-----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, BY3MhBSYFWFyKe8lqTy8o6WQcIdV7pcQ5KC/9t7oGiYNSx9mTHgIXHw5r/f8DPUd 2Son8H6VYSMceweHJZQhDQ== 0000950123-04-011695.txt : 20041004 0000950123-04-011695.hdr.sgml : 20041004 20041004102425 ACCESSION NUMBER: 0000950123-04-011695 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040731 FILED AS OF DATE: 20041004 DATE AS OF CHANGE: 20041004 EFFECTIVENESS DATE: 20041004 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY BALANCED INCOME FUND CENTRAL INDEX KEY: 0000932842 STATE OF INCORPORATION: MA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-07243 FILM NUMBER: 041060468 BUSINESS ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 BUSINESS PHONE: (212) 869-6397 MAIL ADDRESS: STREET 1: C/O MORGAN STANLEY TRUST STREET 2: HARBORSIDE FINANCIAL CENTER, PLAZA TWO CITY: JERSEY CITY STATE: NJ ZIP: 07311 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY DEAN WITTER BALANCED INCOME FUND DATE OF NAME CHANGE: 19980622 FORMER COMPANY: FORMER CONFORMED NAME: DEAN WITTER BALANCED INCOME FUND DATE OF NAME CHANGE: 19941116 N-CSRS 1 y00736nvcsrs.txt MORGAN STANLEY BALANCED INCOME FUND 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: 811-07243 Morgan Stanley Balanced Income 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: January 31, 2005 Date of reporting period: July 31, 2004 Item 1 - Report to Shareholders Welcome, Shareholder: In this report, you'll learn about how your investment in Morgan Stanley Balanced Income Fund performed during the semiannual period. We will provide an overview of the market conditions, and discuss some of the factors that affected performance during the reporting period. In addition, this report includes the Fund's financial statements and a list of Fund investments. This material must be preceded or accompanied by a prospectus for the fund being offered. Market forecasts provided in this report may not necessarily come to pass. There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that market values of securities owned by the Fund will decline and, therefore, the value of the Fund's shares may be less than what you paid for them. Accordingly, you can lose money investing in this Fund. FUND REPORT For the six-month period ended July 31, 2004 TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED JULY 31, 2004
RUSSELL LIPPER 1000 LEHMAN BROTHERS INCOME VALUE U.S. GOVERNMENT/ FUNDS CLASS A CLASS B CLASS C CLASS D INDEX(1) CREDIT INDEX(2) INDEX(3) -0.25% -0.57% -0.64% -0.15% 0.70% -0.04% -0.76%
The performance of the Fund's four share classes varies because each has different expenses. The Fund's total return figures assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. Such costs would lower performance. Past performance is no guarantee of future results. See Performance Summary for standardized performance information. MARKET CONDITIONS After having expanded appreciably in 2003, the U.S. economy slowed considerably in the six-month period ended July 31, 2004. The domestic equity market suffered from the mixed economic news that marked the period as investors lost confidence in the momentum of economic recovery and faced mounting uncertainties related to the market. While concern that the Federal Reserve would soon move to raise interest rates was a major factor hindering equities, investors were also affected by anxieties over rising oil prices and geopolitical difficulties such as the threat of terrorism. Value stocks generally outperformed growth securities for the six months, as small and mid-cap companies outpaced their larger counterparts. The energy sector was the strongest-performing over the period as oil prices continued to rise. Technology stocks suffered greatly as the market continued to slow, and the technology sector was the period's worst-performing as the market's expectations for increased spending in information technology were not realized. The bond market was hampered over the period by rising interest rates, which in turn raised yields and lowered bond prices. PERFORMANCE ANALYSIS Morgan Stanley Balanced Income Fund underperformed the Russell 1000 Value Index and the Lehman Brothers U.S. Government/Credit Index, but outperformed the Lipper Income Funds Index. The Fund's performance was hampered primarily by stock selection within the health care, industrials and financial services sectors. Our stock selection in health care led to the Fund's having an overweighted position in pharmaceuticals relative to the Russell 1000 Value Index, which turned out to be detrimental as these stocks generally suffered over this six-month period from an unfavorable environment. One of the Fund's largest holdings, Bristol-Myers, also became the period's worst performer; while the pharmaceutical company had made efforts to resolve problems with its financial statements, lingering fears among investors about the prospect of drug reimportation and the expectation of continuing competition from generic brands greatly hurt the security. Similarly, several names within the industrials sector also hurt the Fund. Equifax, a credit reporting company, experienced losses as the jobless data failed to improve significantly during the period and rising interest rates contributed to lower numbers of mortgage and loan applications. Union Pacific was 2 hurt by rising oil prices as well as by complications surrounding the organization of its distribution network and scheduling. While we maintained an underweighted position in the financial services sector relative to the Russell 1000 Value Index, stock selection within the sector also hurt performance as the brokerage companies Merrill Lynch and Lehman Brothers underperformed. Stock selection in other sectors contributed positively to performance. We maintained an overweighted position in the consumer discretionary sector relative to the Russell 1000 Value Index. The Fund benefited greatly from gains made by hotel and leisure stocks, as both recreational and business travel picked up and aided the hotel industry. Two of the top-performing securities included Starwood Hotels & Resorts, which owns both the Sheraton and Westin Hotels companies, and Hilton Hotels. Holdings in automakers and parts companies were also gainers within the consumer discretionary sector, with Honda Motor, for instance, performing strongly because of improvements in its product line and increasing market share. Although the Fund's holdings within the technology sector provided negative returns, stock selection within technologies was beneficial relative to benchmark performance, as the Fund did not hold a number of underperforming securities, such as Sun Microsystems, Agilent Technology and Electronic Data Systems. Holdings in telecommunications services companies also had a positive impact on performance, as gains were made by Sprint when that company saw a return of growth in wireless services. INVESTMENT STRATEGY THE FUND WILL NORMALLY INVEST AT LEAST 80% OF ITS ASSETS IN INCOME-PRODUCING SECURITIES, CONSISTING OF (1) FIXED-INCOME SECURITIES AND (2) DIVIDEND PAYING COMMON STOCKS AND SECURITIES CONVERTIBLE INTO COMMON STOCKS. WITHIN THE LIMITATIONS DETAILED BELOW, THE FUND'S "INVESTMENT MANAGER," MORGAN STANLEY INVESTMENT ADVISORS INC., MAY PURCHASE OR SELL SECURITIES IN ANY PROPORTION IT BELIEVES DESIRABLE BASED ON ITS ASSESSMENT OF BUSINESS, ECONOMIC AND INVESTMENT CONDITIONS. FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS, AND MAKES THESE REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE SEC'S WEB SITE, HTTP://WWW.SEC.GOV. YOU MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY 3
TOP 10 HOLDINGS U.S. Treasuries 32.7% Fed. Nat. Mtge. Assoc 7.5 Fed. Home Ln. Mtge. Corp. 2.1 AOL Time Warner 1.2 Bristol Myers Squibb 1.1 JP Morgan Chase & Co. 1.0 BP PLC -- ADR 1.0 Prudential Holdings 1.0 Schlumberger Limited 0.9 General Motors 0.9
PORTFOLIO COMPOSITION* US Government Agencies & Obligations 35.9% Common Stocks 30.5 Corporate Bonds 19.1 Short-Term 8.8 Mortgage-Backed 4.9 Asset-Backed 0.6 Foreign Government Bond 0.2
Data as of July 31, 2004. Subject to change daily. All percentages for top 10 holdings are as a percentage of net assets and all percentages for portfolio composition are as a percentage of total investments. Provided for informational purposes only and should not be deemed a recommendation to buy or sell the securities mentioned. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. * The Fund has outstanding short futures contracts with an underlying face amount of $26,507,782 with unrealized depreciation of $923,157. CALLING THE SEC AT 1-800-SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (PUBLICINFO@SEC.GOV) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. YOU MAY OBTAIN COPIES OF A FUND'S FISCAL QUARTER FILINGS BY CONTACTING MORGAN STANLEY CLIENT RELATIONS AT (800) 847-2424. PROXY VOTING POLICIES AND PROCEDURES A DESCRIPTION OF (1) THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES; AND (2) HOW THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JULY 31 IS AVAILABLE WITHOUT CHARGE, UPON REQUEST, BY CALLING (800) 869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEBSITE AT WWW.MORGANSTANLEY.COM. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEBSITE AT HTTP://WWW.SEC.GOV. 4 PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED JULY 31, 2004
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES(+) CLASS D SHARES(++) (since 07/28/97) (since 07/28/97) (since 03/28/95) (since 07/28/97) SYMBOL BINAX BINBX BINCX BINDX 1 YEAR 7.39%(4) 6.59%(4) 6.50%(4) 7.66%(4) 1.75(5) 1.59(5) 5.50(5) -- 5 YEARS 4.31(4) 3.50(4) 3.50(4) 4.53(4) 3.19(5) 3.15(5) 3.50(5) -- SINCE INCEPTION 5.34(4) 4.52(4) 7.04(4) 5.56(4) 4.53(5) 4.52(5) 7.04(5) --
Performance data quoted represents past performance, which is no guarantee of future results and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit morganstanley.com or speak with your financial advisor. Investment returns and principal value will fluctuate and fund shares, when redeemed, may be worth more or less than their original cost. The table does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance for Class A, Class B, Class C, and Class D shares will vary due to differences in sales charges and expenses. * The maximum front-end sales charge for Class A is 5.25%. ** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The CDSC declines to 0% after six years. + The maximum contingent deferred sales charge for Class C is 1% for shares redeemed within one year of purchase. ++ Class D has no sales charge. (1) The Russell 1000 Value Index measures the performance of those companies in the Russell 1000 Index with lower price-to-book ratios and lower forecasted growth values. Indexes are unmanaged and their returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. (2) The Lehman Brothers U.S. Government/Credit Index tracks the performance of government and corporate obligations, including U.S. government agency and Treasury securities and corporate and Yankee bonds. The Index does not include any expenses, fees or charges. Such costs would lower performance. It is not possible to invest directly in an index. (3) The Lipper Income Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Income Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. (4) Figure shown assumes reinvestment of all distributions and does not reflect the deduction of any sales charges. (5) Figure shown assumes reinvestment of all distributions and the deduction of the maximum applicable sales charge. See the Fund's current prospectus for complete details on fees and sales charges. 5 EXPENSE EXAMPLE As a shareholder of the Fund, you incur ongoing costs, including management fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 02/01/04 - 07/31/04. ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds that have transactional costs, such as sales charges (loads), and redemption fees, or exchange fees.
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD * ------------- ------------- --------------- 02/01/04 - 02/01/04 07/31/04 07/31/04 ------------- ------------- --------------- CLASS A Actual...................................................... $1,000.00 $ 997.51 $5.41 Hypothetical (5% return before expenses).................... $1,000.00 $1,019.44 $5.47 CLASS B Actual...................................................... $1,000.00 $ 994.29 $9.12 Hypothetical (5% return before expenses).................... $1,000.00 $1,015.71 $9.22 CLASS C Actual...................................................... $1,000.00 $ 993.62 $9.12 Hypothetical (5% return before expenses).................... $1,000.00 $1,015.17 $9.22 CLASS D Actual...................................................... $1,000.00 $ 998.54 $4.17 Hypothetical (5% return before expenses).................... $1,000.00 $1,020.69 $4.22
- ------------------ * Expenses are equal to the Fund's annualized expense ratio of 1.09%, 1.84%, 1.84% and 0.84% respectively, multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period). 6 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED)
NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------- Common Stocks (31.5%) Advertising/Marketing Services (0.2%) 36,120 Interpublic Group of Companies, Inc. (The)*................. $ 461,975 ----------- Aerospace & Defense (0.3%) 12,400 Northrop Grumman Corp. ..................................... 652,240 ----------- Auto Parts: O.E.M. (0.6%) 14,490 Magna International, Inc. (Class A) (Canada)................ 1,166,445 ----------- Broadcasting (0.5%) 29,600 Clear Channel Communications, Inc. ......................... 1,056,720 ----------- Chemicals: Major Diversified (1.2%) 56,800 Bayer AG (ADR) (Germany).................................... 1,532,464 22,430 Dow Chemical Co. (The)...................................... 894,733 ----------- 2,427,197 ----------- Computer Processing Hardware (0.3%) 30,230 Hewlett-Packard Co. ........................................ 609,135 ----------- Containers/Packaging (0.3%) 10,420 Temple-Inland, Inc. ........................................ 711,165 ----------- Data Processing Services (0.9%) 14,610 Automatic Data Processing, Inc. ............................ 613,328 17,100 First Data Corp. ........................................... 762,831 19,400 SunGard Data Systems Inc.*.................................. 452,214 ----------- 1,828,373 ----------- Discount Stores (0.4%) 21,250 Target Corp. ............................................... 926,500 ----------- Electric Utilities (1.4%) 9,900 Consolidated Edison, Inc. .................................. 405,603 14,200 Edison International........................................ 380,560 13,010 Entergy Corp. .............................................. 748,075
See Notes to Financial Statements 7 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------- 20,820 Exelon Corp. ............................................... $ 726,618 15,900 FirstEnergy Corp. .......................................... 621,690 ----------- 2,882,546 ----------- Finance/Rental/Leasing (0.5%) 17,200 Freddie Mac................................................. 1,106,132 ----------- Financial Conglomerates (2.0%) 25,990 Citigroup, Inc. ............................................ 1,145,899 58,256 J.P. Morgan Chase & Co. .................................... 2,174,696 16,790 Prudential Financial, Inc. ................................. 781,742 ----------- 4,102,337 ----------- Financial Publishing/Services (0.4%) 36,730 Equifax, Inc. .............................................. 885,928 ----------- Food: Major Diversified (0.9%) 23,200 Kraft Foods Inc. (Class A).................................. 708,760 7,100 Nestle SA (ADR) (Registered Shares) (Switzerland)........... 455,110 15,910 PepsiCo, Inc. .............................................. 795,500 ----------- 1,959,370 ----------- Foods: Specialty/Candy (0.4%) 23,150 Cadbury Schweppes PLC (ADR) (United Kingdom)................ 764,876 ----------- Hotels/Resorts/Cruiselines (0.8%) 20,780 Hilton Hotels Corp. ........................................ 370,507 12,400 Marriott International, Inc. (Class A)...................... 605,120 14,630 Starwood Hotels & Resorts Worldwide, Inc. .................. 658,350 ----------- 1,633,977 ----------- Household/Personal Care (0.6%) 19,190 Kimberly-Clark Corp. ....................................... 1,229,503 ----------- Industrial Conglomerates (0.7%) 27,300 General Electric Co. ....................................... 907,725 7,570 Ingersoll-Rand Co. Ltd. (Class A) (Bermuda)................. 519,983 ----------- 1,427,708 ----------- Industrial Machinery (0.3%) 11,600 Parker-Hannifin Corp. ...................................... 665,608 -----------
See Notes to Financial Statements 8 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------- Information Technology Services (0.6%) 30,800 Accenture Ltd. (Class A) (Bermuda) (ADR)*................... $ 758,604 6,350 International Business Machines Corp. ...................... 552,895 ----------- 1,311,499 ----------- Integrated Oil (3.0%) 37,880 BP PLC (ADR) (United Kingdom)............................... 2,134,916 16,410 ConocoPhillips.............................................. 1,292,616 28,330 Exxon Mobil Corp. .......................................... 1,311,679 26,400 Royal Dutch Petroleum Co. (NY Registered Shares) (Netherlands)............................................. 1,327,920 ----------- 6,067,131 ----------- Investment Banks/Brokers (1.1%) 16,800 Lehman Brothers Holdings, Inc. ............................. 1,177,680 24,230 Merrill Lynch & Co., Inc. .................................. 1,204,716 ----------- 2,382,396 ----------- Life/Health Insurance (0.3%) 19,680 Metlife, Inc. .............................................. 701,986 ----------- Major Banks (0.7%) 11,350 Bank of America Corp. ...................................... 964,864 9,120 PNC Financial Services Group................................ 461,472 ----------- 1,426,336 ----------- Major Telecommunications (1.2%) 16,200 SBC Communications, Inc. ................................... 410,508 56,610 Sprint Corp. (FON Group).................................... 1,057,475 27,120 Verizon Communications Inc. ................................ 1,045,205 ----------- 2,513,188 ----------- Managed Health Care (0.4%) 12,050 CIGNA Corp. ................................................ 747,221 ----------- Media Conglomerates (1.5%) 60,490 Disney (Walt) Co. (The)..................................... 1,396,714 108,250 Time Warner Inc.*........................................... 1,802,362 ----------- 3,199,076 ----------- Medical Specialties (0.6%) 18,440 Bausch & Lomb, Inc. ........................................ 1,135,720 -----------
See Notes to Financial Statements 9 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------- Motor Vehicles (0.8%) 65,400 Honda Motor Co., Ltd. (ADR) (Japan)......................... $ 1,587,258 ----------- Multi-Line Insurance (0.5%) 17,170 Hartford Financial Services Group, Inc. (The)............... 1,117,767 ----------- Oil Refining/Marketing (0.3%) 9,610 Valero Energy Corp. ........................................ 719,981 ----------- Oilfield Services/Equipment (0.9%) 30,070 Schlumberger Ltd. (Netherlands) ............................ 1,934,102 ----------- Package Software (0.7%) 21,300 Computer Associates International, Inc. .................... 537,612 28,710 Microsoft Corp. ............................................ 817,087 ----------- 1,354,699 ----------- Pharmaceuticals: Major (2.7%) 6,600 AstraZeneca PLC (ADR) (United Kingdom)...................... 296,472 97,490 Bristol-Myers Squibb Co. ................................... 2,232,520 12,470 Roche Holdings Ltd. (ADR) (Switzerland)..................... 1,234,031 60,450 Schering-Plough Corp. ...................................... 1,176,357 16,200 Wyeth....................................................... 573,480 ----------- 5,512,860 ----------- Precious Metals (0.3%) 17,430 Newmont Mining Corp. ....................................... 705,392 ----------- Property - Casualty Insurers (1.2%) 24,070 Chubb Corp. (The)........................................... 1,655,535 24,034 St. Paul Travelers Companies, Inc. (The).................... 890,940 ----------- 2,546,475 ----------- Railroads (0.9%) 49,620 Norfolk Southern Corp. ..................................... 1,324,357 11,040 Union Pacific Corp. ........................................ 621,994 ----------- 1,946,351 ----------- Restaurants (0.3%) 19,320 McDonald's Corp. ........................................... 531,300 -----------
See Notes to Financial Statements 10 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
NUMBER OF SHARES VALUE - -------------------------------------------------------------------------------------------------------------- Semiconductors (0.3%) 25,250 Intel Corp. ........................................................................ $ 615,595 ----------- Tobacco (0.2%) 9,680 Altria Group, Inc. ................................................................. 460,768 ----------- Wireless Communications (0.3%) 36,300 AT&T Wireless Services. Inc.*....................................................... 524,172 ----------- Total Common Stocks (Cost $52,624,239).............................................. 65,539,008 -----------
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE - --------- ---------- ---------- Corporate Bonds (19.8%) Advertising/Marketing Services (0.2%) $ 350 WPP Finance (UK) Corp. - 144A** (United Kingdom)......... 5.875% 06/15/14 355,742 ------------ Aerospace & Defense (0.4%) 235 Raytheon Co. ............................................ 8.30 03/01/10 277,536 586 Systems 2001 Asset Trust - 144A**........................ 6.664 09/15/13 634,629 ------------ 912,165 ------------ Air Freight/Couriers (0.1%) 225 Fedex Corp. - 144A**..................................... 2.65 04/01/07 219,587 ------------ Airlines (0.5%) 350 America West Airlines, (Series 01-1)..................... 7.10 04/02/21 370,278 47 Continental Airlines, Inc. (Series 981A)................. 6.648 09/15/17 43,597 359 Continental Airlines, Inc. (Series 974A)................. 6.90 01/02/18 339,750 89 Continental Airlines, Inc. (Series 991A)................. 6.545 02/02/19 83,530 195 Southwest Airlines Co. (Series 01-1)..................... 5.496 11/01/06 202,780 ------------ 1,039,935 ------------ Beverages: Alcoholic (0.1%) 235 Miller Brewing Co. - 144A**.............................. 4.25 08/15/08 235,645 ------------ Broadcasting (0.1%) 245 Clear Channel Communications, Inc. ...................... 7.65 09/15/10 277,429 ------------
See Notes to Financial Statements 11 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------- Cable/Satellite TV (0.3%) $ 95 Comcast Cable Communications Inc. ....................... 6.75 % 01/30/11 $ 103,616 410 Comcast Corp. ........................................... 6.50 01/15/15 432,203 40 Comcast Corp. ........................................... 7.625 02/15/08 43,988 105 TCI Communications, Inc. ................................ 7.875 02/15/26 120,262 ------------ 700,069 ------------ Chemicals: Major Diversified (0.1%) 170 ICI Wilmington Inc. ..................................... 4.375 12/01/08 168,210 ------------ Containers/Packaging (0.2%) 320 Sealed Air Corp - 144A**................................. 5.625 07/15/13 319,321 ------------ Department Stores (0.5%) 50 Federated Department Stores, Inc. ....................... 6.625 09/01/08 54,369 160 Federated Department Stores, Inc. ....................... 6.90 04/01/29 169,323 110 Federated Department Stores, Inc. ....................... 7.00 02/15/28 117,618 80 May Department Stores Co., Inc. ......................... 5.95 11/01/08 84,356 415 May Department Stores Co., Inc. ......................... 6.70 09/15/28 419,117 60 May Department Stores Co., Inc. ......................... 6.90 01/15/32 62,113 100 May Department Stores Co., Inc. ......................... 7.875 03/01/30 115,354 ------------ 1,022,250 ------------ Drugstore Chains (0.2%) 290 CVS Corp. ............................................... 5.625 03/15/06 302,612 64 CVS Corp. - 144A**....................................... 6.204 10/10/25 65,114 ------------ 367,726 ------------ Electric Utilities (1.8%) 145 Appalachian Power Co. (Series H)......................... 5.95 05/15/33 137,361 340 Arizona Public Service Co. .............................. 5.80 06/30/14 344,553 325 Carolina Power & Light Co. .............................. 5.125 09/15/13 323,206 145 Cincinnati Gas & Electric Co. ........................... 5.70 09/15/12 149,731 130 Cincinnati Gas & Electric Co. (Series A)................. 5.375 06/15/33 114,088 105 Cincinnati Gas & Electric Co. (Series B)................. 5.40 06/15/33 92,495 95 Columbus Southern Power Co. ............................. 6.60 03/01/33 99,267 230 Consolidated Natural Gas Co. ............................ 6.25 11/01/11 246,531 100 Consolidated Natural Gas Co. (Series A).................. 5.00 03/01/14 97,101 85 Detroit Edison Co. ...................................... 6.125 10/01/10 91,354 160 Duke Energy Corp. ....................................... 3.75 03/05/08 158,957 200 Duke Energy Corp. ....................................... 4.50 04/01/10 199,525 130 Entergy Gulf States, Inc. ............................... 3.60 06/01/08 126,808 225 Exelon Corp. ............................................ 6.75 05/01/11 246,321
See Notes to Financial Statements 12 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------- $ 230 Ohio Power Co. (Series G)................................ 6.60 % 02/15/33 $ 239,392 345 Pacific Gas & Electric Co. .............................. 6.05 03/01/34 333,475 220 Public Service Electric & Gas Co. (Series MTNB).......... 5.00 01/01/13 219,527 115 South Carolina Electric & Gas Co. ....................... 5.30 05/15/33 104,457 50 Southern California Edison Co. .......................... 5.00 01/15/14 49,476 155 Texas Eastern Transmission, L.P. ........................ 7.00 07/15/32 168,415 190 TXU Energy Co. .......................................... 7.00 03/15/13 209,043 35 Wisconsin Electric Power Co. ............................ 5.625 05/15/33 33,300 ------------ 3,784,383 ------------ Electrical Products (0.1%) 240 Cooper Industries Inc. .................................. 5.25 07/01/07 251,133 ------------ Environmental Services (0.3%) 85 Waste Management, Inc. .................................. 5.00 03/15/14 82,254 435 Waste Management, Inc. .................................. 6.875 05/15/09 480,430 ------------ 562,684 ------------ Finance/Rental/Leasing (1.1%) 240 CIT Group Inc. .......................................... 2.875 09/29/06 237,622 105 CIT Group Inc. .......................................... 7.375 04/02/07 115,015 460 Countrywide Home Loans, Inc. ............................ 3.25 05/21/08 445,855 225 Ford Motor Credit Co. ................................... 7.375 10/28/09 241,663 315 Ford Motor Credit Co. ................................... 7.25 10/25/11 331,745 530 MBNA Corp. .............................................. 6.125 03/01/13 553,298 350 SLM Corp. ............................................... 5.00 10/01/13 341,687 ------------ 2,266,885 ------------ Financial Conglomerates (2.9%) 500 Associates Corp. of North America........................ 6.25 11/01/08 540,753 230 Bank One Corp. .......................................... 6.00 02/17/09 245,372 370 Chase Manhattan Corp. ................................... 6.00 02/15/09 395,100 80 Chase Manhattan Corp. ................................... 7.00 11/15/09 89,607 160 Citicorp................................................. 6.75 08/15/05 166,935 185 Citigroup Inc. .......................................... 5.625 08/27/12 192,662 255 Citigroup Inc. .......................................... 5.75 05/10/06 267,336 125 Citigroup Inc. .......................................... 6.00 02/21/12 134,007 165 General Electric Capital Corp. .......................... 4.25 12/01/10 162,207 650 General Electric Capital Corp. .......................... 6.75 03/15/32 712,041 1,010 General Motors Acceptance Corp. ......................... 6.875 09/15/11 1,038,282 735 General Motors Acceptance Corp. ......................... 8.00 11/01/31 748,430 135 John Hancock Financial Services.......................... 5.625 12/01/08 142,858
See Notes to Financial Statements 13 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------- $ 910 Prudential Holdings, LLC (Series B) (FSA) - 144A**....... 7.245% 12/18/23 $ 1,038,213 220 Prudential Holdings, LLC (Series C) - 144A**............. 8.695 12/18/23 270,241 ------------ 6,144,044 ------------ Food Retail (0.2%) 195 Albertson's Inc. ........................................ 7.50 02/15/11 221,127 150 Kroger Co. .............................................. 6.80 04/01/11 164,951 110 Kroger Co. .............................................. 8.00 09/15/29 129,896 ------------ 515,974 ------------ Food: Major Diversified (0.4%) 80 General Mills Inc. ...................................... 3.875 11/30/07 80,152 115 Kraft Foods Inc. ........................................ 5.25 06/01/07 120,028 325 Kraft Foods Inc. ........................................ 5.625 11/01/11 335,844 230 Kraft Foods Inc. ........................................ 6.25 06/01/12 245,893 ------------ 781,917 ------------ Forest Products (0.4%) 160 Weyerhaeuser Co. ........................................ 6.00 08/01/06 168,459 110 Weyerhaeuser Co. ........................................ 6.125 03/15/07 117,135 515 Weyerhaeuser Co. ........................................ 6.75 03/15/12 563,908 ------------ 849,502 ------------ Gas Distributors (0.2%) 295 Ras Laffan Liquid Natural Gas Co. Ltd. - 144A** 8.294 03/15/14 336,300 (Qatar)................................................ ------------ Home Furnishings (0.1%) 95 Mohawk Industries, Inc. ................................. 7.20 04/15/12 106,422 ------------ Home Improvement Chains (0.1%) 40 Lowe's Companies, Inc. .................................. 6.875 02/15/28 44,427 65 Lowe's Companies, Inc. .................................. 6.50 03/15/29 69,278 ------------ 113,705 ------------ Hotels/Resorts/Cruiselines (0.4%) 305 Hyatt Equities LLC - 144A**.............................. 6.875 06/15/07 325,168 505 Marriott International, Inc. (Series E).................. 7.00 01/15/08 550,700 ------------ 875,868 ------------
See Notes to Financial Statements 14 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------- Industrial Conglomerates (0.4%) $ 365 Honeywell International, Inc. ........................... 6.125% 11/01/11 $ 394,320 155 Hutchison Whampoa International Ltd. - 144A** (Virgin 5.45 11/24/10 154,244 Islands)............................................... 230 Hutchison Whampoa International Ltd. - 144A** (Virgin 6.50 02/13/13 232,751 Islands)............................................... ------------ 781,315 ------------ Information Technology Services (0.1%) 120 Electronic Data Systems.................................. 7.125 10/15/09 125,469 ------------ Insurance Brokers/Services (0.3%) 670 Farmers Exchange Capital - 144A**........................ 7.05 07/15/28 658,146 ------------ Integrated Oil (0.2%) 110 Amerada Hess Corp. ...................................... 6.65 08/15/11 118,130 40 Petro-Canada............................................. 4.00 07/15/13 36,196 195 Petro-Canada............................................. 5.35 07/15/33 169,081 145 Amerada Hess Corp. ...................................... 7.875 10/01/29 160,170 ------------ 483,577 ------------ Investment Banks/Brokers (0.4%) 260 Goldman Sachs Group Inc. ................................ 5.25 10/15/13 256,183 345 Goldman Sachs Group Inc. ................................ 6.60 01/15/12 375,694 235 Goldman Sachs Group Inc. ................................ 6.875 01/15/11 260,380 ------------ 892,257 ------------ Major Banks (0.7%) 120 Bank of New York (The)................................... 5.20 07/01/07 125,679 290 FleetBoston Financial Corp. ............................. 7.25 09/15/05 304,898 195 Household Finance Corp. ................................. 4.125 12/15/08 193,937 220 Household Finance Corp. ................................. 5.875 02/01/09 234,174 105 Household Finance Corp. ................................. 6.375 10/15/11 113,337 230 Household Finance Corp. ................................. 6.40 06/17/08 249,148 225 Household Finance Corp. ................................. 6.75 05/15/11 248,204 ------------ 1,469,377 ------------ Major Telecommunications (0.9%) 400 Deutsche Telekom International Finance Corp. 8.75 06/15/30 498,331 (Netherlands).......................................... 170 France Telecom S.A. (France)............................. 9.50 03/01/31 217,072 345 GTE Corp. ............................................... 6.94 04/15/28 357,646 95 Sprint Capital Corp. .................................... 8.75 03/15/32 115,455 210 Telecom Italia Capital SpA - 144A** (Luxembourg)......... 4.00 11/15/08 207,744
See Notes to Financial Statements 15 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------- $ 205 Verizon Global Funding Corp. ............................ 7.75 % 12/01/30 $ 235,929 300 Verizon New England Inc. ................................ 6.50 09/15/11 323,829 ------------ 1,956,006 ------------ Managed Health Care (0.6%) 605 Aetna, Inc. ............................................. 7.875 03/01/11 703,818 30 Anthem Inc. ............................................. 6.80 08/01/12 33,198 135 Anthem Insurance - 144A**................................ 9.125 04/01/10 166,633 345 Wellpoint Health Network, Inc. .......................... 6.375 06/15/06 364,633 ------------ 1,268,282 ------------ Media Conglomerates (0.6%) 295 AOL Time Warner Inc. .................................... 7.625 04/15/31 325,522 140 AOL Time Warner, Inc. ................................... 7.70 05/01/32 155,987 405 News America Holdings, Inc. ............................. 7.28 06/30/28 444,296 10 News America Holdings, Inc. ............................. 8.875 04/26/23 12,603 90 News America Holdings, Inc. ............................. 7.75 02/01/24 102,770 135 Time Warner, Inc. ....................................... 6.625 05/15/29 133,605 ------------ 1,174,783 ------------ Motor Vehicles (0.7%) 140 DaimlerChrysler North American Holdings Co. ............. 7.20 09/01/09 153,987 450 DaimlerChrysler North American Holdings Co. ............. 7.30 01/15/12 496,689 220 DaimlerChrysler North American Holdings Co. ............. 8.50 01/18/31 259,043 135 General Motors Acceptance Corp. ......................... 4.50 07/15/06 136,951 90 Ford Motor Co. .......................................... 6.625 10/01/28 78,960 290 Ford Motor Co. .......................................... 7.45 07/16/31 276,593 ------------ 1,402,223 ------------ Multi-Line Insurance (1.0%) 780 AIG SunAmerica Global Finance VI - 144A**................ 6.30 05/10/11 847,004 265 American General Finance Corp. .......................... 5.875 07/14/06 278,406 130 American General Finance Corp. (Series MTNH)............. 4.625 09/01/10 129,592 60 AXA Financial Inc. ...................................... 6.50 04/01/08 65,551 120 Hartford Financial Services Group, Inc. (The)............ 2.375 06/01/06 118,452 265 Hartford Financial Services Group, Inc. (The)............ 7.90 06/15/10 309,216 135 International Lease Finance Corp. ....................... 3.75 08/01/07 135,016 100 Nationwide Mutual Insurance Co. - 144A**................. 8.25 12/01/31 119,657 ------------ 2,002,894 ------------ Oil & Gas Pipelines (0.0%) 70 Panhandle Eastern Pipe Line Co. ......................... 2.75 03/15/07 67,533 ------------
See Notes to Financial Statements 16 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------- Oil & Gas Production (1.0%) $ 55 Kerr-McGee Corp. ........................................ 5.875% 09/15/06 $ 57,582 135 Kerr-McGee Corp. ........................................ 6.875 09/15/11 146,866 215 Nexen Inc. (Canada)...................................... 5.05 11/20/13 208,760 220 Pemex Project Funding Master Trust....................... 7.375 12/15/14 231,000 390 Pemex Project Funding Master Trust....................... 8.00 11/15/11 429,975 610 Pemex Project Funding Master Trust....................... 8.625 02/01/22 660,325 290 Pemex Project Funding Master Trust....................... 9.125 10/13/10 337,125 ------------ 2,071,633 ------------ Oil Refining/Marketing (0.1%) 145 Marathon Oil Corp. ...................................... 5.375 06/01/07 151,858 ------------ Other Metals/Minerals (0.3%) 415 Inco Ltd. (Canada)....................................... 7.20 09/15/32 442,995 105 Inco Ltd. (Canada)....................................... 7.75 05/15/12 120,040 ------------ 563,035 ------------ Pharmaceuticals: Major (0.0%) 80 Schering-Plough Corp. ................................... 5.30 12/01/13 80,132 ------------ Property - Casualty Insurers (0.2%) 460 Mantis Reef Ltd. - 144A** (Australia).................... 4.692 11/14/08 456,910 ------------ Pulp & Paper (0.2%) 245 International Paper Co. ................................. 4.25 01/15/09 242,113 225 Sappi Papier Holding AG-144A** (Austria)................. 6.75 06/15/12 241,983 ------------ 484,096 ------------ Railroads (0.1%) 105 Union Pacific Corp. ..................................... 3.625 06/01/10 98,812 110 Union Pacific Corp. ..................................... 6.79 11/09/07 119,832 ------------ 218,644 ------------ Real Estate Development (0.5%) 451 World Financial Properties - 144A**...................... 6.91 09/01/13 495,456 443 World Financial Properties - 144A**...................... 6.95 09/01/13 488,823 ------------ 984,279 ------------ Real Estate Investment Trust (0.3%) 30 EOP Operating L.P. ...................................... 4.75 03/15/14 28,041 245 EOP Operating L.P. ...................................... 6.763 06/15/07 264,164 45 EOP Operating L.P. ...................................... 7.25 06/15/28 47,068
See Notes to Financial Statements 17 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------- $ 140 Rouse Co. (The).......................................... 3.625% 03/15/09 $ 134,238 60 Rouse Co. (The).......................................... 5.375 11/26/13 58,876 ------------ 532,387 ------------ Savings Banks (0.2%) 195 Washington Mutual Inc. .................................. 5.50 01/15/13 198,086 195 Washington Mutual Inc. .................................. 8.25 04/01/10 228,438 ------------ 426,524 ------------ Tobacco (0.2%) 265 Altria Group, Inc. ...................................... 7.00 11/04/13 274,013 215 Altria Group, Inc. ...................................... 7.75 01/15/27 221,866 ------------ 495,879 ------------ Wireless Communications (0.1%) 160 AT&T Wireless Services, Inc. ............................ 8.75 03/01/31 199,739 ------------ Total Corporate Bonds (Cost $40,037,927).......................................... 41,153,874 ------------ Foreign Government Obligation (0.2%) 390 United Mexican States Corp. (Mexico) (Cost $449,125)..... 8.30 08/15/31 422,175 ------------ U.S. Government Agency & Obligations (37.0%) 1,300 Federal Home Loan Mortgage Corp. ........................ 5.125 11/07/13 1,292,129 7,060 Federal National Mortgage Assoc.......................... 4.25 05/15/09 7,121,620 740 Tennessee Valley Authority............................... 0.00 10/15/04 737,350 U.S. Treasury Bonds 5,000 ......................................................... 5.50 08/15/28 5,136,330 3,260 ......................................................... 6.125 08/15/29 3,636,556 7,700 ......................................................... 7.625 02/15/25 10,004,286 1,450 ......................................................... 8.125 08/15/19 1,921,365 6,850 ......................................................... 8.125 08/15/21 9,169,903 1,150 ......................................................... 8.75 08/15/20 1,611,708 U.S. Treasury Notes 10,050 ......................................................... 1.875 01/31/06 9,974,635 15,000 ......................................................... 3.50 11/15/06 15,225,014 4,950 ......................................................... 3.875 02/15/13 4,785,066 500 ......................................................... 6.50 02/15/10 566,114 U.S. Treasury Strips 1,000 ......................................................... 0.00 05/15/11 750,724 4,190 ......................................................... 0.00 08/15/20 1,766,265 5,750 ......................................................... 0.00 02/15/25 1,849,625 5,555 ......................................................... 0.00 02/15/25 1,779,778 ------------ Total U.S. Government & Agency Obligations (Cost $77,185,320)..................... 77,328,468 ------------
See Notes to Financial Statements 18 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------- Mortgage-Backed Securities (5.1%) Federal Home Loan Mortgage Corp. Gold $ 978 ......................................................... 6.50 % 08/01/29- 08/01/33 $ 1,024,983 836 ......................................................... 7.50 10/01/29- 08/01/32 897,983 Federal National Mortgage Assoc. 3,755 ......................................................... 6.50 01/01/33 3,924,620 1,222 ......................................................... 7.00 07/01/11- 07/01/32 1,293,303 965 ......................................................... 7.50 08/01/23- 06/01/32 1,033,874 1,000 ......................................................... 7.50 + 1,069,688 997 ......................................................... 8.00 05/01/24- 08/01/31 1,082,746 Government National Mortgage Assoc. 185 ......................................................... 7.50 08/15/25- 09/15/26 199,088 87 ......................................................... 8.00 06/15/26- 07/15/26 95,988 ------------ Total Mortgage-Backed Securities (Cost $10,477,479)............................... 10,622,273 ------------ Asset-Backed Securities (0.7%) Finance/Rental/Leasing 315 Chase Credit Card Master Trust 2001-4A................... 5.50 11/17/08 329,602 300 Citibank Credit Issuance Trust 2001-A/A1................. 6.90 10/15/07 315,551 17 Harley-Davidson Motorcycle Trust 2002-1.................. 3.02 09/15/06 17,075 140 MBNA Master Credit Card Trust............................ 5.90 08/15/11 150,726 365 Nissan Auto Receivables Owner Trust 2001-C A4............ 4.80 02/15/07 368,412 175 TXU Electric Delivery Transition Bond Co. LLC 2004-1 4.81 11/15/12 176,319 A2..................................................... ------------ Total Asset-Backed Securities (Cost $1,323,153)................................... 1,357,685 ------------ Short-Term Investments (9.0%) U.S. Government Obligations (a) (0.2%) U.S. Treasury Bills 400 ***...................................................... 0.98 09/23/04 399,412 100 ***...................................................... 1.645 01/13/05 99,251 ------------ Total U.S. Government Obligations (Cost $498,669)................................. 498,663 ------------
See Notes to Financial Statements 19 Morgan Stanley Balanced Income Fund PORTFOLIO OF INVESTMENTS - JULY 31, 2004 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE - -------------------------------------------------------------------------------------------------------------- ] Repurchase Agreement (8.8%) $18,337 Joint repurchase agreement account (dated 07/30/04; 1.355% 08/02/04 $ 18,337,000 proceeds $18,339,071) (b) (Cost $18,337,000)........... ------------ Total Short-Term Investments (Cost $18,835,669)................................... 18,835,663 ------------
Total Investments (Cost $200,932,912) (c) (d)........................ 103.3% 215,259,146 Liabilities in Excess of Other Assets................................ (3.3) (6,905,122) ----- ------------ Net Assets........................................................... 100.0% $208,354,024 ===== ============
- --------------------- ADR American Depository Receipt. FSA Financial Security Assurance. * Non-income producing security. ** Resale is restricted to qualified institutional investors. *** All or a portion of this security has been physically segregated in connection with open futures contracts in an amount equal to $321,700. + Security purchased on a forward commitment basis with an approximate principal amount and no definite maturity date; the actual principal amount and maturity date will be determined upon settlement. (a) Purchased on a discount basis. The interest rates shown have been adjusted to reflect a money market equivalent yield. (b) Collateralized by federal agency and U.S. Treasury obligations. (c) Securities have been designated as collateral in a amount equal to $33,504,323 in connection with securities purchased on a forward commitment basis and open futures contracts. (d) The aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $16,105,924 and the aggregate gross unrealized depreciation is $1,779,690, resulting in net unrealized appreciation of $14,326,234.
Futures Contracts Open at July 31, 2004:
NUMBER OF DESCRIPTION, DELIVERY UNDERLYING FACE UNREALIZED CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE DEPRECIATION - --------- ---------- ------------------------ --------------- ------------ 37 Short U.S. Treasury Notes 5 Year September 2004 $ (4,051,500) $ (59,915) 22 Short U.S. Treasury Notes 5 Year September 2004 (2,435,813) (61,745) 185 Short U.S. Treasury Bonds 20 Year September 2004 (20,020,469) (801,497) --------- Total unrealized depreciation............................ $(923,157) =========
20 See Notes to Financial Statements Morgan Stanley Balanced Income Fund FINANCIAL STATEMENTS Statement of Assets and Liabilities July 31, 2004 (unaudited) Assets: Investments in securities, at value (cost $200,932,912)....................................... $215,259,146 Receivable for: Interest................................................ 1,968,238 Investments sold........................................ 161,292 Shares of beneficial interest sold...................... 91,457 Dividends............................................... 73,476 Prepaid expenses and other assets........................... 71,435 ------------ Total Assets............................................ 217,625,044 ------------ Liabilities: Payable for: Investments purchased................................... 8,519,662 Variation margin........................................ 263,938 Distribution fee........................................ 170,812 Shares of beneficial interest redeemed.................. 161,450 Investment management fee............................... 106,664 Accrued expenses and other payables......................... 48,494 ------------ Total Liabilities....................................... 9,271,020 ------------ Net Assets.............................................. $208,354,024 ============ Composition of Net Assets: Paid-in-capital............................................. $199,780,850 Net unrealized appreciation................................. 13,403,077 Dividends in excess of net investment income................ (754,004) Accumulated net realized loss............................... (4,075,899) ------------ Net Assets.............................................. $208,354,024 ============ Class A Shares: Net Assets.................................................. $8,032,423 Shares Outstanding (unlimited authorized, $.01 par value)... 644,785 Net Asset Value Per Share............................... $12.46 ============ Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value)....... $13.15 ============ Class B Shares: Net Assets.................................................. $155,155,606 Shares Outstanding (unlimited authorized, $.01 par value)... 12,506,454 Net Asset Value Per Share............................... $12.41 ============ Class C Shares: Net Assets.................................................. $43,124,186 Shares Outstanding (unlimited authorized, $.01 par value)... 3,470,939 Net Asset Value Per Share............................... $12.42 ============ Class D Shares: Net Assets.................................................. $2,041,809 Shares Outstanding (unlimited authorized, $.01 par value)... 164,313 Net Asset Value Per Share............................... $12.43 ============
See Notes to Financial Statements 21 Morgan Stanley Balanced Income Fund FINANCIAL STATEMENTS continued Statement of Operations For the six months ended July 31, 2004 (unaudited) Net Investment Income: Income Interest.................................................... $ 3,105,631 Dividends (net of $21,222 foreign withholding tax).......... 645,511 ----------- Total Income............................................ 3,751,142 ----------- Expenses Distribution fee (Class A shares)........................... 9,567 Distribution fee (Class B shares)........................... 816,187 Distribution fee (Class C shares)........................... 216,582 Investment management fee................................... 649,738 Transfer agent fees and expenses............................ 125,399 Professional fees........................................... 34,278 Shareholder reports and notices............................. 33,902 Registration fees........................................... 27,848 Custodian fees.............................................. 21,338 Trustees' fees and expenses................................. 1,516 Other....................................................... 11,774 ----------- Total Expenses.......................................... 1,948,129 ----------- Net Investment Income................................... 1,803,013 ----------- Net Realized and Unrealized Gain (Loss): Net Realized Gain on: Investments................................................. 3,759,473 Futures contracts........................................... 397,251 ----------- Net Realized Gain....................................... 4,156,724 ----------- Net Change in Unrealized Appreciation/Depreciation on: Investments................................................. (7,000,159) Futures contracts........................................... (408,669) ----------- Net Depreciation........................................ (7,408,828) ----------- Net Loss................................................ (3,252,104) ----------- Net Decrease................................................ $(1,449,091) ===========
See Notes to Financial Statements 22 Morgan Stanley Balanced Income Fund FINANCIAL STATEMENTS continued Statement of Changes in Net Assets
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JULY 31, 2004 JANUARY 31, 2004 ------------- ---------------- (unaudited) Increase (Decrease) in Net Assets: Operations: Net investment income....................................... $ 1,803,013 $ 2,886,139 Net realized gain........................................... 4,156,724 7,018,523 Net change in unrealized appreciation....................... (7,408,828) 14,617,180 ------------ ------------ Net Increase (Decrease)................................. (1,449,091) 24,521,842 ------------ ------------ Dividends to Shareholders from Net Investment Income: Class A shares.............................................. (105,672) (152,122) Class B shares.............................................. (1,550,100) (3,159,058) Class C shares.............................................. (416,463) (780,828) Class D shares.............................................. (33,615) (57,992) ------------ ------------ Total Dividends......................................... (2,105,850) (4,150,000) ------------ ------------ Net increase (decrease) from transactions in shares of beneficial interest....................................... (10,670,536) 30,021,645 ------------ ------------ Net Increase (Decrease)................................. (14,225,477) 50,393,487 Net Assets: Beginning of period......................................... 222,579,501 172,186,014 ------------ ------------ End of Period (Including dividends in excess of net investment income of $754,004 and $451,167, respectively)...................... $208,354,024 $222,579,501 ============ ============
See Notes to Financial Statements 23 Morgan Stanley Balanced Income Fund NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 (UNAUDITED) 1. Organization and Accounting Policies Morgan Stanley Balanced Income Fund (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open-end management investment company. The Fund's investment objective is to provide current income and moderate capital growth. The Fund was organized as a Massachusetts business trust on November 23, 1994 and commenced operations on March 28, 1995. On July 28, 1997, the Fund converted to a multiple class share structure. The Fund offers Class A shares, Class B shares, Class C shares and Class D shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within one year, six years and one year, respectively. Class D shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses. The following is a summary of significant accounting policies: A. Valuation of Investments -- (1) an equity portfolio security listed or traded on the New York Stock Exchange ("NYSE") or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) futures are valued at the latest price published by the commodities exchange on which they trade; (6) when market quotations are not readily available or Morgan Stanley Investment Advisors Inc. (the "Investment Manager") determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Trustees. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as 24 Morgan Stanley Balanced Income Fund NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 (UNAUDITED) continued of the close of the NYSE, as determined in good faith by the Fund's Trustees or by the Investment Manager using a pricing service and/or procedures approved by the Trustees of the Fund; (7) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; and (8) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. B. Accounting for Investments -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily. C. Repurchase Agreements -- Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the Fund, along with other affiliated entities managed by the Investment Manager, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements and are collateralized by cash, U.S. Treasury or federal agency obligations. The Fund may also invest directly with institutions in repurchase agreements. The Fund's custodian receives the collateral, which is marked-to-market daily to determine that the value of the collateral does not decrease below the repurchase price plus accrued interest. D. Multiple Class Allocations -- Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class. E. Futures Contracts -- A futures contract is an agreement between two parties to buy and sell financial instruments or contracts based on financial indices at a set price on a future date. Upon entering into such a contract, the Fund is required to pledge to the broker cash, U.S. Government securities or other liquid portfolio securities equal to the minimum initial margin requirements of the applicable futures exchange. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments known as variation margin are recorded by the Fund as unrealized gains and losses. Upon closing of the contract, the Fund realizes a gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. 25 Morgan Stanley Balanced Income Fund NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 (UNAUDITED) continued F. 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. G. Dividends and Distributions to Shareholders -- Dividends and distributions to shareholders are recorded on the ex-dividend date. H. Use of Estimates -- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. 2. Investment Management Agreement Pursuant to an Investment Management Agreement, the Fund pays the Investment Manager a management fee, accrued daily and payable monthly, by applying the annual rate of 0.60% to the portion of daily net assets not exceeding $500 million and 0.575% to the portion of the daily net assets in excess of $500 million. 3. Plan of Distribution Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Manager. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A - up to 0.25% of the average daily net assets of Class A; (ii) Class B - up to 1.0% of the average daily net assets of Class B; and (iii) Class C - up to 1.0% of the average daily net assets of Class C. In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $7,743,702 at July 31, 2004. In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except 26 Morgan Stanley Balanced Income Fund NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 (UNAUDITED) continued that expenses representing a gross sales credit to Morgan Stanley Financial Advisors or other selected broker-dealer representatives may be reimbursed in the subsequent calendar year. For the six months ended July 31, 2004, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.25% and 1.0%, respectively. The Distributor has informed the Fund that for the six months ended July 31, 2004, it received contingent deferred sales charges from certain redemptions of the Fund's Class B shares and Class C shares of $228,558 and $4,973, respectively and received $26,920 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund. 4. Security Transactions and Transactions with Affiliates The cost of purchases and proceeds from sales/prepayments of portfolio securities, excluding short-term investments, for the six months ended July 31, 2004, aggregated $70,027,900 and $86,394,740, respectively. Included in the aforementioned are purchases and sales of U.S. Government securities of $20,378,229 and $16,085,596, respectively. For the six months ended July 31, 2004, the Fund incurred brokerage commissions of $431 with Morgan Stanley & Co., Inc., an affiliate of the Investment Manager and Distributor, for portfolio transactions executed on behalf of the Fund. Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is the Fund's transfer agent. At July 31, 2004, the Fund had transfer agent fees and expenses payable of approximately $1,700. Effective April 1, 2004, the Fund began an unfunded Deferred Compensation Plan (the "Compensation Plan") which allows each independent Trustee to defer payment of all, or a portion, of the fees he receives for serving on the Board of Trustees. Each eligible Trustee generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund. 27 Morgan Stanley Balanced Income Fund NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 (UNAUDITED) continued 5. Shares of Beneficial Interest Transactions in shares of beneficial interest were as follows:
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JULY 31, 2004 JANUARY 31, 2004 ------------------------- ------------------------- (unaudited) SHARES AMOUNT SHARES AMOUNT ---------- ------------ ---------- ------------ CLASS A SHARES Sold.............................................. 173,432 $ 2,172,755 458,941 $ 5,545,611 Reinvestment of dividends......................... 6,145 76,924 8,979 108,282 Redeemed.......................................... (112,837) (1,413,559) (162,828) (1,962,686) ---------- ------------ ---------- ------------ Net increase - Class A............................ 66,740 836,120 305,092 3,691,207 ---------- ------------ ---------- ------------ CLASS B SHARES Sold.............................................. 1,393,372 17,524,473 6,190,170 73,503,551 Reinvestment of dividends......................... 87,497 1,092,490 183,758 2,197,677 Redeemed.......................................... (2,392,029) (29,908,854) (4,810,133) (57,539,950) ---------- ------------ ---------- ------------ Net increase (decrease) - Class B................. (911,160) (11,291,891) 1,563,795 18,161,278 ---------- ------------ ---------- ------------ CLASS C SHARES Sold.............................................. 349,694 4,394,470 1,380,443 16,559,967 Reinvestment of dividends......................... 25,239 315,610 50,778 608,265 Redeemed.......................................... (317,127) (3,967,807) (859,068) (10,354,912) ---------- ------------ ---------- ------------ Net increase - Class C............................ 57,806 742,273 572,153 6,813,320 ---------- ------------ ---------- ------------ CLASS D SHARES Sold.............................................. 15,847 201,776 239,592 2,881,351 Reinvestment of dividends......................... 1,988 24,849 3,633 43,824 Redeemed.......................................... (93,766) (1,183,663) (132,275) (1,569,335) ---------- ------------ ---------- ------------ Net increase (decrease) - Class D................. (75,931) (957,038) 110,950 1,355,840 ---------- ------------ ---------- ------------ Net increase (decrease) in Fund................... (862,545) $(10,670,536) 2,551,990 $ 30,021,645 ========== ============ ========== ============
6. 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. 28 Morgan Stanley Balanced Income Fund NOTES TO FINANCIAL STATEMENTS - JULY 31, 2004 (UNAUDITED) continued As of January 31, 2004, the Fund had a net capital loss carryforward of $6,999,142 which will expire on January 31, 2011 to offset future capital gains to the extent provided by regulations. As of January 31, 2004, the Fund had temporary book/tax differences primarily attributable to capital loss deferrals on wash sales and amortization of premiums on debt securities. 7. Purposes of and Risks Relating to Certain Financial Instruments The Fund may invest in futures with respect to financial instruments and interest rate indexes ("futures contracts"). These future contracts involve elements of market risk in excess of the amount reflected in the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the value of the underlying securities. Risks may also arise from the potential inability of the counterparties to meet the terms of their contracts. 8. Legal Matters The Investment Manager, certain affiliates of the Investment Manager, certain officers of such affiliates and certain investment companies advised by the Investment Manager or its affiliates, including the Fund, are named as defendants in a number of similar class action complaints which were recently consolidated. This consolidated action also names as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint generally alleges that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Manager and certain affiliates of the Investment Manager allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Manager or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Manager or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their efforts to recommend these funds to investors. The complaint seeks, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. The defendants have moved to dismiss the action and intend to otherwise vigorously defend it. While the Fund believes that it has meritorious defenses, the ultimate outcome of this matter is not presently determinable at this early stage of the litigation, and no provision has been made in the Fund's financial statements for the effect, if any, of this matter. 29 Morgan Stanley Balanced Income Fund FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE SIX FOR THE YEAR ENDED JANUARY 31, MONTHS ENDED ------------------------------------------------------- JULY 31, 2004 2004 2003 2002 2001 2000 ------------- ------ ------ ------ ------ ------ (unaudited) Class A Shares: Selected Per Share Data: Net asset value, beginning of period............ $12.66 $11.45 $12.35 $12.42 $11.80 $12.75 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income++..................... 0.15 0.26 0.33 0.43 0.47 0.47 Net realized and unrealized gain (loss)..... (0.18) 1.28 (0.84) (0.06) 0.94 (0.69) ------ ------ ------ ------ ------ ------ Total income (loss) from investment operations..................................... (0.03) 1.54 (0.51) 0.37 1.41 (0.22) ------ ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income....................... (0.17) (0.33) (0.39) (0.44) (0.47) (0.47) Net realized gain........................... -- -- -- -- (0.32) (0.26) ------ ------ ------ ------ ------ ------ Total dividends and distributions............... (0.17) (0.33) (0.39) (0.44) (0.79) (0.73) ------ ------ ------ ------ ------ ------ Net asset value, end of period.................. $12.46 $12.66 $11.45 $12.35 $12.42 $11.80 ====== ====== ====== ====== ====== ====== Total Return+................................... (0.25)%(1) 13.65% (4.19)% 3.13% 12.66% (1.84)% Ratios to Average Net Assets(3): Expenses........................................ 1.09 %(2) 1.09% 1.08 % 1.16% 1.20% 1.20 % Net investment income........................... 2.37 %(2) 2.15% 2.79 % 3.44% 3.97% 3.82 % Supplemental Data: Net assets, end of period, in thousands......... $8,032 $7,318 $3,125 $2,216 $2,043 $2,187 Portfolio turnover rate......................... 34 %(1) 174% 173 % 99% 21% 35 %
- --------------------- ++ The per share amounts were computed using an average number of shares outstanding during the period. + Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (1) Not annualized. (2) Annualized. (3) Reflects overall Fund ratios for investment income and non-class specific expenses.
See Notes to Financial Statements 30 Morgan Stanley Balanced Income Fund FINANCIAL HIGHLIGHTS continued
FOR THE SIX FOR THE YEAR ENDED JANUARY 31, MONTHS ENDED --------------------------------------------------------------- JULY 31, 2004 2004 2003 2002 2001 2000 ------------- -------- -------- -------- ------- ------- (unaudited) Class B Shares: Selected Per Share Data: Net asset value, beginning of period... $12.61 $11.40 $12.31 $12.39 $11.77 $12.74 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income++............ 0.10 0.17 0.24 0.34 0.37 0.38 Net realized and unrealized gain (loss)............................. (0.24) 1.28 (0.85) (0.07) 0.95 (0.71) ------ ------ ------ ------ ------ ------ Total income (loss) from investment operations............................ (0.14) 1.45 (0.61) 0.27 1.32 (0.33) ------ ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income.............. (0.06) (0.24) (0.30) (0.35) (0.38) (0.38) Net realized gain.................. -- -- -- -- (0.32) (0.26) ------ ------ ------ ------ ------ ------ Total dividends and distributions...... (0.06) (0.24) (0.30) (0.35) (0.70) (0.64) ------ ------ ------ ------ ------ ------ Net asset value, end of period......... $12.41 $12.61 $11.40 $12.31 $12.39 $11.77 ====== ====== ====== ====== ====== ====== Total Return+.......................... (0.57)%(1) 12.77% (4.98)% 2.32% 11.82% (2.69)% Ratios to Average Net Assets(3): Expenses............................... 1.84 %(2) 1.86% 1.84 % 1.91% 2.00% 1.95 % Net investment income.................. 1.62 %(2) 1.38% 2.03 % 2.68% 3.17% 3.07 % Supplemental Data: Net assets, end of period, in thousands............................. $155,156 $169,135 $135,146 $101,957 $45,803 $56,827 Portfolio turnover rate................ 34 %(1) 174% 173 % 99% 21% 35 %
- --------------------- ++ The per share amounts were computed using an average number of shares outstanding during the period. + Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (1) Not annualized. (2) Annualized. (3) Reflects overall Fund ratios for investment income and non-class specific expenses.
See Notes to Financial Statements 31 Morgan Stanley Balanced Income Fund FINANCIAL HIGHLIGHTS continued
FOR THE SIX FOR THE YEAR ENDED JANUARY 31, MONTHS ENDED ------------------------------------------------------------ JULY 31, 2004 2004 2003 2002 2001 2000 ------------- ------- ------- ------- ------- ------- (unaudited) Class C Shares: Selected Per Share Data: Net asset value, beginning of period...... $12.63 $11.42 $12.33 $12.41 $11.78 $12.74 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income++............... 0.10 0.17 0.24 0.33 0.38 0.38 Net realized and unrealized gain (loss)................................ (0.19) 1.28 (0.85) (0.05) 0.95 (0.70) ------ ------ ------ ------ ------ ------ Total income (loss) from investment operations............................... (0.09) 1.45 (0.61) 0.28 1.33 (0.32) ------ ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income................. (0.12) (0.24) (0.30) (0.36) (0.38) (0.38) Net realized gain..................... -- -- -- -- (0.32) (0.26) ------ ------ ------ ------ ------ ------ Total dividends and distributions......... (0.12) (0.24) (0.30) (0.36) (0.70) (0.64) ------ ------ ------ ------ ------ ------ Net asset value, end of period............ $12.42 $12.63 $11.42 $12.33 $12.41 $11.78 ====== ====== ====== ====== ====== ====== Total Return+............................. (0.64)%(1) 12.74% (5.00)% 2.32% 11.89% (2.62)% Ratios to Average Net Assets(3): Expenses.................................. 1.84 %(2) 1.85% 1.84 % 1.91% 1.94% 1.95 % Net investment income..................... 1.62 %(2) 1.39% 2.03 % 2.68% 3.23% 3.07 % Supplemental Data: Net assets, end of period, in thousands... $43,124 $43,092 $32,439 $33,321 $24,205 $29,535 Portfolio turnover rate................... 34 %(1) 174% 173 % 99% 21% 35 %
- --------------------- ++ The per share amounts were computed using an average number of shares outstanding during the period. + Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (1) Not annualized. (2) Annualized. (3) Reflects overall Fund ratios for investment income and non-class specific expenses.
See Notes to Financial Statements 32 Morgan Stanley Balanced Income Fund FINANCIAL HIGHLIGHTS continued
FOR THE SIX FOR THE YEAR ENDED JANUARY 31 MONTHS ENDED ------------------------------------------------------- JULY 31, 2004 2004 2003 2002 2001 2000 ------------- ------ ------ ------ ------ ------ (unaudited) Class D Shares: Selected Per Share Data: Net asset value, beginning of period............ $12.63 $11.42 $12.33 $12.40 $11.79 $12.75 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income++..................... 0.16 0.29 0.34 0.45 0.50 0.50 Net realized and unrealized gain (loss)..... (0.18) 1.28 (0.83) (0.05) 0.93 (0.70) ------ ------ ------ ------ ------ ------ Total income (loss) from investment operations..................................... (0.02) 1.57 (0.49) 0.40 1.43 (0.20) ------ ------ ------ ------ ------ ------ Less dividends and distributions from: Net investment income....................... (0.18) (0.36) (0.42) (0.47) (0.50) (0.50) Net realized gain........................... -- -- -- -- (0.32) (0.26) ------ ------ ------ ------ ------ ------ Total dividends and distributions............... (0.18) (0.36) (0.42) (0.47) (0.82) (0.76) ------ ------ ------ ------ ------ ------ Net asset value, end of period.................. $12.43 $12.63 $11.42 $12.33 $12.40 $11.79 ====== ====== ====== ====== ====== ====== Total Return+................................... (0.15)%(1) 13.94% (4.04)% 3.37% 12.88% (1.63)% Ratios to Average Net Assets(3): Expenses........................................ 0.84 %(2) 0.86% 0.84 % 0.91% 1.00% 0.95 % Net investment income........................... 2.62 %(2) 2.38% 3.03 % 3.68% 4.17% 4.07 % Supplemental Data: Net assets, end of period, in thousands......... $2,042 $3,034 $1,476 $496 $107 $1,546 Portfolio turnover rate......................... 34 %(1) 174% 173 % 99% 21% 35 %
- --------------------- ++ The per share amounts were computed using an average number of shares outstanding during the period. + Calculated based on the net asset value as of the last business day of the period. (1) Not annualized. (2) Annualized. (3) Reflects overall Fund ratios for investment income and non-class specific expenses.
See Notes to Financial Statements 33 (This Page Intentionally Left Blank) (This Page Intentionally Left Blank) TRUSTEES Michael Bozic Charles A. Fiumefreddo Edwin J. Garn Wayne E. Hedien James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael E. Nugent Fergus Reid OFFICERS Charles A. Fiumefreddo Chairman of the Board Mitchell M. Merin President Ronald E. Robison Executive Vice President and Principal Executive Officer Barry Fink Vice President Joseph J. McAlinden Vice President Stefanie V. Chang Vice President Francis J. Smith Treasurer and Chief Financial Officer Thomas F. Caloia Vice President Mary E. Mullin Secretary TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Two World Financial Center New York, New York 10281 INVESTMENT MANAGER Morgan Stanley Investment Advisors Inc. 1221 Avenue of the Americas New York, New York 10020 The financial statements included herein have been taken from the records of the Fund without examination by the independent auditors and accordingly they do not express an opinion thereon. This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Investments and services offered through Morgan Stanley DW Inc., member SIPC. Morgan Stanley Distributors Inc., member NASD. (c) 2004 Morgan Stanley [MORGAN STANLEY LOGO] MORGAN STANLEY FUNDS Morgan Stanley Balanced Income Fund Semiannual Report July 31, 2004 [MORGAN STANLEY LOGO] 38400RPT-RA04-00542P-Y07/04 Item 2. Code of Ethics. Not applicable for semiannual reports. Item 3. Audit Committee Financial Expert. Not applicable for semiannual reports. Item 4. Principal Accountant Fees and Services Not applicable for semiannual reports. Item 5. Audit Committee of Listed Registrants. Not applicable for semiannual reports. Item 6. [Reserved.] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable for semiannual reports. Item 8. [Reserved.] Item 9 - Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. There were no significant changes or corrective actions with regard to significant deficiencies or material weaknesses in the Fund's internal controls or in other factors that could significantly affect the Fund's internal controls subsequent to the date of their evaluation. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 10 Exhibits (a) Code of Ethics - Not applicable for semiannual reports. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. 2 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 Balanced Income Fund /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer September 20, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer September 20, 2004 /s/ Francis Smith Francis Smith Principal Financial Officer September 20, 2004 3 EX-99.CERT 2 y00736exv99wcert.txt CERTIFICATION EXHIBIT 10 B1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER CERTIFICATIONS I, Ronald E. Robison, certify that: 1. I have reviewed this report on Form N-CSR of Morgan Stanley Balanced Income Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 4 a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: September 20, 2004 /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer 5 EXHIBIT 10 B2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER CERTIFICATIONS I, Francis Smith, certify that: 6. I have reviewed this report on Form N-CSR of Morgan Stanley Balanced Income Fund; 7. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 8. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 9. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: b) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; [b) Omitted.] e) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and f) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 10. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): c) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and 6 d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: September 20, 2004 /s/ Francis Smith Francis Smith Principal Financial Officer 7 EX-99.906CERT 3 y00736exv99w906cert.txt CERTIFICATION 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 Balanced Income Fund In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended July 31, 2004 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: September 20, 2004 /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 Balanced Income Fund and will be retained by Morgan Stanley Balanced Income Fund and furnished to the Securities and Exchange Commission or its staff upon request. 8 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 Balanced Income Fund In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended July 31, 2004 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: September 20, 2004 /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 Balanced Income Fund and will be retained by Morgan Stanley Balanced Income Fund and furnished to the Securities and Exchange Commission or its staff upon request. 9 -----END PRIVACY-ENHANCED MESSAGE-----