MORGAN STANLEY LIQUID ASSET FUND INC

N-CSRS 1 d699068dncsrs.htm MORGAN STANLEY LIQUID ASSET FUND INC MORGAN STANLEY LIQUID ASSET FUND INC

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: 811-02575

Morgan Stanley Liquid Asset Fund, Inc.

(Exact name of registrant as specified in charter)


522 Fifth Avenue, New York, New York 10036
(Address of principal executive offices)		(Zip code)

Kevin Klingert

522 Fifth Avenue, New York, New York 10036

(Name and address of agent for service)

Registrant’s telephone number, including area code: 212.296.0289

Date of fiscal year end: August 31, 2014

Date of reporting period: February 28, 2014

Item 1 - Report to Shareholders

Directors

Frank L. Bowman

Michael Bozic

Kathleen A. Dennis

James F. Higgins

Dr. Manuel H. Johnson

Joseph J. Kearns

Michael F. Klein

Michael E. Nugent

W. Allen Reed

Fergus Reid

Officers

Michael E. Nugent

Chairperson of the Board

Kevin Klingert

President and Principal Executive Officer

Stefanie V. Chang Yu

Chief Compliance Officer

Joseph C. Benedetti

Vice President

Francis J. Smith

Treasurer and Principal Financial Officer

Mary E. Mullin

Secretary

Transfer Agent

Boston Financial Data Services, Inc.

2000 Crown Colony Drive

Quincy, Massachusetts 02169

Custodian

State Street Bank and Trust Company

One Lincoln Street

Boston, Massachusetts 02111

Independent Registered Public Accounting Firm

Ernst & Young LLP

200 Clarendon Street

Boston, Massachusetts 02116

Legal Counsel

Dechert LLP

1095 Avenue of the Americas

New York, New York 10036

Counsel to the Independent Directors

Kramer Levin Naftalis & Frankel LLP

1177 Avenue of the Americas

New York, New York 10036

Adviser

Morgan Stanley Investment Management Inc.

522 Fifth Avenue

New York, New York 10036

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 directors. It is available, without charge, by calling (800) 548-7786.

This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Please read the Prospectus carefully before investing.

Morgan Stanley Distribution, Inc., member FINRA.

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ILASAN

892355 EXP 4.30.15

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INVESTMENT MANAGEMENT

Morgan Stanley Liquid Asset Fund Inc.

Semiannual Report

February 28, 2014

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Morgan Stanley Liquid Asset Fund Inc.

Table of Contents


Welcome Shareholder			3
Fund Report			4
Expense Example			7
Portfolio of Investments			8
Statement of Assets and Liabilities			14
Statement of Operations			15
Statements of Changes in Net Assets			16
Notes to Financial Statements			17
Financial Highlights			24
U.S. Privacy Policy			25

Welcome Shareholder,

We are pleased to provide this semiannual report, in which you will learn how your investment in Morgan Stanley Liquid Asset Fund Inc. performed during the latest six-month period. It includes an overview of the market conditions and discusses some of the factors that affected performance during the reporting period. In addition, the report contains financial statements and a list of portfolio holdings.

Morgan Stanley Investment Management is a client-centric, investor-led organization. Our global presence, intellectual capital, and breadth of products and services enable us to partner with investors to meet the evolving challenges of today’s financial markets. We aim to deliver superior investment service and to empower our clients to make the informed decisions that help them reach their investment goals.

As always, we thank you for selecting Morgan Stanley Investment Management, and look forward to working with you in the months and years ahead.

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 a mutual fund will achieve its investment objective. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of an investment at $1.00 per share, it is possible to lose money by investing in the Fund. Please see the prospectus for more complete information on investment risks.

Fund Report (unaudited)

For the six months ended February 28, 2014

Market Conditions

Overall economic growth in the U.S. continued to be moderate. Capital markets were positively surprised by gross domestic product (GDP) growth readings during most of the period. In fact, economic growth in the second half of 2013 was the strongest it has been in almost two years, aided by stronger retail sales and inventory build-ups in the third quarter and higher consumer spending and business investment in the fourth quarter. This put average growth for 2013 at 2.7 percent, which was remarkable given that sequestration (automatic federal budget cuts and payroll tax increases that went into effect earlier in 2013) has been a drag on the economy during the year.

Average monthly job gains for October and November came in strong and above market expectations, averaging 255,000 jobs per month. However, December payrolls were disappointing and much weaker, up only 84,000, indicating a pause in the labor market recovery. The decrease has been blamed on poor weather conditions preventing people from working in December, but the weather’s exact impact is hard to quantify. January payrolls also were disappointing at 129,000 jobs, well below market estimates of 180,000. While still plagued by harsh winter weather, the February employment report was expected to continue this weakening trend, but instead surprised the market with a much-better-than-expected 175,000 jobs. In addition, the unemployment rate continued to drop, from 7.2 percent in October 2013 to 6.7 percent in February 2014. While the decrease is partially due to people leaving the workforce, the trend is encouraging and bodes well for the continued, gradual healing of the labor market.

At its December 18 meeting, the Federal Open Market Committee (FOMC) decided to start gradually reducing its quantitative easing (QE) program. In January, monthly bond purchases decreased by $10 billion per month to $75 billion, with the reduction split equally between Treasuries and mortgage-backed securities (MBS). Even with the cumulative progress toward its dual mandate of maximum employment and stable prices, the Federal Reserve (Fed) stated that its target federal funds rate would remain on hold for an extended period as it expanded “forward guidance,” or using communications to influence market expectations. Fed officials indicated that they believe it will be appropriate to keep interest rates at current low levels “well past” the time that the unemployment rate declines below 6.5 percent, especially if inflation stays below the Fed’s 2 percent target. Fed member consensus still expects the federal funds target rate to stay at the current range of zero percent to 0.25 percent until at least 2015. By pairing a long-anticipated tapering with enhanced forward guidance on the direction of interest rates, the FOMC managed to convey that the modest reduction in purchases does not constitute a monetary tightening.

Ben Bernanke’s last meeting as the Fed chairman in January 2014 was fairly benign and met market expectations. The Fed announced that it will reduce its monthly asset purchases by another $10 billion, to $65 billion in February. Committee members also communicated their plan to continue the tapering process in measured steps going forward. The baseline path forward points toward the Fed tapering in $10 billion increments at each subsequent FOMC meeting. This would result in the Fed completing the tapering process by the latter half of 2014, assuming continued positive economic progress. Also, as expected, the Fed extended its overnight fixed-rate, reverse repurchase agreement facility exercise by one

year to January 30, 2015. The maximum allotment increased from $3 billion to $5 billion per counterparty per day, while rates (0.03 percent) and timing (12:45 pm to 1:15 pm Eastern time) were left unchanged. The Fed acknowledged that over the coming months it expects to increase the maximum allotment cap even further. Market expectations are for the Fed to increase to full-allotment by later this year, meaning counterparties would have no cap on the amount they can lend to the Fed. In February, Janet Yellen replaced Bernanke as the next Fed chair, and the market expected a dovish rate policy to continue.

Performance Analysis

As of February 28, 2014, Morgan Stanley Liquid Asset Fund Inc. had net assets of approximately $8.2 billion and an average portfolio maturity of 33 days. For the six-month period ended February 28, 2014, the Fund provided a total return of 0.00 percent. For the seven-day period ended February 28, 2014, the Fund provided an effective annualized yield of 0.01 percent (subsidized) and -0.24 percent (non-subsidized) and a current yield of 0.01 percent (subsidized) and -0.24 percent (non-subsidized), while its 30-day moving average yield for February was 0.01 percent (subsidized) and -0.25 percent (non-subsidized). Yield quotations more closely reflect the current earnings of the Fund. The non-subsidized yield reflects what the yield would have been had a fee and/or expense waiver not been in place during the period shown. Past performance is no guarantee of future results.

We remain quite comfortable in our conservative approach to managing this portfolio, focusing on securities with high liquidity and short durations. We believe our investment process and focus on credit research and risk management, combined with the high degree of liquidity and short maturity position of the portfolio, has put us in a favorable position to respond to market uncertainty. Our investment philosophy continues to revolve around prudent credit and risk management and portfolios that are positioned defensively and with very high levels of liquidity.

There is no guarantee that any sectors mentioned will continue to perform as discussed herein or that securities in such sectors will be held by the Fund in the future.


PORTFOLIO COMPOSITION as of 02/28/14
Repurchase Agreements	37.4	%
Certificates of Deposit	21.4
Commercial Paper	17.4
Extendible Floating Rate Notes	10.0
Floating Rate Notes	8.9
U.S. Agency Security	2.3
Time Deposit	2.1
Tax-Exempt Instruments	0.5


MATURITY SCHEDULE as of 02/28/14
1 – 30 Days	65.0	%
31 – 60 Days	8.7
61 – 90 Days	16.4
91 – 120 Days	3.8
121 + Days	6.1

Subject to change daily. Provided for informational purposes only and should not be deemed as a recommendation to buy or sell the securities mentioned above. Portfolio composition and maturity schedule are as a percentage of total investments.

Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services.

Investment Strategy

The Fund invests in high quality, short-term debt obligations. In selecting investments, the Adviser, Morgan Stanley Investment Management Inc., seeks to maintain the Fund’s share price at $1.00. The Fund’s investments include the following money market instruments: corporate obligations (including but not limited to commercial paper); debt obligations of U.S.-regulated banks (including U.S. branches or subsidiaries of foreign banks) and instruments secured by those obligations (including certificates of deposit and commercial paper); certificates of deposit of savings banks and savings and loan associations; debt obligations issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities; municipal obligations, including tax-exempt variable rate demand notes; repurchase agreements; and asset-backed securities.

An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

For More Information

About Portfolio Holdings

Each Morgan Stanley fund provides a complete schedule of portfolio holdings in its semiannual and annual reports within 60 days of the end of the fund’s second and fourth fiscal quarters. The semiannual reports and the annual reports are filed electronically with the Securities and Exchange Commission (SEC) on Form N-CSRS and Form N-CSR, respectively. Morgan Stanley also delivers the semiannual and annual reports to fund shareholders and makes these reports available on its public web site, www.morganstanley.com. Each Morgan Stanley fund also files a complete schedule of portfolio holdings with the SEC for the fund’s first and third fiscal quarters on Form N-Q and monthly holdings for each money market fund on Form N-MFP. Morgan Stanley does not deliver these reports to shareholders, nor are the first and third fiscal quarter reports posted to the Morgan Stanley public web site. However, the holdings for each money market fund are posted to the Morgan Stanley public web site. You may obtain the Form N-Q filings (as well as the Form N-CSR, N-CSRS and N-MFP filings) by accessing the SEC’s web site, http://www.sec.gov. You may also review and copy them at the SEC’s public reference room in Washington, DC. Information on the operation of the SEC’s public reference room may be obtained by calling the SEC at (800) SEC-0330. You can also request copies of these materials, upon payment of a duplicating fee, by electronic request at the SEC’s e-mail address (publicinfo@sec.gov) or by writing the public reference section of the SEC, Washington, DC 20549-1520.

Householding Notice

To reduce printing and mailing costs, the Fund attempts to eliminate duplicate mailings to the same address. The Fund delivers a single copy of certain shareholder documents, including shareholder reports, prospectuses and proxy materials, to investors with the same last name who reside at the same address. Your participation in this program will continue for an unlimited period of time unless you instruct us otherwise. You can request multiple copies of these documents by calling (800) 548-7786, 8:00 a.m. to 8:00 p.m., ET. Once our Customer Service Center has received your instructions, we will begin sending individual copies for each account within 30 days.

Expense Example (unaudited)

As a shareholder of the Fund, you incur ongoing costs, including advisory fees, administration fees, shareholder services 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.

This example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 09/01/13 – 02/28/14.

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) or exchange fees.


	Beginning Account Value		Ending Account Value		Expenses Paid During Period @
	09/01/13		02/28/14		09/01/13 – 02/28/14
Actual (0.00% return)	$	1,000.00	$	1,000.05	$	0.90
Hypothetical (5% annual return before expenses)	$	1,000.00	$	1,024.03	$	0.91

@	Expenses are equal to the Fund’s annualized expense ratio of 0.18% multiplied by the average account value over the period, multiplied by 182^@@/365 (to reflect the one-half year period). If the fund had borne all of its expenses, the annualized expense ratio would have been 0.45%.

@@	Adjusted to reflect non-business day accruals.

Morgan Stanley Liquid Asset Fund Inc.

Portfolio of InvestmentsⁿFebruary 28, 2014 (unaudited)


PRINCIPAL AMOUNT (000)			ANNUALIZED YIELD ON DATE OF PURCHASE	MATURITY DATE		VALUE
		Repurchase Agreements (37.5%)
$	110,000	ABN Amro Securities LLC, (dated 02/28/14; proceeds $110,000,550; fully collateralized by various U.S. Government Agencies, 2.50% – 5.00% due 05/01/20 – 02/01/43; valued at $113,239,869)	0.06%		03/03/14	$	110,000,000
	150,000	Bank of Montreal, (dated 02/14/14; proceeds $150,025,958; fully collateralized by various U.S. Government Agencies, Zero Coupon – 4.00% due 03/04/14 – 05/01/43; valued at $154,229,264) (Demand 03/07/14)	0.07(a)		05/14/14		150,000,000
	130,000	Bank of Nova Scotia, (dated 01/02/14; proceeds $130,224,069; fully collateralized by various U.S. Government Agencies, 3.50% – 5.00% due 03/01/26 – 01/01/43; valued at $134,774,556) (Demand 03/07/14)	0.17(a)		01/02/15		130,000,000
	155,000	Bank of Nova Scotia, (dated 09/13/13; proceeds $155,279,000; fully collateralized by various U.S. Government Agencies, 3.00% – 4.50% due 02/01/26 – 02/01/44; valued at $160,374,957) (Demand 03/07/14)	0.18(a)		09/08/14		155,000,000
	35,000	Bank of Nova Scotia, (dated 03/06/13; proceeds $35,070,583; fully collateralized by various U.S. Government Agencies, 2.50% – 4.50% due 02/01/26 – 02/01/43; valued at $36,206,643)	0.20(a)		03/04/14		35,000,000
	105,000	Bank of Nova Scotia, (dated 03/15/13; proceeds $105,210,000; fully collateralized by various U.S. Government Agencies, 2.50% – 5.00% due 10/01/25 – 05/01/43, and by a U.S. Government Obligation, 1.25% due 10/31/18; valued at $108,118,510) (Demand 03/07/14)	0.20(a)		03/10/14		105,000,000
	14,000	BNP Paribas Securities Corp., (dated 02/28/14; proceeds $14,000,070; fully collateralized by a U.S. Government Agency, 3.50% due 11/01/26; valued at $14,435,664)	0.06		03/03/14		14,000,000
	180,000	BNP Paribas Securities Corp., (dated 02/28/14; proceeds $180,003,150; fully collateralized by various Common Stocks and Preferred Stocks; valued at $189,003,316)	0.21		03/03/14		180,000,000
	160,000	Credit Agricole Corp., (dated 02/28/14; proceeds $160,000,800; fully collateralized by various U.S. Government Agencies, 4.00% – 4.50% due 11/01/41 – 01/01/44; valued at $164,801,469)	0.06		03/03/14		160,000,000
	20,000	Deutsche Bank Securities, Inc., (dated 02/28/14; proceeds $20,000,300; fully collateralized by various Common Stocks; valued at $21,000,021)	0.18		03/03/14		20,000,000
	865,000	Federal Reserve Bank of New York, (dated 02/28/14; proceeds $865,003,604; fully collateralized by a U.S. Government Obligation, 3.88% due 05/15/18; valued at $864,670,437)	0.05		03/03/14		865,000,000
	65,000	Goldman Sachs & Co., (dated 02/28/14; proceeds $65,000,325; fully collateralized by various U.S. Government Agencies, 2.50% – 5.50% due 04/01/26 – 03/01/44; valued at $67,017,888)	0.06		03/03/14		65,000,000

See Notes to Financial Statements

Morgan Stanley Liquid Asset Fund Inc.

Portfolio of InvestmentsⁿFebruary 28, 2014 (unaudited) continued


PRINCIPAL AMOUNT (000)			ANNUALIZED YIELD ON DATE OF PURCHASE	MATURITY DATE		VALUE
$	145,000	Goldman Sachs & Co., (dated 02/28/14; proceeds $145,000,725; fully collateralized by various U.S. Government Agencies, 2.50% – 5.50% due 01/01/26 – 03/01/43; valued at $149,551,779)	0.06%		03/03/14	$	145,000,000
	44,000	ING Financial Markets LLC, (dated 02/28/14; proceeds $44,000,587; fully collateralized by various Corporate Bonds, 2.00% – 8.88% due 01/27/16 – 06/15/67; valued at $46,202,286)	0.16		03/03/14		44,000,000
	10,100	ING Financial Markets LLC, (dated 02/05/14; proceeds $10,101,683; fully collateralized by various Corporate Bonds, 2.55% – 5.13% due 06/01/15 – 02/15/24; valued at $10,606,353)	0.20		03/07/14		10,100,000
	20,200	ING Financial Markets LLC, (dated 02/11/14; proceeds $20,203,479; fully collateralized by various Corporate Bonds, 2.50% – 6.60% due 09/01/18 – 03/29/41; valued at $21,212,149) (Demand 03/07/14)	0.20(a)		03/14/14		20,200,000
	20,000	ING Financial Markets LLC, (dated 02/13/14; proceeds $20,003,222; fully collateralized by various Corporate Bonds, 2.50% – 6.40% due 06/15/18 – 12/01/22; valued at $21,000,881) (Demand 03/07/14)	0.20(a)		03/14/14		20,000,000
	20,400	ING Financial Markets LLC, (dated 02/21/14; proceeds $20,407,021; fully collateralized by various Corporate Bonds, 1.30% – 7.38% due 12/14/15 – 01/31/44; valued at $21,422,892) (Demand 03/07/14)	0.21(a)		04/21/14		20,400,000
	29,000	ING Financial Markets LLC, (dated 02/27/14; proceeds $29,010,150; fully collateralized by various Corporate Bonds, 5.88% – 6.46% due 12/13/36 – 09/15/42; valued at $30,454,597) (Demand 03/07/14)	0.21(a)		04/28/14		29,000,000
	9,800	ING Financial Markets LLC, (dated 02/26/14; proceeds $9,805,812; fully collateralized by various Corporate Bonds, 0.78% – 6.50% due 04/15/16 – 07/15/42; valued at $10,293,269) (Demand 03/07/14)	0.35(a)		04/28/14		9,800,000
	4,500	ING Financial Markets LLC, (dated 02/07/14; proceeds $4,502,581; fully collateralized by various Corporate Bonds, 1.14% – 5.95% due 04/27/17 – 01/22/24; valued at $4,725,682) (Demand 03/07/14)	0.35(a)		04/07/14		4,500,000
	62,000	Merrill Lynch Pierce Fenner & Smith, (dated 12/10/13; proceeds $62,012,400; fully collateralized by various U.S. Government Agencies, 1.00% – 4.13% due 06/29/17 – 10/11/33; valued at $63,275,718) (Demand 03/07/14)	0.08(a)		03/10/14		62,000,000
	89,000	Merrill Lynch Pierce Fenner & Smith, (dated 02/04/14; proceeds $89,434,889; fully collateralized by various Common Stocks, Convertible Bonds, 1.00% – 4.25% due 05/15/14 – 09/30/43, and a Preferred Stock; valued at $95,970,185) (Demand 03/03/14)	0.49(a)		01/29/15		89,000,000

See Notes to Financial Statements

Morgan Stanley Liquid Asset Fund Inc.

Portfolio of InvestmentsⁿFebruary 28, 2014 (unaudited) continued


PRINCIPAL AMOUNT (000)			ANNUALIZED YIELD ON DATE OF PURCHASE	MATURITY DATE	VALUE
$	79,000	Mizuho Securities USA, Inc., (dated 02/28/14; proceeds $79,001,514; fully collateralized by various Common Stocks; valued at $82,950,009)	0.23%	03/03/14	$	79,000,000
	285,000	RBC Capital Markets LLC, (dated 10/01/13; proceeds $285,130,388; fully collateralized by various U.S. Government Agencies, 1.33% – 6.50% due 01/01/17 – 06/01/51; valued at $293,513,848) (Demand 03/07/14)	0.09(a)	04/02/14		285,000,000
	45,000	RBC Capital Markets LLC, (dated 01/16/14; proceeds $45,060,750 fully collateralized by various Corporate Bonds, 0.54% – 7.30% due 04/17/14 – 01/25/56 (b); valued at $47,250,001) (Demand 03/07/14)	0.27(a)	07/15/14		45,000,000
	35,000	RBS Securities, Inc., (dated 02/28/14; proceeds $35,001,050 fully collateralized by various Corporate Bonds, 3.95% – 6.40% due 09/21/15 – 08/24/20, and a U.S. Government Agency, 4.00% due 11/01/43; valued at $36,484,902)	0.36	03/03/14		35,000,000
	30,000	TD Securities USA LLC, (dated 02/28/14; proceeds $30,000,225; fully collateralized by various Corporate Bonds, 2.60% – 7.20% due 03/01/18 – 02/01/44; valued at $31,547,895)	0.09	03/03/14		30,000,000
	35,000	Wells Fargo Securities LLC, (dated 01/27/14; proceeds $35,030,965; fully collateralized by various Corporate Bonds, 0.95% – 12.00% due 03/03/14 – 08/01/66; valued at $36,879,063)	0.35	04/28/14		35,000,000
	25,000	Wells Fargo Securities LLC, (dated 12/06/13; proceeds $25,025,000; fully collateralized by various Corporate Bonds, 0.95% – 8.75% due 06/08/14 – 12/15/43 (b); valued at $26,250,001)	0.40	03/06/14		25,000,000
	92,500	Wells Fargo Securities LLC, (dated 12/18/13; proceeds $92,592,500; fully collateralized by various Corporate Bonds, 0.80% – 12.25% due 03/01/14 – 11/15/80; valued at $97,525,444)	0.40	03/18/14		92,500,000

		Total Repurchase Agreements (Cost $3,069,500,000)				3,069,500,000

		Certificates of Deposit (21.5%)
		Domestic Bank (1.3%)
	105,100	Branch Banking & Trust Co.	0.17	4/22/14		105,100,000

		International Banks (20.2%)
	232,000	Bank of Montreal	0.07 – 0.18	03/04/14 – 05/20/14		232,000,000
	116,500	BNP Paribas	0.32	05/01/14		116,500,000
	252,100	Credit Industriel et Commercial	0.13 – 0.33	03/06/14 – 07/28/14		252,100,000
	179,700	Credit Suisse NY	0.23	05/02/14 – 06/24/14		179,700,000
	82,500	Deutsche Bank AG	0.27	05/29/14		82,500,000

See Notes to Financial Statements

Morgan Stanley Liquid Asset Fund Inc.

Portfolio of InvestmentsⁿFebruary 28, 2014 (unaudited) continued


PRINCIPAL AMOUNT (000)			ANNUALIZED YIELD ON DATE OF PURCHASE		MATURITY DATE	VALUE

$	200,000	Lloyds Bank PLC	0.08%		03/04/14 – 03/05/14	$	200,000,000
	80,400	Mizuho Bank Ltd.	0.22		05/02/14		80,400,000
	201,100	Oversea Chinese Banking Corporation	0.19 – 0.23		04/16/14 – 05/09/14		201,100,000
	206,000	Sumitomo Mitsui Banking Corp.	0.10 – 0.26		03/07/14 – 05/09/14		206,000,000
	100,000	Toronto Dominion Bank	0.18		03/17/14		100,000,000

							1,650,300,000

		Total Certificates of Deposit (Cost $1,755,400,000)					1,755,400,000

		Commercial Paper (17.5%)
		Automobiles (1.1%)
	12,000	Toyota Credit Canada, Inc.	0.23		04/11/14		11,996,857
	32,200	Toyota Financial Services de Puerto Rico, Inc.	0.23		04/03/14 – 07/15/14		32,185,841
	50,000	Toyota Motor Credit Corp.	0.18		06/05/14		49,976,000

							94,158,698

		Domestic Bank (2.0%)
	163,700	JP Morgan Securities LLC (c)	0.28		7/14/14		163,528,114

		Food & Beverage (1.0%)
	40,900	Coca-Cola Co. (c)	0.15 – 0.18		07/15/14 – 09/04/14		40,865,909
	42,600	Nestle Capital Corp. (c)	0.20		08/19/14		42,560,542

							83,426,451

		International Banks (13.4%)
	146,450	Bank of Nova Scotia	0.21 – 0.23		04/17/14 – 05/19/14		146,390,799
	228,000	Caisse Des Depots Et (c)	0.05		04/30/14		227,933,500
	82,100	Caisse Des Depots Et	0.24		06/26/14		82,035,962
	67,700	DBS Bank Ltd. (c)	0.22		05/05/14 – 07/01/14		67,661,265
	58,800	DBS Bank Ltd.	0.22		07/21/14		58,748,975
	152,300	Erste Abwicklungsanstalt	0.17 – 0.18		03/03/14 – 05/16/14		152,268,724
	167,500	Sumitomo Mitsui Banking Corp.	0.22		03/10/14		167,490,997
	189,850	United Overseas Bank Ltd. (c)	0.20 – 0.24		03/17/14 – 06/23/14		189,793,511

							1,092,323,733

		Total Commercial Paper (Cost $1,433,436,996)					1,433,436,996

			COUPON RATE (a)	DEMAND DATE (d)
		Extendible Floating Rate Notes (10.0%)
		Domestic Banks (5.5%)
	220,000	JP Morgan Chase Bank NA (Extendible Maturity Date 03/06/15)	0.32%	03/07/14	03/07/19		220,000,000

See Notes to Financial Statements

Morgan Stanley Liquid Asset Fund Inc.

Portfolio of InvestmentsⁿFebruary 28, 2014 (unaudited) continued


PRINCIPAL AMOUNT (000)			COUPON RATE (a)	DEMAND DATE (d)	MATURITY DATE	VALUE

$	227,250	Wells Fargo Bank NA (Extendible Maturity Date 03/13/15 – 03/20/15)	0.29 – 0.32%	03/17/14 – 03/20/14	03/20/19 – 07/15/19	$	227,250,000

							447,250,000

		International Banks (4.5%)
	92,000	Bank of Nova Scotia (Extendible Maturity Date 02/27/15)	0.34	04/30/14	01/31/19		92,000,000
	149,000	Royal Bank of Canada (Extendible Maturity Date 02/27/15)	0.30	04/01/14	04/01/19		148,992,519
	130,000	Svenska Handelsbanken AB (c) (Extendible Maturity Date 08/15/14)	0.27	03/17/14	05/13/16		130,000,000

							370,992,519

		Total Extendible Floating Rate Notes (Cost $818,242,519)					818,242,519

		Floating Rate Notes (9.0%)
		International Banks
	88,500	DBS Bank Ltd. (c)	0.26	03/26/14 – 03/31/14	09/26/14 – 09/30/14		88,495,710
	78,700	HSBC Bank PLC	0.24	04/10/14	04/10/14		78,700,000
	360,250	Rabobank Nederland NY	0.26 – 0.32	03/24/14 – 05/28/14	03/24/14 – 12/23/14		360,250,000
	37,300	Toronto Dominion Bank	0.24	05/06/14	02/06/15		37,300,000
	170,100	Westpac Banking Corp.	0.29	03/17/14	12/15/14		170,100,000

		Total Floating Rate Notes (Cost $734,845,710)					734,845,710

			ANNUALIZED YIELD ON DATE OF PURCHASE
		U.S. Agency Security (2.3%)
	188,000	Federal Home Loan Bank (Cost $187,994,256)	0.10%		03/12/14		187,994,256

		Time Deposit (2.1%)
		International Bank
	170,000	Credit Agricole CIB Grand Cayman (Cost $170,000,000)	0.10		03/03/14		170,000,000

See Notes to Financial Statements

Morgan Stanley Liquid Asset Fund Inc.

Portfolio of InvestmentsⁿFebruary 28, 2014 (unaudited) continued


PRINCIPAL AMOUNT (000)			COUPON RATE (a)			DEMAND DATE (d)	MATURITY DATE			VALUE

		Tax-Exempt Instruments (0.5%)
		Weekly Variable Rate Bonds
$	20,000	New York State Housing Finance Agency, Gotham West Housing Ser 2011 B (Taxable)		0.14	%	03/07/14		05/01/45		$	20,000,000
	21,000	NGSP, Inc., Ser 2006		0.14		03/07/14		06/01/46			21,000,000
	145	Pennsylvania Housing Finance Agency, Single Family Mortgage Ser 2004-82C (AMT)		0.04		03/07/14		10/01/34			145,000

		Total Weekly Variable Rate Bonds (Cost $41,145,000)									41,145,000

		Total Investments (Cost $8,210,564,481)						100.4	%		8,210,564,481
		Liabilities in Excess of Other Assets						(0.4	)		(29,906,862	)

		Net Assets						100.0	%	$	8,180,657,619

AMT

Alternative Minimum Tax.

(a)

Rate shown is the rate in effect at February 28, 2014.

(b)

Perpetual – One or more securities do not have a predetermined maturity date. Rates for these securities are fixed for a period of time, after which they revert to a floating rate. Interest rates in effect are as of February 28, 2014.

(c)

144A security – Certain conditions for public sale may exist. Unless otherwise noted, these securities are deemed to be liquid.

(d)

Date of next interest rate reset.

See Notes to Financial Statements

Morgan Stanley Liquid Asset Fund Inc.

Financial Statements

Statement of Assets and Liabilities February 28, 2014 (unaudited)


Assets:
Investments in securities, at value (cost $8,210,564,481, including value of repurchase agreements of $3,069,500,000)	$	8,210,564,481
Cash		23,170
Receivable for:
Capital stock sold		115,646,602
Investments sold		8,257,076
Interest		1,906,660
Prepaid expenses and other assets		214,621

Total Assets		8,336,612,610

Liabilities:
Payable for:
Capital stock redeemed		133,037,243
Investments purchased		20,580,997
Transfer agent fee		1,079,729
Advisory fee		494,443
Administration fee		318,622
Accrued expenses and other payables		443,957

Total Liabilities		155,954,991

Net Assets	$	8,180,657,619

Composition of Net Assets:
Paid-in-capital	$	8,180,617,972
Accumulated undistributed net investment income		100,612
Accumulated net realized loss		(60,965	)

Net Assets	$	8,180,657,619

Net Asset Value Per Share
8,180,743,846 shares outstanding (50,000,000,000 shares authorized of $0.01 par value)	$	1.00

See Notes to Financial Statements

Morgan Stanley Liquid Asset Fund Inc.

Financial Statements continued

Statement of Operations For the six months ended February 28, 2014 (unaudited)


Net Investment Income:
Interest Income	$	8,118,252

Expenses
Advisory fee (Note 3)		10,198,315
Shareholder services fee (Note 4)		4,366,794
Administration fee (Note 3)		2,183,397
Transfer agent fees and expenses		1,881,196
Shareholder reports and notices		401,386
Custodian fees		133,082
Directors’ fees and expenses		103,381
Professional fees		52,123
Registration fees		34,857
Other		107,526

Total Expenses		19,462,057
Less: amounts waived/reimbursed (Note 4)		(11,780,490	)

Net Expenses		7,681,567

Net Investment Income		436,685
Net Realized Gain		23,923

Net Increase	$	460,608

See Notes to Financial Statements

Morgan Stanley Liquid Asset Fund Inc.

Financial Statements continued

Statements of Changes in Net Assets


	FOR THE SIX MONTHS ENDED FEBRUARY 28, 2014			FOR THE YEAR ENDED AUGUST 31, 2013
	(unaudited)
Increase (Decrease) in Net Assets:

Operations:
Net investment income	$	436,685		$	962,297
Net realized gain		23,923			5,422


Net Increase		460,608			967,719


Dividends to shareholders from net investment income		(436,685	)		(962,441	)

Net decrease from capital stock transactions		(1,052,649,986	)		(1,133,201,206	)


Net Decrease		(1,052,626,063	)		(1,133,195,928	)


Net Assets:
Beginning of period		9,233,283,682			10,366,479,610


End of Period
(Including accumulated undistributed net investment income of $100,612 and $100,612, respectively)	$	8,180,657,619		$	9,233,283,682

See Notes to Financial Statements

Morgan Stanley Liquid Asset Fund Inc.

Notes to Financial Statements n February 28, 2014 (unaudited)

1. Organization and Accounting Policies

Morgan Stanley Liquid Asset Fund Inc. (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 objectives are high current income, preservation of capital and liquidity. The Fund was incorporated in Maryland on September 3, 1974 and commenced operations on September 22, 1975.

The following is a summary of significant accounting policies:

A. Valuation of Investments — Portfolio securities are valued at amortized cost, which approximates fair value, in accordance with Rule 2a-7 under the Act. The amortized cost of an instrument is determined by valuing it at its original cost and thereafter amortizing any discount or premium from its face value at a constant rate until maturity.

B. Accounting for Investments — Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Discounts are accreted and premiums are amortized over the life of the respective securities and are included in interest income. Interest income is accrued daily as earned.

C. Repurchase Agreements — The Fund invests 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 as earned. If such a decrease occurs, additional collateral will be requested and, when received, will be added to the account to maintain full collateralization.

The following table presents financial instruments that are subject to enforceable netting arrangements as of February 28, 2014.


GROSS AMOUNTS NOT OFFSET IN THE STATEMENT OF ASSETS AND LIABILITIES
GROSS ASSET AMOUNT PRESENTED IN STATEMENT OF ASSETS AND LIABILITIES		FINANCIAL INSTRUMENT		COLLATERAL RECEIVED			NET AMOUNT (NOT LESS THAN 0)
$	3,069,500,000		—	$	(3,069,500,000	)⁽¹⁾	$	0

⁽¹⁾

The actual collateral received is greater than the amount shown here due to overcollateralization.

D. Dividends and Distributions to Shareholders — Dividends and distributions to shareholders are recorded on the close of each business day. Dividends from net investment income, if any, are declared and paid daily. Net realized capital gains, if any, are distributed at least annually.

E. Use of Estimates — The preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates.

Morgan Stanley Liquid Asset Fund Inc.

Notes to Financial Statements n February 28, 2014 (unaudited) continued

F. Indemnifications — The Fund enters into contracts that contain a variety of indemnifications. The Fund’s maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

2. Fair Valuation Measurements

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the value that the Fund would receive to sell an investment or pay to transfer a liability in a timely transaction with an independent buyer in the principal market, or in the absence of a principal market the most advantageous market for the investment or liability. ASC 820 establishes a three-tier hierarchy to distinguish between (1) inputs that reflect the assumptions market participants would use in valuing an asset or liability developed based on market data obtained from sources independent of the reporting entity (observable inputs); and (2) inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in valuing an asset or liability developed based on the best information available in the circumstances (unobservable inputs) and to establish classification of fair value measurements for disclosure purposes. Various inputs are used in determining the value of the Fund’s investments. The inputs are summarized in the three broad levels listed below.

•

Level 1 — unadjusted quoted prices in active markets for identical investments

•

Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

•

Level 3 — significant unobservable inputs including the Fund’s own assumptions in determining the fair value of investments. Factors considered in making this determination may include, but are not limited to, information obtained by contacting the issuer, analysts, or the appropriate stock exchange (for exchange-traded securities), analysis of the issuer’s financial statements or other available documents and, if necessary, available information concerning other securities in similar circumstances

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities and the determination of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each security.

Morgan Stanley Liquid Asset Fund Inc.

Notes to Financial Statements n February 28, 2014 (unaudited) continued

The following is a summary of the inputs used to value the Fund’s investments as of February 28, 2014.


INVESTMENT TYPE	LEVEL 1 UNADJUSTED QUOTED PRICES		LEVEL 2 OTHER SIGNIFICANT OBSERVABLE INPUTS		LEVEL 3 SIGNIFICANT UNOBSERVABLE INPUTS		TOTAL
Assets:
Repurchase Agreements	$	—	$	3,069,500,000	$	—	$	3,069,500,000
Certificates of Deposit		—		1,755,400,000		—		1,755,400,000
Commercial Paper		—		1,433,436,996		—		1,433,436,996
Extendible Floating Rate Notes		—		818,242,519		—		818,242,519
Floating Rate Notes		—		734,845,710		—		734,845,710
U.S. Agency Security		—		187,994,256		—		187,994,256
Time Deposit		—		170,000,000		—		170,000,000
Tax-Exempt Instruments
Weekly Variable Rate Bonds		—		41,145,000		—		41,145,000
Total Assets	$	—	$	8,210,564,481	$	—	$	8,210,564,481

Transfers between investment levels may occur as the markets fluctuate and/or the availability of data used in an investment’s valuation changes. The Fund recognizes transfers between the levels as of the end of the period. As of February 28, 2014, the Fund did not have any investments transfer between investment levels.

3. Advisory/Administration Agreements

Pursuant to an Investment Advisory Agreement with Morgan Stanley Investment Management Inc. (the “Adviser”), the Fund pays the Adviser an advisory fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined at the close of each business day: 0.45% to the portion of the daily net assets not exceeding $250 million; 0.375% to the portion of the daily net assets exceeding $250 million but not exceeding $750 million; 0.325% to the portion of the daily net assets exceeding $750 million but not exceeding $1.25 billion; 0.30% to the portion of the daily net assets exceeding $1.25 billion but not exceeding $1.5 billion; 0.275% to the portion of the daily net assets exceeding $1.5 billion but not exceeding $1.75 billion; 0.25% to the portion of the daily net assets exceeding $1.75 billion but not exceeding $2.25 billion; 0.225% to the portion of the daily net assets exceeding $2.25 billion but not exceeding $2.75 billion; 0.20% to the portion of the daily net assets exceeding $2.75 billion but not exceeding $15 billion; 0.199% to the portion of the daily net assets exceeding $15 billion but not exceeding $17.5 billion; 0.198% to the portion of the daily net assets exceeding $17.5 billion but not exceeding $25 billion; 0.197% to the portion of the daily net assets exceeding $25 billion but not exceeding $30 billion; and 0.196% to the portion of the daily net assets exceeding $30 billion. For the six months ended February 28, 2014, the advisory fee rate (net of waivers) was equivalent to an annual effective rate of 0.06% of the Fund’s daily net assets.

Morgan Stanley Services Company Inc. was the Fund’s Administrator. Effective January 1, 2014, the Adviser also serves as the Administrator to the Fund and provides administrative services pursuant to an Administrative Agreement for an annual fee, accrued daily and paid monthly, of 0.05% to the Fund’s daily net assets.

Morgan Stanley Liquid Asset Fund Inc.

Notes to Financial Statements n February 28, 2014 (unaudited) continued

Under a Sub-Administration Agreement between the Administrator and State Street Bank and Trust Company (“State Street”), State Street provides certain administrative services to the Fund. For such services, the Administrator pays State Street a portion of the fee the Administrator receives from the Fund.

4. Shareholder Services Plan

Pursuant to a Shareholder Services Plan (the “Plan”), the Fund may pay Morgan Stanley Distribution, Inc. (the “Distributor”) as compensation for the provision of services to shareholders a service fee up to the rate of 0.15% on an annualized basis of the average daily net assets of the Fund.

Reimbursements for these expenses are made in monthly payments by the Fund to the Distributor, which will in no event exceed an amount equal to a payment at the annual rate of 0.15% of the Fund’s average daily net assets during the month. Expenses incurred by the Distributor pursuant to the Plan in any fiscal year will not be reimbursed by the Fund through payments accrued in any subsequent fiscal year. For the six months ended February 28, 2014, the distribution fee was accrued at the annual rate of 0.10%.

The Distributor, Adviser and Administrator have agreed to waive and/or reimburse all or a portion of the Fund’s shareholder services fee, advisory fee and administration fee, respectively, to the extent that total expenses exceed total income of the Fund on a daily basis. For the six months ended February 28, 2014, the Distributor waived $4,366,794, and the Adviser waived $7,413,696. These fee waivers and/or expense reimbursements will continue for at least one year or until such time that the Fund’s Board of Directors, (the “Directors”), act to discontinue all or a portion of such waivers and/or expense reimbursements when it deems such action is appropriate.

5. Transactions with Affiliates

The Fund has an unfunded noncontributory defined benefit pension plan covering certain independent Directors of the Fund who will have served as independent Directors for at least five years at the time of retirement. Benefits under this plan are based on factors which include years of service and compensation. The Directors voted to close the plan to new participants and eliminate the future benefits growth due to increases to compensation after July 31, 2003. Aggregate pension costs for the six months ended February 28, 2014, included in “Directors’ fees and expenses” in the Statement of Operations amounted to $2,794. At February 28, 2014, the Fund had an accrued pension liability of $59,562, which is included in “Accrued expenses and other payables” in the Statement of Assets and Liabilities.

The Fund has an unfunded Deferred Compensation Plan (the “Compensation Plan”), which allows each independent Director to defer payment of all, or a portion, of the fees he or she receives for serving on the Board of Directors. Each eligible Director 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

Morgan Stanley Liquid Asset Fund Inc.

Notes to Financial Statements n February 28, 2014 (unaudited) continued

investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund.

6. Capital Stock

Transactions in capital stock, at $1.00 per share, were as follows:


	FOR THE SIX MONTHS ENDED FEBRUARY 28, 2014			FOR THE YEAR ENDED AUGUST 31, 2013
	(unaudited)
Shares sold		15,075,593,940			34,115,342,085
Shares issued in reinvestment of dividends		436,685			962,441

		15,076,030,625			34,116,304,526
Shares redeemed		(16,128,680,611	)		(35,249,505,732	)

Net decrease in shares outstanding		(1,052,649,986	)		(1,133,201,206	)

7. Risks Relating to Certain Financial Instruments

The Fund may invest in, or receive as collateral for repurchase agreements, securities issued by Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”). Securities issued by FNMA and FHLMC are not backed by or entitled to the full faith and credit of the United States and are supported by the right of the issuer to borrow from the U.S. Department of the Treasury.

The Federal Housing Finance Agency (“FHFA”) serves as conservator of FNMA and FHLMC and the U.S. Department of the Treasury has agreed to provide capital as needed to ensure FNMA and FHLMC continue to provide liquidity to the housing and mortgage markets.

The Fund may enter into repurchase agreements under which the Fund sends cash and takes possession of securities with an agreement that the counterparty will repurchase such securities. In the event of default on the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. In the event of default or bankruptcy by the counterparty to the agreement, realization of the collateral proceeds may be subject to certain costs and delays.

8. Federal Income Tax Status

It is the Fund’s intention to continue to qualify as a regulated investment company and distribute all of its taxable and tax-exempt income. Accordingly, no provision for Federal income taxes is required in the financial statements.

Dividend income and distributions to shareholders are recorded on the ex-dividend date. Interest income is recognized on an accrual basis.

Morgan Stanley Liquid Asset Fund Inc.

Notes to Financial Statements n February 28, 2014 (unaudited) continued

FASB ASC 740-10, Income Taxes — Overall, sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. Management has concluded there are no significant uncertain tax positions that would require recognition in the financial statements. If applicable, the Fund recognizes interest accrued related to unrecognized tax benefits in “Interest Expense” and penalties in ‘‘Other Expenses” in the Statement of Operations. The Fund files tax returns with the U.S. Internal Revenue Service, New York and various states. Each of the tax years in the four-year period ended August 31, 2013, remains subject to examination by taxing authorities.

The tax character of distributions paid may differ from the character of distributions shown in the Statements of Changes in Net Assets due to short-term capital gains being treated as ordinary income for tax purposes. The tax character of distributions paid during fiscal years 2013 and 2012 was as follows:


2013 DISTRIBUTIONS PAID FROM:		2012 DISTRIBUTIONS PAID FROM:
ORDINARY INCOME		ORDINARY INCOME
$962,441		$702,995

The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from GAAP. These book/tax differences are either considered temporary or permanent in nature.

Temporary differences are attributable to differing book and tax treatments for the timing of the recognition of gains (losses) on certain investment transactions and the timing of the deductibility of certain expenses.

Permanent differences, deferred compensation, resulted in the following reclassifications among the Fund’s components of net assets at August 31, 2013:


ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME	ACCUMULATED NET REALIZED LOSS	PAID-IN-CAPITAL
$(499)	$499	—

At August 31, 2013 the components of distributable earnings for the Fund on a tax basis were as follows:


UNDISTRIBUTED ORDINARY INCOME		UNDISTRIBUTED LONG-TERM CAPITAL GAIN
$234,601		—

At February 28, 2014, the aggregate cost for federal income tax purposes is the same as the cost for book purposes.

At August 31, 2013, the Fund had available for Federal income tax purposes unused short-term capital losses of $83,955 that do not have an expiration date.

Morgan Stanley Liquid Asset Fund Inc.

Notes to Financial Statements n February 28, 2014 (unaudited) continued

To the extent that capital loss carryforwards are used to offset any future capital gains realized during the carryover period as provided by U.S. Federal income tax regulations, no capital gains tax liability will be incurred by a Fund for gains realized and not distributed. To the extent that capital gains are offset, such gains will not be distributed to the shareholders. During the year ended August 31, 2013, the Fund utilized capital loss carryforwards for U.S. Federal income tax purposes of $6,854.

Capital losses and specified ordinary losses, including currency losses, incurred after October 31 but within the taxable year are deemed to arise on the first day of the Fund’s next taxable year. For the year ended August 31, 2013, the Fund deferred to September 1, 2013 for U.S. Federal income tax purposes the following losses:


POST-OCTOBER CURRENCY AND SPECIFIED ORDINARY LOSSES		POST-OCTOBER CAPITAL LOSSES
—		$933

9. Accounting Pronouncement

In June 2013, FASB issued Accounting Standards Update 2013-08 Financial Services — Investment Companies (Topic 946) — Amendments to the Scope, Measurement, and Disclosure Requirements (“ASU 2013-08”) which is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013. ASU 2013-08 sets forth a methodology for determining whether an entity should be characterized as an investment company and prescribes fair value accounting for an investment company’s non-controlling ownership interest in another investment company. FASB has determined that a fund registered under the Act automatically meets ASU 2013-08’s criteria for an investment company. Although still evaluating the potential impacts of ASU 2013-08 to the Fund, management expects that the impact of the Fund’s adoption will be limited to additional financial statement disclosures.

Morgan Stanley Liquid Asset Fund Inc.

Financial Highlights

Selected ratios and per share data for a share of capital stock outstanding throughout each period:


	FOR THE SIX MONTHS ENDED FEBRUARY 28, 2014			FOR THE YEAR ENDED AUGUST 31,
	FOR THE SIX MONTHS ENDED FEBRUARY 28, 2014			2013			2012			2011			2010^			2009^
	(unaudited)
Selected Per Share Data:

Net asset value, beginning of period		$1.00			$1.00			$1.00			$1.00			$1.00			$1.00

Net income from investment operations		0.000	⁽¹⁾		0.000	⁽¹⁾		0.000	⁽¹⁾		0.000	⁽¹⁾		0.000	⁽¹⁾		0.005
Less dividends from net investment income		(0.000	)⁽¹⁾		(0.000	)⁽¹⁾		(0.000	)⁽¹⁾		(0.000	)⁽¹⁾⁽²⁾		(0.000	)⁽¹⁾⁽²⁾		(0.005	)

Net asset value, end of period		$1.00			$1.00			$1.00			$1.00			$1.00			$1.00

Total Return		0.00	%⁽³⁾⁽⁶⁾		0.01	%		0.01	%		0.01	%		0.01	%		0.49	%

Ratios to Average Net Assets:
Net expenses		0.18	%⁽⁴⁾⁽⁷⁾		0.23	%⁽⁴⁾		0.25	%⁽⁴⁾		0.25	%⁽⁴⁾		0.27	%⁽⁴⁾⁽⁵⁾		0.57	%⁽⁴⁾⁽⁵⁾
Net investment income		0.01	%⁽⁴⁾⁽⁷⁾		0.01	%⁽⁴⁾		0.01	%⁽⁴⁾		0.01	%⁽⁴⁾		0.01	%⁽⁴⁾⁽⁵⁾		0.61	%⁽⁴⁾⁽⁵⁾

Supplemental Data:
Net assets, end of period, in millions		$8,181			$9,233			$10,366			$6,155			$2,880			$3,768

^	Beginning with the year ended August 31, 2011, the Fund was audited by Ernst & Young LLP. The previous years were audited by another independent registered public accounting firm.

(1)

Amount is less than $0.001.

(2)

Includes capital gain distribution of less than $0.001.

(3)

Amount is less than 0.005%.

(4)

If the Fund had borne all of its expenses that were reimbursed or waived by the Distributor, Adviser, and Administrator, the annualized expense and net investment income (loss) ratios, would have been as follows:


PERIOD ENDED	EXPENSE RATIO			NET INVESTMENT INCOME (LOSS) RATIO
February 28, 2014		0.45	%		(0.26	)%
August 31, 2013		0.45			(0.21	)
August 31, 2012		0.47			(0.21	)
August 31, 2011		0.58			(0.32	)
August 31, 2010		0.71			(0.43	)
August 31, 2009		0.69			0.49

(5)

Reflects fees paid in connection with the U.S. Treasury’s Temporary Guarantee Program for Money Market Funds. This fee had an effect of 0.005% and 0.05% for the years ended 2010 and 2009, respectively.

(6)

Not annualized.

(7)

Annualized.

See Notes to Financial Statements

Morgan Stanley Liquid Asset Fund Inc.

U.S. Privacy Policy (unaudited)

An Important Notice Concerning Our U.S. Privacy Policy

This privacy notice describes the U.S. privacy policy of Morgan Stanley Distribution, Inc., and the Morgan Stanley family of mutual funds (“us”, “our”, “we”).

We are required by federal law to provide you with notice of our U.S. privacy policy (“Policy”). This Policy applies to both our current and former clients unless we state otherwise and is intended for individual clients who purchase products or receive services from us for personal, family or household purposes. This Policy is not applicable to partnerships, corporations, trusts or other non-individual clients or account holders, nor is this Policy applicable to individuals who are either beneficiaries of a trust for which we serve as trustee or participants in an employee benefit plan administered or advised by us. This Policy is, however, applicable to individuals who select us to be a custodian of securities or assets in individual retirement accounts, 401(k) accounts, or accounts subject to the Uniform Gifts to Minors Act.

This notice sets out our business practices to protect your privacy; how we collect and share personal information about you; and how you can limit our sharing or certain uses by others of this information. We may amend this Policy at any time, and will inform you of any changes to our Policy as required by law.

We Respect Your Privacy

We appreciate that you have provided us with your personal financial information and understand your concerns about your information. We strive to safeguard the information our clients entrust to us. Protecting the confidentiality and security of client information is an important part of how we conduct our business.

This notice describes what personal information we collect about you, how we collect it, when we may share it with others, and how certain others may use it. It discusses the steps you may take to limit our sharing of certain information about you with our affiliated companies, including, but not limited to our affiliated banking businesses, brokerage firms and credit service affiliates. It also discloses how you may limit our affiliates’ use of shared information for marketing purposes.

Throughout this Policy, we refer to the nonpublic information that personally identifies you as “personal information.” We also use the term “affiliated company” in this notice. An affiliated company is a company in our family of companies and includes companies with the Morgan Stanley name. These affiliated companies are financial institutions such as broker-dealers, banks, investment advisers and credit card issuers. We refer to any company that is not an affiliated company as a nonaffiliated third party. For purposes of Section 5 of this notice, and your ability to limit certain uses of personal information by our affiliates, this notice applies to the use of personal information by our affiliated companies.

1. What Personal Information Do We Collect From You?

We may collect the following types of information about you: (i) information provided by you, including information from applications and other forms we receive from you, (ii) information about your transactions

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with us or our affiliates, (iii) information about your transactions with nonaffiliated third parties, (iv) information from consumer reporting agencies, (v) information obtained from our websites, and (vi) information obtained from other sources. For example:

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We collect information such as your name, address, e-mail address, telephone/fax numbers, assets, income and investment objectives through applications and other forms you submit to us.

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We may obtain information about account balances, your use of account(s) and the types of products and services you prefer to receive from us through your dealings and transactions with us and other sources.

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We may obtain information about your creditworthiness and credit history from consumer reporting agencies.

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We may collect background information from and through third-party vendors to verify representations you have made and to comply with various regulatory requirements.

2. When Do We Disclose Personal Information We Collect About You?

We may disclose personal information we collect about you in each of the categories listed above to affiliated and nonaffiliated third parties.

a. Information We Disclose to Affiliated Companies. We may disclose personal information that we collect about you to our affiliated companies to manage your account(s) effectively, to service and process your transactions, and to let you know about products and services offered by us and affiliated companies, to manage our business, and as otherwise required or permitted by law. Offers for products and services from affiliated companies are developed under conditions designed to safeguard your personal information.

b. Information We Disclose to Third Parties. We may disclose personal information that we collect about you to nonaffiliated third parties to provide marketing services on our behalf or to other financial institutions with whom we have joint marketing agreements. We may also disclose all of the information we collect to other nonaffiliated third parties for our everyday business purposes, such as to process transactions, maintain account(s), respond to court orders and legal investigations, report to credit bureaus, offer our own products and services, protect against fraud, for institutional risk control, to perform services on our behalf, and as otherwise required or permitted by law.

When we share personal information about you with a nonaffiliated third party, they are required to limit their use of personal information about you to the particular purpose for which it was shared and they are not allowed to share personal information about you with others except to fulfill that limited purpose or as may be permitted or required by law.

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3. How Do We Protect The Security and Confidentiality Of Personal Information We Collect About You?

We maintain physical, electronic and procedural security measures that comply with applicable law and regulations to help safeguard the personal information we collect about you. We have internal policies governing the proper handling of client information by employees. Third parties that provide support or marketing services on our behalf may also receive personal information about you, and we require them to adhere to appropriate security standards with respect to such information.

4. How Can You Limit Our Sharing Certain Personal Information About You With Our Affiliated Companies For Eligibility Determination?

By following the opt-out procedures in Section 6 below, you may limit the extent to which we share with our affiliated companies, personal information that was collected to determine your eligibility for products and services such as your credit reports and other information that you have provided to us or that we may obtain from third parties (“eligibility information”). Eligibility information does not include your identification information or personal information pertaining to our transactions or experiences with you. Please note that, even if you direct us not to share eligibility information with our affiliated companies, we may still share your personal information, including eligibility information, with our affiliated companies under circumstances that are permitted under applicable law, such as to process transactions or to service your account.

5. How Can You Limit the Use of Certain Personal Information About You by Our Affiliated Companies for Marketing?

By following the opt-out instructions in Section 6 below, you may limit our affiliated companies from marketing their products or services to you based on personal information we disclose to them. This information may include, for example, your income and account history with us. Please note that, even if you choose to limit our affiliated companies from using personal information about you that we may share with them for marketing their products and services to you, our affiliated companies may use your personal information that they obtain from us to market to you in circumstances permitted by law, such as if the affiliated party has its own relationship with you.

6. How Can You Send Us an Opt-Out Instruction?

If you wish to limit our sharing of eligibility information about you with our affiliated companies, or our affiliated companies’ use of personal information for marketing purposes, as described in this notice, you may do so by:

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Calling us at (800) 548-7786

Monday-Friday between 8a.m. and 5p.m. (EST)

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Writing to us at the following address:

Boston Financial Data Services, Inc.

c/o Privacy Coordinator

P.O. Box 219804

Kansas City, Missouri 64121

If you choose to write to us, your request should include: your name, address, telephone number and account number(s) to which the opt-out applies and whether you are opting out with respect to sharing of eligibility information (Section 4 above), or information used for marketing (Section 5 above), or both. Written opt-out requests should not be sent with any other correspondence. In order to process your request, we require that the request be provided by you directly and not through a third party. Once you have informed us about your privacy preferences, your opt-out preference will remain in effect with respect to this Policy (as it may be amended) until you notify us otherwise. If you are a joint account owner, we will accept instructions from any one of you and apply those instructions to the entire account.

Please understand that if you limit our sharing or our affiliated companies’ use of personal information, you and any joint account holder(s) may not receive information about our affiliated companies’ products and services, including products or services that could help you manage your financial resources and achieve your investment objectives.

If you have more than one account or relationship with us, please specify the accounts to which you would like us to apply your privacy choices. If you have accounts or relationships with our affiliates, you may receive multiple privacy policies from them, and will need to separately notify those companies of your privacy choices for those accounts or relationships.

7. What if an affiliated company becomes a nonaffiliated third party?

If, at any time in the future, an affiliated company becomes a nonaffiliated third party, further disclosures of personal information made to the former affiliated company will be limited to those described in Section 2(b) above relating to nonaffiliated third parties. If you elected under Section 6 to limit disclosures we make to affiliated companies, or use of personal information by affiliated companies, your election will not apply to use by any former affiliated company of your personal information in their possession once it becomes a nonaffiliated third party.

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SPECIAL NOTICE TO RESIDENTS OF VERMONT

The following section supplements our Policy with respect to our individual clients who have a Vermont address and supersedes anything to the contrary in the above Policy with respect to those clients only.

The State of Vermont requires financial institutions to obtain your consent prior to sharing personal information that they collect about you with nonaffiliated third parties, or eligibility information with affiliated companies, other than in certain limited circumstances. Except as permitted by law, we will not share personal information we collect about you with nonaffiliated third parties or eligibility information with affiliated companies, unless you provide us with your written consent to share such information.

SPECIAL NOTICE TO RESIDENTS OF CALIFORNIA

The following section supplements our Policy with respect to our individual clients who have a California address and supersedes anything to the contrary in the above Policy with respect to those clients only.

In response to a California law, if your account has a California home address, your personal information will not be disclosed to nonaffiliated third parties except as permitted by applicable California law, and we will limit sharing such personal information with our affiliates to comply with California privacy laws that apply to us.

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.

(a) Refer to Item 1.

(b) Not applicable.

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

Not applicable for semiannual reports.

Item 8. Portfolio Managers of Closed-End Management Investment Companies

Applicable only to reports filed by closed-end funds.

Item 9. Closed-End Fund Repurchases

Applicable to reports filed by closed-end funds.

Item 10. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 11. Controls and Procedures

(a) The Fund’s principal executive officer and principal financial officer have concluded that the Fund’s disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, based upon such officers’ evaluation of these controls and procedures as of a date within 90 days of the filing date of the report.

(b) There were no changes in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

Item 12. Exhibits

(a) Code of Ethics – Not applicable for semiannual reports.

(b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Morgan Stanley Liquid Asset Fund, Inc.

/s/ Kevin Klingert

Kevin Klingert

Principal Executive Officer

April 17, 2014

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/ Kevin Klingert

Kevin Klingert

Principal Executive Officer

April 17, 2014

/s/ Francis Smith

Francis Smith

Principal Financial Officer

April 17, 2014