity Growth Portfolio - European Real Estate Portfolio - Focus Equity Portfolio - Global Franchise Portfolio - Global Value Equity Portfolio - International Equity Portfolio - International Magnum Portfolio - International Small Cap Portfolio - Money Market Portfolio - Municipal Money Market Portfolio - Small Company Growth Portfolio - U.S. Real Estate Portfolio - Value Equity Portfolio INACTIVE PORTFOLIOS*: - China Growth Portfolio - Gold Portfolio - Large Cap Relative Value Portfolio - MicroCap Portfolio - Mortgage-Backed Securities Portfolio - Municipal Bond Portfolio - U.S. Equity Plus Portfolio 2. Morgan Stanley Institutional Fund Trust ("INSTITUTIONAL FUND TRUST") ACTIVE PORTFOLIOS: - Advisory Foreign Fixed Income II Portfolio - Advisory Foreign Fixed Income Portfolio - Advisory Mortgage Portfolio - Balanced Portfolio - Core Plus Fixed Income Portfolio - Equity Portfolio - High Yield Portfolio - Intermediate Duration Portfolio - International Fixed Income Portfolio - Investment Grade Fixed Income Portfolio - Limited Duration Portfolio - Mid-Cap Growth Portfolio - Municipal Portfolio - U.S. Core Fixed Income Portfolio - U.S. Mid-Cap Value Portfolio - U.S. Small-Cap Value Portfolio - Value Portfolio - ---------- * Have not commenced or have ceased operations INACTIVE PORTFOLIOS*: - Balanced Plus Portfolio - Growth Portfolio - Investment Grade Credit Advisory Portfolio - Mortgage Advisory Portfolio - New York Municipal Portfolio - Targeted Duration Portfolio - Value II Portfolio 3. The Universal Institutional Funds, Inc. ("UNIVERSAL FUNDS") ACTIVE PORTFOLIOS: - Core Plus Fixed Income Portfolio - Emerging Markets Debt Portfolio - Emerging Markets Equity Portfolio - Equity and Income Portfolio - Equity Growth Portfolio - Global Franchise Portfolio - Global Value Equity Portfolio - High Yield Portfolio - International Magnum Portfolio - Mid-Cap Growth Portfolio - Money Market Portfolio - Small Company Growth Portfolio - Technology Portfolio - U.S. Mid-Cap Value Portfolio - U.S. Real Estate Portfolio - Value Portfolio INACTIVE PORTFOLIOS*: - Balanced Portfolio - Capital Preservation Portfolio - Core Equity Portfolio - International Fixed Income Portfolio - Investment Grade Fixed Income Portfolio - Latin American Portfolio - Multi-Asset Class Portfolio - Targeted Duration Portfolio 4. Morgan Stanley Institutional Liquidity Funds ("LIQUIDITY FUNDS") - ---------- ACTIVE PORTFOLIOS: - Government Portfolio - Money Market Portfolio - Prime Portfolio - Tax-Exempt Portfolio - Treasury Portfolio INACTIVE PORTFOLIOS*: - Government Securities Portfolio - Treasury Securities Portfolio CLOSED-END INSTITUTIONAL FUNDS 5. Morgan Stanley Asia-Pacific Fund, Inc. ("ASIA-PACIFIC FUND") 6. Morgan Stanley Eastern Europe Fund, Inc. ("EASTERN EUROPE") 7. Morgan Stanley Emerging Markets Debt Fund, Inc. ("EMERGING MARKETS DEBT") 8. Morgan Stanley Emerging Markets Fund, Inc. ("EMERGING MARKETS FUND") 9. Morgan Stanley Global Opportunity Bond Fund, Inc. ("GLOBAL OPPORTUNITY") 10. Morgan Stanley High Yield Fund, Inc. ("HIGH YIELD FUND") 11. The Latin American Discovery Fund, Inc. ("LATIN AMERICAN DISCOVERY") 12 The Malaysia Fund, Inc. ("MALAYSIA FUND") 13. The Thai Fund, Inc. ("THAI FUND") 14. The Turkish Investment Fund, Inc. ("TURKISH INVESTMENT") CLOSED-END FUND OF HEDGE FUNDS 15. Morgan Stanley Institutional Fund of Hedge Funds ("FUND OF HEDGE FUNDS") IN REGISTRATION MORGAN STANLEY RETAIL FUNDS 1. Morgan Stanley American Franchise Fund FUNDS OF HEDGE FUNDS 1. Morgan Stanley Absolute Return Fund 2. Morgan Stanley Institutional Fund of Hedge Funds II - ---------- * Have not commenced or have ceased operations EXHIBIT B INSTITUTIONAL FUNDS COVERED OFFICERS Ronald E. Robison -President and Principal Executive Officer James W. Garrett - Chief Financial Officer and Treasurer RETAIL FUNDS COVERED OFFICERS Ronald E. Robison -President and Principal Executive Officer Frank Smith - Chief Financial Officer and Treasurer MORGAN STANLEY INDIA INVESTMENT FUND, INC. COVERED OFFICERS Ronald E. Robison - President and Principal Executive Officer James W. Garrett - Chief Financial Officer and Treasurer EXHIBIT C GENERAL COUNSEL Barry Fink EX-99.CERT 3 a2170875zex-99_cert.txt EX-99.CERT EXHIBIT 12 B1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER CERTIFICATIONS I, Ronald E. Robison, certify that: 1. I have reviewed this report on Form N-CSR of Morgan Stanley Limited Duration Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: June 20, 2006 /s/ Ronald E. Robison ----------------------------- Ronald E. Robison Principal Executive Officer EXHIBIT 12 B2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER CERTIFICATIONS I, Francis Smith, certify that: 1. I have reviewed this report on Form N-CSR of Morgan Stanley Limited Duration Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: June 20, 2006 /s/ Francis Smith ------------------------------- Francis Smith Principal Financial Officer EX-99.906CERT 4 a2170875zex-99_906cert.txt EX-99.906CERT SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Limited Duration Fund In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended April 30, 2006 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: June 20, 2006 /s/ Ronald E. Robison ----------------------------- Ronald E. Robison Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Limited Duration Fund and will be retained by Morgan Stanley Limited Duration Fund and furnished to the Securities and Exchange Commission or its staff upon request. SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Limited Duration Fund In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended April 30, 2006 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: June 20, 2006 /s/ Francis Smith ------------------------------- Francis Smith Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Limited Duration Fund and will be retained by Morgan Stanley Limited Duration Fund and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----