N-CSRS 1 a16-14873_1ncsrs.htm N-CSRS

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM N-CSR

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES

 

Investment Company Act file number

811-03692

 

Morgan Stanley Variable Investment Series

(Exact name of registrant as specified in charter)

 

522 Fifth Avenue, New York, New York

 

10036

(Address of principal executive offices)

 

(Zip code)

 

John H. Gernon

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:

December 31,

 

 

Date of reporting period:

June 30, 2016

 

 


 

Item 1 - Report to Shareholders

 


MORGAN STANLEY
VARIABLE INVESTMENT SERIES

Semi-Annual Report

JUNE 30, 2016

The Portfolios are intended to be the funding vehicle for variable annuity contracts and variable life insurance policies offered by the separate accounts of certain life insurance companies.


Morgan Stanley Variable Investment Series

Table of Contents

Letter to the Shareholders

    

1

    

Fund Performance

    

10

    

Expense Examples

    

12

    

Portfolio of Investments:

  
Limited Duration    

14

    
Income Plus    

22

    
European Equity    

33

    
Multi Cap Growth    

36

    

Financial Statements:

  
Statements of Assets and Liabilities    

40

    
Statements of Operations    

41

    
Statements of Changes in Net Assets    

42

    
Notes to Financial Statements    

46

    
Financial Highlights    

78

    
Investment Advisory Agreement Approval    

82

    


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2016 (unaudited)

Dear Shareholder:

The first half of 2016 brought turbulence across the global financial markets. The biggest surprise was the outcome of the June 23 Brexit referendum, in which the U.K. public voted to leave the European Union. Risky assets from global equity to fixed income to currency markets sold off initially, but volatility subsided as the markets appeared to digest the news as more political than systemic financial shock. Other headwinds continued to loom, including the uncertain outlook on China's ongoing transition to a service-led economy, fragile economic conditions in Europe and Japan, and the intentions of the U.S. Federal Reserve (Fed) and other central banks around the world. In this environment, investors tended to favor assets with more defensive orientations (such as bonds, and consumer staples and utilities stocks) and perceived "safe haven" assets (such as government bonds and gold).

Domestic and International Equity Overview

U.S. equities managed to eke out a modest gain over the period, up 3.84% as measured by the S&P 500 Index. Negative sentiment and risk aversion dominated the global markets in January and February amid renewed concerns about China's economic slowdown, a further decline in oil prices and fears that the Fed might raise interest rates more aggressively than expected. However, by March, sentiment brightened. More upbeat economic data in the U.S. and Europe, accommodative central bank actions in Europe, assurances from the Fed that were more aligned with the market's rate hike expectations and a reversal in oil prices helped spur a rebound in the U.S. stock market that erased earlier losses. From there, stocks trended only slightly higher, with a surprisingly weak U.S. jobs report in May and uncertainty about the U.K's Brexit referendum keeping gains in check.

European equities sank 5.13% over the six-month period, as measured by the MSCI Europe Index. Following the same trajectory as global equities in general, European stock markets tumbled in early in 2016 amid concerns about global growth and weakening commodity prices, then rebounded over the next several months as investor sentiment and economic data improved. However, conditions shifted again in May and June. Approaching the June 23 Brexit referendum, opinion polls were too close to call. This uncertainty destabilized European markets, until some indicators predicted that the remain camp could win, fueling a rally in the days leading up to the vote. When leave won the majority, the markets were taken by surprise. European and global equities plummeted, the U.K. sterling fell to 30-year lows versus the U.S. dollar and Britain's prime minister announced he would resign (which took place in mid-July, after the close of the reporting period). However, central banks remained on standby to implement policy tools in the event of credit market jitters, with expectations that the Bank of England would likely cut interest rates in the coming months and the Fed likely deferring additional rate hikes until at least until December.


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2016 (unaudited) continued

Although the timeline and process of the U.K.'s exit and the political and economic outlooks for both the U.K. and Europe remain highly uncertain, some of the equity market turbulence subsided, enabling share prices to recover to near pre-Brexit-vote levels by the end of the reporting period.

Prior to the referendum, the region's economic data painted a fairly positive picture, with evidence of stronger manufacturing activity in May across many countries and still-positive GDP growth for the euro area. Also during the period, the European Central Bank expanded its quantitative easing program to include the purchase of investment-grade corporate bonds in a further attempt to bolster investment and inflation. For the six-months overall, the market was led by commodity-related sectors (energy and materials), as commodity prices rebounded strongly, and defensive sectors (consumer staples and utilities), as the economic outlook remained uncertain. Conversely, financials, especially banks, and consumer discretionary stocks underperformed in the period. Low-to-negative interest rates across Europe are likely to hurt banks' profit margins, particularly as this environment now looks likely to persist longer than expected. Consumer discretionary stocks declined on anticipation of waning consumer sentiment due to Brexit uncertainties and recession concerns.

Fixed Income Overview

Fixed income markets also experienced periods of heightened volatility in the six-month period but performed well overall. U.S. bonds were up 5.31% and global bonds appreciated 8.96%, as measured by the Barclays U.S. Aggregate Index and Barclays Global Aggregate Unhedged Index, respectively.

Global capital markets took investors on a roller coaster ride in the first quarter of 2016. January through mid-February was a period of extreme investor risk aversion, largely due to falling oil prices and uncertainty about China's slowing economic growth and possible currency devaluation. The early part of the quarter saw declines in many asset prices, widening of yield spreads between US Treasuries and non-Treasury fixed income sectors, and a rally in developed market government bonds.

The second part of the quarter was almost a complete reversal of the first as investors regained their risk appetites in response to stabilization of oil prices and the US dollar. During the quarter, central banks across the globe made comments favoring additional stimulus and, thus, were supportive of asset prices. Even the Federal Reserve jumped on the bandwagon, reducing the number of forecasted 2016 rate hikes from four to two. These events drove asset prices higher. In general, many asset categories finished the quarter not far from where they started.

During the second quarter, yields in the U.S., U.K. and Europe decreased as risk-off sentiment gripped the markets after the U.K. voted to leave the EU. Despite the uncertainty surrounding the U.K. referendum


2


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2016 (unaudited) continued

result, and the potential negative impact that this uncertainty will have on economic growth, the credit markets remain well supported by well-balanced supply and demand technicals.

While the result of the U.K. referendum was undoubtedly unexpected by most market participants, the U.K. economy is a relatively small part of the global economy, which largely drives the risk in the global credit market. Although the leave vote creates some risk of short-term turbulence, the economic conditions in the rest of the world continue to display expansionary conditions. As such we do not believe that risk premia should rise meaningfully as a result of the vote. Furthermore, the financial markets do not seem to be exhibiting the stresses witnessed during prior periods of European uncertainty. While financial stocks continue to underperform, the market is not anticipating a period of widespread banking stress. As such, the outcome of the vote does not appear to have caused a broader systemic shock, which was the most likely mechanism for transferring the volatility from the political uncertainty in the U.K. to the broader global economy.

Limited Duration Portfolio

For the six-month period ended June 30, 2016, Variable Investment Series – Limited Duration Portfolio Class X shares produced a total return of 4.26%, outperforming the Barclays U.S. Government/Credit Index (1-5 Year) (the "Index"),1 which returned 2.60%. For the same period, the Portfolio's Class Y shares returned 4.11%. Past performance is no guarantee of future results.

The performance of the Portfolio's two share classes varies because each has different expenses. The Portfolio's total returns assume the reinvestment of all distributions but do not reflect the deduction of any charges by your insurance company. Such costs would lower performance.

The Portfolio's overweight positions in the securitized sector, namely in non-agency mortgage-backed securities (MBS), agency MBS and commercial mortgage-backed securities, as well as overweight positions in the investment-grade and high yield credit sectors added to relative returns, with much of the relative outperformance coming from the attractive yield offered by these sectors.

However, the Portfolio maintained a slightly lower duration, a measure of interest-rate sensitivity, than the Index using U.S. Treasury futures, which detracted from relative performance. Also dampening relative returns were the Portfolio's small positions in the emerging market and taxable municipal sectors.

1  The Barclays U.S. Government/Credit Index (1-5 Year) tracks the performance of U.S. government and corporate obligations, including U.S. government agency and Treasury securities, and corporate and Yankee bonds with maturities of one to five years. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.


3


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2016 (unaudited) continued

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

Income Plus Portfolio

For the six-month period ended June 30, 2016, Variable Investment Series – Income Plus Portfolio Class X shares produced a total return of 7.46%, underperforming the Barclays U.S. Corporate Index (the "Index"),2 which returned 7.68%. For the same period, the Portfolio's Class Y shares returned 7.26%. Past performance is no guarantee of future results.

The performance of the Portfolio's two share classes varies because each has different expenses. The Portfolio's total returns assume the reinvestment of all distributions but do not reflect the deduction of any charges by your insurance company. Such costs would lower performance.

Despite a challenging macroeconomic environment and increased market volatility, the Portfolio ended the six-month reporting period with performance nearly in line with that of the Index. The greatest contributor to the Portfolio's relative performance was the investment grade segment of the market, followed by the high yield segment of the market. Within investment grade, the main contributors to positive returns were the Portfolio's exposure to the communications and energy sectors, as these sectors saw tightening spreads in the first six months of 2016. Security selection also proved to be a significant positive influence on the Portfolio's performance within these two volatile sectors, particularly in energy. The Portfolio's overweight to the financials sector detracted from returns, as the financials sector underperformed industrials in the first half of 2016. Specifically, subordinated banks underperformed the broader investment grade market and negatively impacted the Portfolio's performance, given the greater sensitivity of this sub-sector to overall market volatility during a period of heightened market turbulence.

The Portfolio's overweight to the high yield segment of the market contributed to relative outperformance, as this asset class performed well during the first half of 2016 as yields and spreads declined. In contrast, the Portfolio's overweight to convertible bonds detracted from performance given relative weakness in this sector of the market. The Fund's short duration position (or lower interest rate sensitivity) hurt performance in the falling interest rate environment over the period. Treasury yields have declined further amid global macroeconomic headwinds and easing policies by central banks outside the U.S.

2  The Barclays U.S. Corporate Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by U.S. and non-U.S. industrial, utility and financial issuers that meet specified maturity, liquidity and quality requirements. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.


4


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2016 (unaudited) continued

We remain cautiously optimistic about the market as we head into year end. We anticipate slow, positive grow in the U.S. economy, which could be supportive of credit markets. Technicals in the U.S. markets appear supportive of corporate credit, as global yields continue to trade at historic lows (even negative in some cases), stoking demand for credit assets, particularly in the U.S. As we approach the end of 2016, we anticipate that security and sub-sector selection will be of paramount importance within the industrial sector. Furthermore, given the underperformance of financials in the first half of the year, we expect a recovery in this sub-sector, which could benefit the Portfolio's current positioning. We believe that the Portfolio's current construction, with an overweight to investment grade financials over industrials and modest exposure to high yield and convertible bonds, is an appropriate allocation for the latter half of the year, as the market appears poised to recover from the negative sentiment we saw in the first half of 2016.

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

European Equity Portfolio

For the six-month period ended June 30, 2016, Variable Investment Series – European Equity Portfolio Class X shares produced a total return of -3.76%, outperforming the MSCI Europe Index (the "Index"),3 which returned -5.13%. For the same period, the Portfolio's Class Y shares returned -3.90%. Past performance is no guarantee of future results.

The performance of the Portfolio's two share classes varies because each has different expenses. The Portfolio's total returns assume the reinvestment of all distributions but do not reflect the deduction of any charges by your insurance company. Such costs would lower performance.

The primary country-level contributors to relative performance included our stock selection in the U.K., Switzerland, the Netherlands and Ireland. However, our stock selection in France negatively impacted the Portfolio's relative returns.

On an industry level, key positive contributors were both our stock selection and overweight allocation in food, beverage and tobacco, along with our stock selection in telecommunications and media. In addition, our underweight allocation to diversified financials added to overall performance. Detractors from performance included stock selection in utilities and banks, as well as both our stock selection and underweight allocation in materials.

3  The MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. The term "free float" represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.


5


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2016 (unaudited) continued

Individual holdings that helped relative performance included a U.K. tobacco company with significant exposure to emerging markets and the U.S.; two U.K. oil and gas companies whose share prices benefited from the surge in oil prices in the reporting period; a U.K. household and personal care company and a Swiss food producer company.

However, other holdings detracted from performance. The Portfolio was exposed to some weak-performing European financials, in particular a U.K. bank that is still slowly restructuring its investment banking division; two insurance companies, one French and one U.K., whose profitability remains under pressure due to lower-for-longer interest rates; and an Italian asset management company that suffered amid negative market conditions. In addition, a holding in a German health care company that made an expensive bid for a U.S. agro-chemical company detracted from the Portfolio's performance in the period.

Following the unexpected results of the Brexit referendum in the U.K., our outlook for global and European equities is more prudent, as the uncertain scenario has weighed on investors' and consumers' sentiment. The sterling was one of the biggest losers in the EU referendum. On June 24, the sterling recorded its greatest fall in over 30 years, continuing to fall through the week as the lack of political stability had a negative impact on the market. The U.K. runs a large twin deficit, which will be hard to finance given the possible fall in foreign direct investment.

The uncertainty around the Brexit scenario along with an appreciation of the U.S. dollar will probably mean that the U.S. Federal Reserve is likely to delay a hike until December while Bank of England Governor Mark Carney hinted that the central bank is ready to add additional stimulus to the U.K. economy if necessary, with now a probable 0.25% cut in interest rates on the table for the summer.

Current valuations for European equities have come down significantly, and analysts have already revised earnings growth lower for the second half of 2016 and 2017 in many sectors. A swift resolution of the U.K. and EU's negotiations and a market-friendly outcome in the U.S. elections in November may help to restore confidence in the market, supporting equity valuations.

Although the current situation is different from both the 2008 and the 2011-12 crises, central banks remain vigilant and ready to offer liquidity in the market if deemed necessary. Populist political parties across the Continent are riding a popularity wave and requesting similar referendums in their countries. In this context, Italy's constitutional referendum in October will be crucial, as a possible vote against the reforms may force Prime Minister Matteo Renzi to leave and spur a call for early elections.


6


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2016 (unaudited) continued

We remain fairly defensively positioned in the Portfolio, with overweight exposures to technology, telecommunications, health care and consumer staples and underweights in materials, utilities, industrials, consumer discretionary and financials.

In these uncertain times, our investment approach remains the same. We continue to seek high-quality companies with high earnings visibility and predictability, stable and strong cash flow, and low levels of debt, trading at attractive valuations.

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

Multi Cap Growth Portfolio

For the six-month period ended June 30, 2016, Variable Investment Series – Multi Cap Growth Portfolio Class X shares produced a total return of -5.00%, underperforming the Russell 3000® Growth Index (the "Index"),4 which returned 1.14%. For the same period, the Portfolio's Class Y shares returned -5.11%. Past performance is no guarantee of future results.

The performance of the Portfolio's two share classes varies because each has different expenses. The Portfolio's total returns assume the reinvestment of all distributions but do not reflect the deduction of any charges by your insurance company. Such costs would lower performance.

The largest detractors from relative performance during the reporting period were the information technology (IT), consumer discretionary and consumer staples sectors. Within the IT sector, a position in a professional networking platform was the largest detractor, as its shares sold off sharply earlier in the year from weaker-than-expected quarterly results. The Portfolio's relative results were further dampened by the negative impact of an overweight in the IT sector, which was among the weakest-performing groups in the Index. In the consumer discretionary sector, a holding in a leading video-streaming service was the biggest drag on returns. The stock faced selling pressure in April after a disappointing outlook for near-term subscriber growth. The consumer staples sector was disadvantageous to relative performance due to a holding in a lagging beverage company and an underweight position in the sector, which was one of the Index's better performers in the period.

4  The Russell 3000® Growth Index measures the performance of the broad growth segment of the U.S. equity universe. It includes those Russell 3000® Index companies with higher price-to-book ratios and higher forecasted growth values. The Russell 3000® Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index.


7


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2016 (unaudited) continued

While the majority of sectors had a negative impact on relative performance over the reporting period, the Portfolio's lack of exposure to the utilities and energy sectors, as well as its positioning in the health care sector had a neutral impact on performance.

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

We appreciate your ongoing support of Morgan Stanley Variable Investment Series and look forward to continuing to serve your investment needs.

Very truly yours,

John H. Gernon
President and Principal Executive Officer


8


Morgan Stanley Variable Investment Series

Letter to the Shareholders n June 30, 2016 (unaudited) continued

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/im. 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 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.

Proxy Voting Policy and Procedures and Proxy Voting Record

You may obtain a copy of the Portfolios' Proxy Voting Policy and Procedures without charge, upon request, by calling toll free (800) 548-7786 or by visiting the Mutual Fund Center on our web site at www.morganstanley.com/im. It is also available on the SEC's web site at http://www.sec.gov.

You may obtain information regarding how the Portfolios voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 without charge by visiting the Mutual Fund Center on our web site at www.morganstanley.com/im. This information is also available on the SEC's web site at http://www.sec.gov.


9



Morgan Stanley Variable Investment Series

Fund Performance n June 30, 2016 (unaudited)

Average Annual Total Returns — Period Ended June 30, 2016(1)   

Class X

  

1 Year

  

5 Years

  

10 Years

   Since
Inception		   Gross Expense
Ratio		   Date of
Inception		  

European Equity

    

-13.33

%

    

0.89

%

    

1.83

%

    

7.58

%

    

1.32

%

  

3/1/1991

  

Income Plus

    

5.85

      

5.79

      

6.58

      

7.09

      

0.67

    

3/1/1987

  

Limited Duration

    

3.70

      

1.94

      

0.91

      

1.98

      

0.94

    

5/4/1999

  

Multi Cap Growth

    

-4.03

      

10.40

      

9.57

      

11.25

      

0.58

    

3/9/1984

  

Class Y

                          

European Equity

    

-13.57

      

0.63

      

1.58

      

1.24

      

1.57

    

6/5/2000

  

Income Plus

    

5.64

      

5.51

      

6.31

      

6.29

      

0.92

    

6/5/2000

  

Limited Duration

    

3.41

      

1.67

      

0.66

      

1.65

      

1.19

    

6/5/2000

  

Multi Cap Growth

    

-4.26

      

10.13

      

9.29

      

4.76

      

0.83

    

6/5/2000

  

Performance data quoted represents past performance, which is no guarantee of future results and current performance may be lower or higher than the figures shown. For most recent month-end performance figures, please contact the issuing insurance company or speak with your Financial Advisor. Investment return and principal value will fluctuate. When you sell Portfolio shares, they may be worth less than their original cost. Total returns do not reflect the deduction of taxes that a shareholder would pay on Portfolio distributions or the redemption of Portfolio shares. Performance for Class Y shares will vary from the performance of Class X shares due to differences in expenses. Expenses are as of each Portfolio's fiscal year end as outlined in the Portfolio's current prospectus.

(1)  Figure assumes reinvestment of all distributions for the underlying fund based on net asset value (NAV). It does not reflect the deduction of insurance expenses, an annual contract maintenance fee, or surrender charges. If performance information included the effect of these additional charges, the total returns would be lower.


10


Morgan Stanley Variable Investment Series

Expense Examples n June 30, 2016 (unaudited)

As a shareholder of a Portfolio, you incur two types of costs: (1) insurance company charges; and (2) ongoing costs, which may include advisory fees, administration fees, distribution and services (12b-1) fees, and other Portfolio expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in each Portfolios and to compare these costs with the ongoing costs of investing in other mutual funds.

These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period 01/01/16 – 06/30/16.

Actual Expenses

The first line of the tables on the following page 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 tables on the following page provides information about hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio'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 Portfolio 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 tables are meant to highlight your ongoing costs only and do not reflect any insurance company charges. Therefore, the second line of the tables is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds. In addition, if these insurance company charges were included, your costs would have been higher.


11


Morgan Stanley Variable Investment Series

Expense Examples n June 30, 2016 (unaudited) continued

Limited Duration

    Beginning
Account Value		   Ending
Account Value		   Expenses Paid
During Period@		  
   

01/01/16

  

06/30/16

   01/01/16 –
06/30/16		  

Class X

  
Actual (4.26% return)  

$

1,000.00

    

$

1,042.60

    

$

4.72

    
Hypothetical (5% annual return before expenses)  

$

1,000.00

    

$

1,020.24

    

$

4.67

    

Class Y

  
Actual (4.11% return)  

$

1,000.00

    

$

1,041.10

    

$

5.99

    
Hypothetical (5% annual return before expenses)  

$

1,000.00

    

$

1,019.00

    

$

5.92

    

  @  Expenses are equal to the Portfolio's annualized expense ratios of 0.93% and 1.18% for Class X and Class Y shares, respectively, multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period).

Income Plus

    Beginning
Account Value		   Ending
Account Value		   Expenses Paid
During Period@		  
   

01/01/16

  

06/30/16

   01/01/16 –
06/30/16		  

Class X

  
Actual (7.46% return)  

$

1,000.00

    

$

1,074.60

    

$

3.51

    
Hypothetical (5% annual return before expenses)  

$

1,000.00

    

$

1,021.48

    

$

3.42

    

Class Y

  
Actual (7.26% return)  

$

1,000.00

    

$

1,072.60

    

$

4.79

    
Hypothetical (5% annual return before expenses)  

$

1,000.00

    

$

1,020.24

    

$

4.67

    

  @  Expenses are equal to the Portfolio's annualized expense ratios of 0.68% and 0.93% for Class X and Class Y shares, respectively, multiplied by the average account value over the period, multiplied by 182/366(to reflect the one-half year period).


12


Morgan Stanley Variable Investment Series

Expense Examples n June 30, 2016 (unaudited) continued

European Equity

    Beginning
Account Value		   Ending
Account Value		   Expenses Paid
During Period@		  
   

01/01/16

  

06/30/16

   01/01/16 –
06/30/16		  

Class X

  
Actual (-3.76% return)  

$

1,000.00

    

$

962.40

    

$

4.88

    
Hypothetical (5% annual return before expenses)  

$

1,000.00

    

$

1,019.89

    

$

5.02

    

Class Y

  
Actual (-3.90% return)  

$

1,000.00

    

$

961.00

    

$

6.09

    
Hypothetical (5% annual return before expenses)  

$

1,000.00

    

$

1,018.65

    

$

6.27

    

  @  Expenses are equal to the Portfolio's annualized expense ratios of 1.00% and 1.25% for Class X and Class Y shares, respectively, multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period). If the Portfolio had borne all of its expenses, the annualized expense ratios would have been 1.40% and 1.65% for Class X and Class Y shares, respectively.

Multi Cap Growth

    Beginning
Account Value		   Ending
Account Value		   Expenses Paid
During Period@		  
   

01/01/16

  

06/30/16

   01/01/16 –
06/30/16		  

Class X

  
Actual (-5.00% return)  

$

1,000.00

    

$

950.00

    

$

2.76

    
Hypothetical (5% annual return before expenses)  

$

1,000.00

    

$

1,022.03

    

$

2.87

    

Class Y

  
Actual (-5.11% return)  

$

1,000.00

    

$

948.90

    

$

3.97

    
Hypothetical (5% annual return before expenses)  

$

1,000.00

    

$

1,020.79

    

$

4.12

    

  @  Expenses are equal to the Portfolio's annualized expense ratios of 0.57% and 0.82% for Class X and Class Y shares, respectively, multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period). If the Portfolio had borne all of its expenses, the annualized expense ratios would have been 0.58% and 0.83% for Class X and Class Y shares, respectively.


13



Morgan Stanley Variable Investment Series - Limited Duration

Portfolio of Investments n June 30, 2016 (unaudited)

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		  

VALUE

  
   

Corporate Bonds (77.9%)

  
   

Basic Materials (0.6%)

  

$

175

    

Goldcorp, Inc. (Canada)

    

2.125

%

  

03/15/18

  

$

175,329

    
   

Communications (7.4%)

  
 

150

    

Amazon.com, Inc.

    

2.60

    

12/05/19

    

156,584

    
 

400

    

AT&T, Inc.

    

2.45

    

06/30/20

    

408,763

    
 

225

    

Baidu, Inc. (China)

    

3.25

    

08/06/18

    

230,992

    
 

200

    

CBS Corp.

    

2.30

    

08/15/19

    

203,226

    
 

225

    

Orange SA (France)

    

2.75

    

02/06/19

    

232,008

    
 

175

    

Scripps Networks Interactive, Inc.

    

2.75

    

11/15/19

    

178,790

    
 

125

    

Thomson Reuters Corp. (Canada)

    

1.30

    

02/23/17

    

125,041

    
 

50

    

Thomson Reuters Corp. (Canada)

    

1.65

    

09/29/17

    

50,229

    
 

175

    

Time Warner Cable, Inc.

    

6.75

    

07/01/18

    

191,985

    
 

225

    

Verizon Communications, Inc.

    

2.55

    

06/17/19

    

233,274

    
 

225

    

Viacom, Inc.

    

2.50

    

09/01/18

    

228,245

    
         

2,239,137

    
   

Consumer, Cyclical (7.8%)

  
 

175

    

American Honda Finance Corp., MTN (Japan)

    

2.45

    

09/24/20

    

181,861

    
 

175

    

CVS Health Corp.

    

2.125

    

06/01/21

    

177,354

    
 

250

    

Daimler Finance North America LLC (Germany) (a)

    

2.375

    

08/01/18

    

255,628

    
 

83

    

Harley-Davidson Financial Services, Inc. (a)

    

1.55

    

11/17/17

    

83,525

    
 

100

    

Harley-Davidson Financial Services, Inc. (a)

    

2.15

    

02/26/20

    

102,134

    
 

175

    

Hyundai Capital America (Korea, Republic of) (a)

    

2.00

    

03/19/18

    

176,171

    
 

100

    

Hyundai Capital America (Korea, Republic of) (a)

    

2.60

    

03/19/20

    

101,886

    
 

175

    

McDonald's Corp., MTN

    

2.20

    

05/26/20

    

179,203

    
 

240

    

Nissan Motor Acceptance Corp. (Japan) (a)

    

2.65

    

09/26/18

    

246,264

    
 

175

    

Southwest Airlines Co.

    

2.75

    

11/06/19

    

181,052

    
 

150

    

Starbucks Corp.

    

2.10

    

02/04/21

    

154,273

    
 

150

    

Toyota Motor Credit Corp., MTN

    

1.70

    

02/19/19

    

151,976

    
 

200

     Volkswagen Group of America Finance LLC
(Germany) (a)		    

2.40

    

05/22/20

    

201,066

    
 

160

    

Walgreens Boots Alliance, Inc.

    

1.75

    

05/30/18

    

161,325

    
         

2,353,718

    
   

Consumer, Non-Cyclical (13.9%)

  
 

175

    

AbbVie, Inc.

    

2.50

    

05/14/20

    

179,067

    
 

280

    

Actavis Funding SCS

    

3.00

    

03/12/20

    

289,018

    
 

200

    

Anheuser-Busch InBev Finance, Inc. (Belgium)

    

2.65

    

02/01/21

    

207,622

    
 

150

    

AstraZeneca PLC (United Kingdom)

    

1.75

    

11/16/18

    

152,033

    
 

150

     BAT International Finance PLC
(United Kingdom) (a)		    

2.75

    

06/15/20

    

155,630

    

See Notes to Financial Statements
14


Morgan Stanley Variable Investment Series - Limited Duration

Portfolio of Investments n June 30, 2016 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		  

VALUE

  

$

175

    

Baxalta, Inc.

    

2.875

%

  

06/23/20

  

$

178,012

    
 

200

    

Bayer US Finance LLC (Germany) (a)

    

2.375

    

10/08/19

    

204,543

    
 

100

    

Becton Dickinson and Co.

    

2.675

    

12/15/19

    

102,938

    
 

175

    

Biogen, Inc.

    

2.90

    

09/15/20

    

182,558

    
 

175

    

Celgene Corp.

    

2.875

    

08/15/20

    

181,148

    
 

175

    

EMD Finance LLC (Germany) (a)

    

2.40

    

03/19/20

    

177,536

    
 

100

    

Estee Lauder Cos., Inc. (The)

    

1.70

    

05/10/21

    

101,280

    
 

210

    

Experian Finance PLC (United Kingdom) (a)

    

2.375

    

06/15/17

    

211,135

    
 

175

    

Gilead Sciences, Inc.

    

2.55

    

09/01/20

    

181,948

    
 

75

    

JM Smucker Co. (The)

    

2.50

    

03/15/20

    

77,421

    
 

150

    

Kroger Co. (The)

    

2.30

    

01/15/19

    

153,138

    
 

50

    

Mead Johnson Nutrition Co.

    

3.00

    

11/15/20

    

52,287

    
 

175

    

Medtronic, Inc.

    

2.50

    

03/15/20

    

181,591

    
 

150

    

Molson Coors Brewing Co.

    

1.45

    

07/15/19(b)

    

150,491

    
 

175

    

Reynolds American, Inc.

    

2.30

    

06/12/18

    

177,891

    
 

300

    

Synchrony Financial

    

3.00

    

08/15/19

    

305,220

    
 

250

    

Tyson Foods, Inc.

    

2.65

    

08/15/19

    

257,023

    
 

150

    

UnitedHealth Group, Inc.

    

2.70

    

07/15/20

    

156,317

    
 

200

    

Wm Wrigley Jr. Co. (a)

    

1.40

    

10/21/16

    

200,319

    
         

4,216,166

    
   

Diversified (1.3%)

  
 

200

     Hutchison Whampoa International 14 Ltd.
(Hong Kong) (a)		    

1.625

    

10/31/17

    

201,042

    
 

200

     LVMH Moet Hennessy Louis Vuitton SE
(France) (a)		    

1.625

    

06/29/17

    

201,137

    
         

402,179

    
   

Energy (2.3%)

  
 

50

    

Enbridge, Inc. (Canada)

    

1.136

(c)

  

06/02/17

    

49,133

    
 

175

    

Energy Transfer Partners LP

    

2.50

    

06/15/18

    

174,274

    
 

125

    

Enterprise Products Operating LLC

    

2.55

    

10/15/19

    

128,548

    
 

150

    

Exxon Mobil Corp.

    

2.222

    

03/01/21

    

154,758

    
 

200

    

Kinder Morgan, Inc.

    

3.05

    

12/01/19

    

202,247

    
         

708,960

    
   

Finance (32.7%)

  
 

230

    

ABN Amro Bank N.V. (Netherlands) (a)

    

2.50

    

10/30/18

    

235,649

    
 

225

    

American Express Credit Corp., Series G

    

2.25

    

08/15/19

    

229,787

    
 

280

    

Bank of America Corp., MTN

    

2.625

    

10/19/20

    

284,750

    
 

150

    

Bank of New York Mellon Corp. (The), MTN

    

2.45

    

11/27/20

    

154,424

    
 

150

    

Bank of Nova Scotia (The) (Canada)

    

1.70

    

06/11/18

    

151,423

    

See Notes to Financial Statements
15


Morgan Stanley Variable Investment Series - Limited Duration

Portfolio of Investments n June 30, 2016 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		  

VALUE

  

$

210

    

BNP Paribas SA, MTN (France)

    

2.70

%

  

08/20/18

  

$

215,187

    
 

260

    

BNZ International Funding Ltd. (New Zealand) (a)

    

2.35

    

03/04/19

    

264,111

    
 

275

    

BPCE SA, MTN (France)

    

2.25

    

01/27/20

    

280,230

    
 

110

    

Canadian Imperial Bank of Commerce (Canada)

    

1.55

    

01/23/18

    

110,491

    
 

175

    

Capital One Financial Corp.

    

2.45

    

04/24/19

    

177,805

    
 

150

    

Citigroup, Inc.

    

2.05

    

12/07/18

    

151,281

    
 

250

    

Commonwealth Bank of Australia (Australia)

    

2.50

    

09/20/18

    

256,004

    
 

250

    

Compass Bank

    

1.85

    

09/29/17

    

249,344

    
 

115

    

Cooperatieve Rabobank UA (Netherlands)

    

3.375

    

01/19/17

    

116,496

    
 

250

    

Credit Agricole SA (France) (a)

    

2.125

    

04/17/18

    

252,808

    
 

250

    

Credit Suisse AG, Series G (Switzerland)

    

2.30

    

05/28/19

    

253,453

    
 

225

    

DBS Group Holdings Ltd. (Singapore) (a)

    

2.246

    

07/16/19

    

228,663

    
 

250

    

Discover Bank

    

2.00

    

02/21/18

    

250,908

    
 

175

    

ERP Operating LP

    

2.375

    

07/01/19

    

179,384

    
 

275

    

Ford Motor Credit Co., LLC

    

5.00

    

05/15/18

    

291,502

    
 

325

    

Goldman Sachs Group, Inc. (The)

    

2.375

    

01/22/18

    

329,493

    
 

220

    

HSBC USA, Inc.

    

2.25

    

06/23/19

    

221,133

    
 

200

    

Intesa Sanpaolo SpA (Italy)

    

3.875

    

01/16/18

    

205,276

    
 

100

    

Jackson National Life Global Funding (a)

    

1.875

    

10/15/18

    

101,207

    
 

100

    

JPMorgan Chase & Co.

    

2.20

    

10/22/19

    

101,694

    
 

200

    

LeasePlan Corp. N.V. (Netherlands) (a)

    

2.875

    

01/22/19

    

200,217

    
 

200

    

Lloyds Banking Group PLC (United Kingdom)

    

3.10

    

07/06/21(b)

    

199,852

    
 

201

    

Macquarie Bank Ltd. (Australia) (a)

    

2.60

    

06/24/19

    

205,097

    
 

175

    

Metropolitan Life Global Funding I (See Note 7) (a)

    

2.00

    

04/14/20

    

176,986

    
 

230

    

Mizuho Bank Ltd. (Japan) (a)

    

1.85

    

03/21/18

    

231,690

    
 

150

    

New York Life Global Funding (a)

    

1.30

    

10/30/17

    

150,851

    
 

125

    

New York Life Global Funding (a)

    

1.55

    

11/02/18

    

126,204

    
 

250

    

Principal Financial Group, Inc.

    

1.85

    

11/15/17

    

251,449

    
 

150

    

Protective Life Global Funding (a)

    

1.722

    

04/15/19

    

150,945

    
 

150

    

Protective Life Global Funding (a)

    

2.70

    

11/25/20

    

155,186

    
 

200

    

QBE Insurance Group Ltd. (Australia) (a)

    

2.40

    

05/01/18

    

201,962

    
 

200

    

Santander Holdings USA, Inc.

    

2.70

    

05/24/19

    

201,097

    
 

200

    

Skandinaviska Enskilda Banken AB (Sweden) (a)

    

1.75

    

03/19/18

    

201,326

    
 

300

    

Standard Chartered PLC (United Kingdom) (a)

    

1.50

    

09/08/17

    

298,926

    
 

260

    

Sumitomo Mitsui Banking Corp. (Japan)

    

2.45

    

01/10/19

    

265,642

    
 

200

    

Swedbank AB (Sweden) (a)

    

1.75

    

03/12/18

    

201,462

    
 

225

    

Toronto-Dominion Bank (The), MTN (Canada)

    

2.625

    

09/10/18

    

231,543

    
 

300

    

UBS AG, MTN (Switzerland)

    

2.375

    

08/14/19

    

306,951

    
 

150

    

Visa, Inc.

    

2.20

    

12/14/20

    

154,758

    
 

200

     WEA Finance LLC/Westfield UK & Europe
Finance PLC (Australia) (a)		    

2.70

    

09/17/19

    

204,151

    

See Notes to Financial Statements
16


Morgan Stanley Variable Investment Series - Limited Duration

Portfolio of Investments n June 30, 2016 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		  

VALUE

  

$

120

    

Wells Fargo & Co.

    

2.15

%

  

01/15/19

  

$

122,555

    
 

350

    

Westpac Banking Corp. (Australia) (a)

    

1.375

    

05/30/18

    

351,718

    
         

9,883,071

    
   

Industrials (4.0%)

  
 

50

    

Harris Corp.

    

2.70

    

04/27/20

    

50,724

    
 

115

    

Ingersoll-Rand Global Holding Co., Ltd.

    

2.875

    

01/15/19

    

119,167

    
 

75

    

L-3 Communications Corp.

    

1.50

    

05/28/17

    

75,082

    
 

75

    

Lockheed Martin Corp.

    

2.50

    

11/23/20

    

77,469

    
 

50

    

Ryder System, Inc., MTN

    

2.65

    

03/02/20

    

50,680

    
 

150

    

Ryder System, Inc., MTN

    

5.85

    

11/01/16

    

152,390

    
 

250

     Siemens Financieringsmaatschappij N.V.
(Germany) (a)		    

2.15

    

05/27/20

    

255,851

    
 

175

    

Union Pacific Corp.

    

2.25

    

06/19/20

    

180,241

    
 

250

    

Waste Management, Inc.

    

2.60

    

09/01/16

    

250,580

    
         

1,212,184

    
   

Technology (3.2%)

  
 

100

    

Altera Corp.

    

2.50

    

11/15/18

    

103,469

    
 

40

    

Hewlett Packard Enterprise Co. (a)

    

3.60

    

10/15/20

    

41,792

    
 

175

    

Intel Corp.

    

2.45

    

07/29/20

    

182,092

    
 

125

    

Lam Research Corp.

    

2.80

    

06/15/21

    

128,113

    
 

200

    

Oracle Corp.

    

2.25

    

10/08/19

    

206,281

    
 

300

    

TSMC Global Ltd. (Taiwan) (a)

    

1.625

    

04/03/18

    

300,943

    
         

962,690

    
   

Utilities (4.7%)

  
 

275

    

Dominion Gas Holdings LLC

    

2.50

    

12/15/19

    

281,504

    
 

225

    

Engie (France) (a)

    

1.625

    

10/10/17

    

225,960

    
 

175

    

Eversource Energy

    

1.45

    

05/01/18

    

175,319

    
 

200

    

Origin Energy Finance Ltd. (Australia) (a)

    

3.50

    

10/09/18

    

201,332

    
 

175

    

Sempra Energy

    

2.40

    

03/15/20

    

178,795

    
 

250

    

Southern Co. (The)

    

2.15

    

09/01/19

    

254,788

    
 

100

    

Xcel Energy, Inc.

    

1.20

    

06/01/17

    

100,086

    
         

1,417,784

    
        Total Corporate Bonds
(Cost $23,154,761)		            

23,571,218

    

See Notes to Financial Statements
17


Morgan Stanley Variable Investment Series - Limited Duration

Portfolio of Investments n June 30, 2016 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		  

VALUE

  
   

Asset-Backed Securities (10.0%)

      

$

43

    

CAM Mortgage LLC (a)

    

3.50  

%

  

07/15/64

  

$

43,259

    
 

136

    

Capital One Multi-Asset Execution Trust

    

1.45

    

08/16/21

    

137,197

    
 

150

    

Citibank Credit Card Issuance Trust

    

2.88

    

01/23/23

    

159,821

    
 

128

    

Colony American Homes (a)

    

1.596

(c)

  

05/17/31

    

126,966

    
 

230

    

Discover Card Execution Note Trust

    

0.872

(c)

  

07/15/21

    

230,662

    
 

381

    

Ford Credit Auto Owner Trust (a)

    

2.26

    

11/15/25

    

388,942

    
 

100

    

Green Tree Agency Advance Funding Trust I (a)

    

3.095

    

10/15/48

    

100,421

    
 

206

    

Invitation Homes Trust (a)

    

3.196

(c)

  

08/17/32

    

205,647

    
   

Nationstar HECM Loan Trust

      
 

100

    

(a)

    

2.239

    

06/25/26

    

100,000

    
 

61

    

(a)

    

2.883

    

11/25/25

    

61,232

    
 

81

    

(a)

    

2.981

    

02/25/26

    

80,934

    
 

122

    

(a)

    

3.844

    

05/25/18

    

121,924

    
 

185

    

North Carolina State Education Assistance Authority

    

1.438

(c)

  

07/25/25

    

182,019

    
 

150

     NRZ Advance Receivables Trust Advance
Receivables Backed (a)		    

2.751

    

06/15/49

    

150,702

    
 

54

    

Panhandle-Plains Higher Education Authority, Inc.

    

1.575

(c)

  

07/01/24

    

54,241

    
 

110

    

RMAT LLC (a)

    

4.826

    

06/25/35

    

108,403

    
 

113

    

SPS Servicer Advance Receivables Trust (a)

    

2.92

    

07/15/47

    

113,495

    
 

88

    

VOLT NPL X LLC (a)

    

4.75

    

10/26/54

    

85,399

    
 

100

    

VOLT XIX LLC (a)

    

5.00

    

04/25/55

    

96,684

    
 

100

    

VOLT XXII LLC (a)

    

4.25

    

02/25/55

    

95,678

    
 

100

    

VOLT XXX LLC (a)

    

4.75

    

10/25/57

    

96,530

    
 

100

    

VOLT XXXI LLC (a)

    

4.50

    

02/25/55

    

96,202

    
 

198

    

VOLT XXXIII LLC (a)

    

4.25

    

03/25/55

    

189,887

    
        Total Asset-Backed Securities
(Cost $3,016,475)		            

3,026,245

    
   

Mortgages - Other (6.1%)

      
 

84

    

CHL Mortgage Pass-Through Trust

    

5.50

    

05/25/34

    

85,628

    
   

Fannie Mae Connecticut Avenue Securities

      
 

68

              

1.603

(c)

  

05/25/25

    

68,286

    
 

74

              

2.653

(c)

  

10/25/28

    

74,876

    
    Freddie Mac Structured Agency Credit Risk
Debt Notes		      
 

223

              

1.353

(c)

  

10/25/27

    

223,309

    
 

131

              

1.453

(c)

  

02/25/24

    

131,432

    
 

246

              

1.703

(c)

  

10/25/28

    

245,946

    
 

244

              

2.203

(c)

  

09/25/28

    

245,337

    
 

96

    

JP Morgan Mortgage Trust

    

3.163

(c)

  

07/25/35

    

95,404

    

See Notes to Financial Statements
18


Morgan Stanley Variable Investment Series - Limited Duration

Portfolio of Investments n June 30, 2016 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		  

VALUE

  

$

152

    

Merrill Lynch Mortgage Investors Trust

    

2.515

(c)%

  

12/25/34

  

$

151,976

    
 

371

    

New Residential Mortgage Loan Trust (a)

    

3.75

(c)

  

11/25/35 - 08/25/55

    

387,590

    
 

157

    

Sequoia Mortgage Trust

    

1.068

(c)

  

08/20/34

    

148,402

    
        Total Mortgages - Other
(Cost $1,854,042)		            

1,858,186

    
   

Commercial Mortgage-Backed Securities (2.3%)

      
 

187

    

BLCP Hotel Trust (a)

    

1.392

(c)

  

08/15/29

    

185,517

    
 

175

    

CDGJ Commercial Mortgage Trust (a)

    

1.842

(c)

  

12/15/27

    

174,915

    
 

90

    

Citigroup Commercial Mortgage Trust (a)

    

2.11

    

01/12/30

    

90,491

    
 

91

    

Hilton USA Trust (a)

    

1.463

(c)

  

11/05/30

    

90,563

    
 

100

    

Hudsons Bay Simon JV Trust (a)

    

2.043

(c)

  

08/05/34

    

99,985

    
 

62

     JP Morgan Chase Commercial
Mortgage Securities Trust (a)		    

1.422

(c)

  

07/15/31

    

62,072

    
        Total Commercial Mortgage-Backed Securities
(Cost $707,023)		            

703,543

    
   

Collateralized Mortgage Obligations - Agency Collateral Series (1.1%)

      
 

127

     Federal Home Loan Mortgage Corporation,
REMIC		    

7.50

    

09/15/29

    

148,851

    
   

Government National Mortgage Association,

      
       

IO

                      
 

273

              

5.782

(c)

  

03/20/43

    

42,924

    
 

340

              

6.052

(c)

  

05/20/40

    

56,715

    
 

431

              

6.058

(c)

  

08/16/39

    

36,321

    
       

IO PAC

                      
 

491

              

5.702

(c)

  

10/20/41

    

50,636

    
        Total Collateralized Mortgage Obligations - Agency Collateral Series
(Cost $286,034)		            

335,447

    
   

Sovereign (0.8%)

      
 

245

     Korea Development Bank (The) (Korea, Republic of)
(Cost $242,427)		    

1.50

    

01/22/18

    

245,631

    
   

Agency Fixed Rate Mortgages (0.4%)

      
    Federal National Mortgage Association,
Conventional Pools:		      
 

57

              

6.50

    

01/01/32

    

65,348

    
 

49

              

7.00

    

12/01/31 - 06/01/32

    

54,717

    
        Total Agency Fixed Rate Mortgages
(Cost $111,053)		            

120,065

    

See Notes to Financial Statements
19


Morgan Stanley Variable Investment Series - Limited Duration

Portfolio of Investments n June 30, 2016 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		  

VALUE

  
   

Short-Term Investments (1.1%)

  
   

U.S. Treasury Security (0.2%)

  

$

51

     U.S. Treasury Bill (d)(e)
(Cost $50,948)		    

0.336

%

  

10/20/16

  

$

50,965

    
NUMBER OF
SHARES (000)		  
 
 
 
 
   

Investment Company (0.9%)

  
 

269

     Morgan Stanley Institutional Liquidity Funds - Government
Portfolio - Institutional Class (See Note 7)
(Cost $268,675) 		   

268,675

    
    Total Short-Term Investments
(Cost $319,623)		            

319,640

    
    Total Investments
(Cost $29,691,438) (f)(g)		        

99.7

%

    

30,179,975

    
   

Other Assets in Excess of Liabilities

        

0.3

      

91,983

    
   

Net Assets

        

100.0

%

  

$

30,271,958

    

  IO  Interest Only.

  MTN  Medium Term Note.

  PAC  Planned Amortization Class.

  REMIC  Real Estate Mortgage Investment Conduit.

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

  (b)  When-issued security.

  (c)  Variable/Floating Rate Security — Interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on June 30, 2016.

  (d)  Rate shown is the yield to maturity at June 30, 2016.

  (e)  All or a portion of the security was pledged to cover margin requirements for futures contracts.

  (f)  Securities are available for collateral in connection with purchase of a when-issued security and open futures contracts.

  (g)  At June 30, 2016, the aggregate cost for Federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $561,068 and the aggregate gross unrealized depreciation is $72,531 resulting in net unrealized appreciation of $488,537.

See Notes to Financial Statements
20


Morgan Stanley Variable Investment Series - Limited Duration

Portfolio of Investments n June 30, 2016 (unaudited) continued

FUTURES CONTRACTS OPEN AT JUNE 30, 2016:

NUMBER OF
CONTRACTS		  

LONG/SHORT

   DESCRIPTION, DELIVERY
MONTH AND YEAR		   UNDERLYING FACE
AMOUNT AT VALUE		   UNREALIZED
APPRECIATION
(DEPRECIATION)		  
 

17

    

Long

   U.S. Treasury 5 yr. Note,
Sep-16		  

$

2,076,789

    

$

37,344

    
 

5

    

Long

   U.S. Treasury Long Bond,
Sep-16		    

861,719

      

50,625

    
 

3

    

Short

   U.S. Treasury Ultra Bond,
Sep-16		    

(559,125

)

    

(34,031

)

  

Net Unrealized Appreciation

  

$

53,938

    

LONG TERM CREDIT ANALYSIS+

AAA

    

14.1

%

  

AA

    

13.6

    

A

    

43.2

    

BBB

    

25.0

    

Not Rated

    

4.1

    
     

100.0

%++

  

+  The ratings shown are based on the Portfolio's security ratings as determined by Standard & Poor's, Moody's or Fitch, each a Nationally Recognized Statistical Ratings Organization ("NRSRO").

++  Does not include open long/short futures contracts with an underlying face amount of $3,497,633 with net unrealized appreciation of $53,938.

See Notes to Financial Statements
21


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2016 (unaudited)

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		  

VALUE

  
   

Corporate Bonds (93.7%)

  
   

Basic Materials (2.8%)

  

$

225

    

Ashland, Inc.

    

6.875

%

  

05/15/43

  

$

226,125

    
 

240

    

BHP Billiton Finance USA Ltd. (Australia)

    

3.85

    

09/30/23

    

261,408

    
 

225

    

BHP Billiton Finance USA Ltd. (Australia)

    

5.00

    

09/30/43

    

262,062

    
 

375

    

Eastman Chemical Co.

    

3.80

    

03/15/25

    

397,047

    
 

390

    

Eldorado Gold Corp. (Canada) (a)

    

6.125

    

12/15/20

    

391,950

    
 

175

    

Goldcorp, Inc. (Canada)

    

5.45

    

06/09/44

    

177,537

    
 

300

    

LyondellBasell Industries N.V.

    

4.625

    

02/26/55

    

294,086

    
 

470

    

NOVA Chemicals Corp. (Canada) (a)

    

5.25

    

08/01/23

    

474,112

    
 

200

    

Southern Copper Corp. (Mexico)

    

5.25

    

11/08/42

    

178,265

    
 

315

    

Southern Copper Corp. (Mexico)

    

7.50

    

07/27/35

    

349,785

    
 

220

    

Vale Overseas Ltd. (Brazil)

    

6.875

    

11/21/36

    

201,300

    
         

3,213,677

    
   

Communications (13.3%)

  
 

325

    

21st Century Fox America, Inc.

    

4.75

    

09/15/44

    

361,505

    
 

700

    

Alibaba Group Holding Ltd. (China)

    

2.50

    

11/28/19

    

709,303

    
 

175

    

Amazon.com, Inc.

    

4.95

    

12/05/44

    

213,882

    
 

175

    

AT&T, Inc.

    

5.55

    

08/15/41

    

196,759

    
 

350

    

AT&T, Inc.

    

5.65

    

02/15/47

    

402,371

    
 

875

    

AT&T, Inc.

    

6.30

    

01/15/38

    

1,055,445

    
 

525

    

Baidu, Inc. (China)

    

2.75

    

06/09/19

    

534,639

    
 

200

    

Baidu, Inc. (China)

    

3.25

    

08/06/18

    

205,326

    
 

100

    

CBS Corp.

    

4.60

    

01/15/45

    

99,502

    
 

150

    

CBS Corp.

    

4.90

    

08/15/44

    

152,695

    
 

1,075

     Charter Communications Operating LLC/Charter
Communications Operating Capital (a)		    

4.908

    

07/23/25

    

1,177,416

    
 

275

     Charter Communications Operating LLC/Charter
Communications Operating Capital (a)		    

6.484

    

10/23/45

    

329,528

    
 

470

    

Comcast Corp.

    

6.40

    

05/15/38

    

648,236

    
 

251

    

Ctrip.com International Ltd. (China)

    

1.25

    

10/15/18

    

307,318

    
 

275

    

Deutsche Telekom International Finance BV (Germany)

    

8.75

    

06/15/30

    

415,075

    
 

375

    

eBay, Inc.

    

2.50

    

03/09/18

    

382,001

    
 

340

    

Empresa Nacional de Telecomunicaciones SA (Chile) (a)

    

4.75

    

08/01/26

    

339,239

    
 

535

    

Motorola Solutions, Inc.

    

4.00

    

09/01/24

    

524,170

    
 

425

    

NBC Universal Media LLC

    

5.95

    

04/01/41

    

573,096

    
 

310

    

Netflix, Inc.

    

5.50

    

02/15/22

    

324,725

    
 

200

    

Numericable-SFR SA (France) (a)

    

7.375

    

05/01/26

    

198,000

    
 

225

    

Omnicom Group, Inc.

    

3.60

    

04/15/26

    

237,456

    
 

350

    

Omnicom Group, Inc.

    

3.625

    

05/01/22

    

372,364

    
 

93

    

Omnicom Group, Inc.

    

3.65

    

11/01/24

    

98,217

    

See Notes to Financial Statements
22


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2016 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		  

VALUE

  

$

900

    

Ooredoo International Finance Ltd. (Qatar) (a)

    

3.25  

%

  

02/21/23

  

$

911,250

    
 

200

    

Orange SA (France)

    

9.00

    

03/01/31

    

310,481

    
 

300

    

Priceline Group, Inc. (The)

    

0.90

    

09/15/21

    

304,500

    
 

330

    

Telefonica Europe BV (Spain)

    

8.25

    

09/15/30

    

472,950

    
 

255

    

Telstra Corp., Ltd. (Australia) (a)

    

3.125

    

04/07/25

    

266,728

    
 

235

    

Time Warner, Inc.

    

7.70

    

05/01/32

    

328,930

    
 

425

    

Twitter, Inc.

    

0.25

    

09/15/19

    

391,531

    
 

1,190

    

Verizon Communications, Inc.

    

4.672

    

03/15/55

    

1,209,028

    
 

309

    

Verizon Communications, Inc.

    

5.012

    

08/21/54

    

328,216

    
 

200

    

Viacom, Inc.

    

5.85

    

09/01/43

    

201,203

    
 

200

    

Vodafone Group PLC (United Kingdom)

    

4.375

    

02/19/43

    

189,289

    
 

226

    

Yahoo!, Inc.

    

0.00

(b)

  

12/01/18

    

225,435

    
         

14,997,809

    
   

Consumer, Cyclical (7.8%)

  
 

372

    

American Airlines Pass-Through Trust

    

4.00

    

07/15/25

    

392,994

    
 

350

    

Aramark Services, Inc. (a)

    

4.75

    

06/01/26

    

343,875

    
 

594

    

British Airways Pass-Through Trust (United Kingdom) (a)

    

4.625

    

06/20/24

    

627,236

    
 

395

    

Daimler Finance North America LLC (Germany)

    

8.50

    

01/18/31

    

642,647

    
 

425

    

Delphi Automotive PLC (United Kingdom)

    

3.15

    

11/19/20

    

437,593

    
 

175

    

Ford Motor Co.

    

4.75

    

01/15/43

    

185,947

    
 

300

    

Ford Motor Credit Co., LLC

    

3.096

    

05/04/23

    

304,657

    
 

650

    

General Motors Co.

    

6.60

    

04/01/36

    

747,492

    
 

200

    

Home Depot, Inc.

    

3.35

    

09/15/25

    

218,214

    
 

175

    

Home Depot, Inc.

    

5.875

    

12/16/36

    

239,488

    
 

400

    

Lowe's Cos., Inc.

    

2.50

    

04/15/26

    

407,918

    
 

300

    

McDonald's Corp., MTN

    

4.60

    

05/26/45

    

336,224

    
 

400

    

Newell Brands, Inc.

    

3.85

    

04/01/23

    

424,884

    
 

575

    

QVC, Inc.

    

4.375

    

03/15/23

    

579,395

    
 

475

    

Restoration Hardware Holdings, Inc. (a)

    

0.00

(b)

  

06/15/19

    

386,531

    
 

336

    

Tesla Motors, Inc.

    

1.25

    

03/01/21

    

277,830

    
 

220

    

Toll Brothers Finance Corp.

    

0.50

    

09/15/32

    

216,425

    
 

811

    

United Airlines Pass-Through Trust, Class A

    

4.30

    

08/15/25

    

876,083

    
 

375

    

Volkswagen Group of America Finance LLC (Germany) (a)

    

2.40

    

05/22/20

    

377,000

    
 

125

    

Wal-Mart Stores, Inc.

    

5.25

    

09/01/35

    

164,521

    
 

200

    

Walgreens Boots Alliance, Inc.

    

3.45

    

06/01/26

    

205,729

    
 

350

    

ZF North America Capital, Inc. (Germany) (a)

    

4.50

    

04/29/22

    

356,125

    
         

8,748,808

    
   

Consumer, Non-Cyclical (14.9%)

  
 

450

    

AbbVie, Inc.

    

3.20

    

05/14/26

    

456,779

    
 

175

    

AbbVie, Inc.

    

4.70

    

05/14/45

    

185,812

    
 

525

    

Actavis Funding SCS

    

4.75

    

03/15/45

    

553,468

    

See Notes to Financial Statements
23


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2016 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		  

VALUE

  

$

400

    

Albea Beauty Holdings SA (a)

    

8.375

%

  

11/01/19

  

$

422,000

    
 

365

    

Altria Group, Inc.

    

5.375

    

01/31/44

    

469,832

    
 

272

    

Amgen, Inc. (a)

    

4.663

    

06/15/51

    

285,432

    
 

400

    

Anheuser-Busch InBev Finance, Inc. (Belgium)

    

3.65

    

02/01/26

    

429,348

    
 

775

    

Anheuser-Busch InBev Finance, Inc. (Belgium)

    

3.70

    

02/01/24

    

836,137

    
 

600

    

Anheuser-Busch InBev Finance, Inc. (Belgium)

    

4.90

    

02/01/46

    

706,013

    
 

325

    

AstraZeneca PLC (United Kingdom)

    

6.45

    

09/15/37

    

444,463

    
 

150

    

Automatic Data Processing, Inc.

    

3.375

    

09/15/25

    

163,303

    
 

200

    

Baxalta, Inc.

    

5.25

    

06/23/45

    

217,422

    
 

350

    

Boston Scientific Corp.

    

3.85

    

05/15/25

    

370,911

    
 

260

     BRF SA (Brazil) (a)    

3.95

    

05/22/23

    

253,500

    
 

675

    

Celgene Corp.

    

3.875

    

08/15/25

    

721,353

    
 

250

    

Cencosud SA (Chile) (a)

    

6.625

    

02/12/45

    

244,574

    
 

312

    

EMD Finance LLC (Germany) (a)

    

3.25

    

03/19/25

    

320,291

    
 

275

    

Express Scripts Holding Co.

    

4.50

    

02/25/26

    

302,711

    
 

75

    

Gilead Sciences, Inc.

    

4.50

    

02/01/45

    

81,953

    
 

225

    

Gilead Sciences, Inc.

    

4.80

    

04/01/44

    

253,735

    
 

250

    

GlaxoSmithKline Capital, Inc. (United Kingdom)

    

6.375

    

05/15/38

    

358,451

    
 

275

    

Grupo Bimbo SAB de CV (Mexico) (a)

    

3.875

    

06/27/24

    

287,159

    
 

316

    

Illumina, Inc.

    

0.00

(b)

  

06/15/19

    

309,285

    
 

500

    

Kraft Heinz Foods Co. (a)

    

4.375

    

06/01/46

    

530,993

    
 

300

    

Mallinckrodt International Finance SA/Mallinckrodt CB LLC (a)

    

5.50

    

04/15/25

    

269,136

    
 

300

    

Mead Johnson Nutrition Co.

    

3.00

    

11/15/20

    

313,724

    
 

525

    

Medtronic, Inc.

    

4.625

    

03/15/45

    

618,907

    
 

400

    

Mylan (a)

    

3.95

    

06/15/26

    

405,623

    
 

325

    

Novartis Capital Corp. (Switzerland)

    

4.40

    

05/06/44

    

392,709

    
 

350

    

PepsiCo, Inc.

    

3.60

    

03/01/24

    

384,963

    
 

325

    

Philip Morris International, Inc.

    

4.50

    

03/20/42

    

366,672

    
 

225

    

RR Donnelley & Sons Co.

    

7.875

    

03/15/21

    

234,000

    
 

800

    

Sigma Alimentos SA de CV (Mexico) (a)

    

5.625

    

04/14/18

    

857,000

    
 

300

    

Transurban Finance Co., Pty Ltd. (Australia) (a)

    

4.125

    

02/02/26

    

319,321

    
 

200

    

Tyson Foods, Inc.

    

4.875

    

08/15/34

    

223,800

    
 

370

    

United Rentals North America, Inc.

    

5.75

    

11/15/24

    

374,625

    
 

750

    

UnitedHealth Group, Inc.

    

2.875

    

03/15/23

    

781,514

    
 

525

    

UnitedHealth Group, Inc.

    

3.75

    

07/15/25

    

576,653

    
 

300

    

Whole Foods Market, Inc. (a)

    

5.20

    

12/03/25

    

324,049

    
 

930

    

WM Wrigley Jr. Co. (a)

    

2.90

    

10/21/19

    

967,179

    
 

190

    

Zimmer Biomet Holdings, Inc.

    

5.75

    

11/30/39

    

225,932

    
         

16,840,732

    
   

Diversified (0.2%)

  
 

200

    

Alfa SAB de CV (Mexico) (a)

    

5.25

    

03/25/24

    

214,000

    

See Notes to Financial Statements
24


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2016 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		  

VALUE

  
   

Energy (8.5%)

  

$

500

    

Anadarko Petroleum Corp.

    

6.45

%

  

09/15/36

  

$

577,769

    
 

675

    

APT Pipelines Ltd. (Australia) (a)

    

4.20

    

03/23/25

    

693,575

    
 

200

    

BG Energy Capital PLC (United Kingdom) (a)

    

5.125

    

10/15/41

    

226,137

    
 

500

    

BP Capital Markets PLC (United Kingdom)

    

3.119

    

05/04/26

    

511,365

    
 

675

    

Buckeye Partners LP

    

4.15

    

07/01/23

    

680,303

    
 

325

    

Carrizo Oil & Gas, Inc.

    

6.25

    

04/15/23

    

314,437

    
 

400

    

Cimarex Energy Co.

    

5.875

    

05/01/22

    

419,094

    
 

151

    

DCP Midstream LLC (a)

    

5.35

    

03/15/20

    

148,347

    
 

425

    

Enable Midstream Partners LP

    

3.90

    

05/15/24

    

379,437

    
 

250

    

Endeavor Energy Resources LP/EER Finance, Inc. (a)

    

7.00

    

08/15/21

    

246,875

    
 

475

    

Energy Transfer Partners LP

    

6.50

    

02/01/42

    

500,353

    
 

250

    

Ensco PLC

    

5.75

    

10/01/44

    

150,313

    
 

600

    

Enterprise Products Operating LLC

    

5.95

    

02/01/41

    

706,520

    
 

250

    

Exxon Mobil Corp.

    

4.114

    

03/01/46

    

282,704

    
 

130

    

Hess Corp.

    

6.00

    

01/15/40

    

134,865

    
 

220

    

Hilcorp Energy I LP/Hilcorp Finance Co. (a)

    

5.75

    

10/01/25

    

211,200

    
 

75

    

Kinder Morgan, Inc.

    

4.30

    

06/01/25

    

76,932

    
 

250

    

Kinder Morgan, Inc.

    

5.55

    

06/01/45

    

254,932

    
 

300

    

Kinder Morgan, Inc. (a)

    

5.625

    

11/15/23

    

321,810

    
 

325

     MPLX LP    

4.00

    

02/15/25

    

295,741

    
 

500

    

Nexen Energy ULC (China)

    

6.40

    

05/15/37

    

623,191

    
 

200

    

Noble Energy, Inc.

    

5.05

    

11/15/44

    

202,159

    
 

100

    

Occidental Petroleum Corp.

    

4.40

    

04/15/46

    

110,782

    
 

100

    

Phillips 66 Partners LP

    

4.68

    

02/15/45

    

92,667

    
 

300

    

Rowan Cos., Inc.

    

5.85

    

01/15/44

    

201,572

    
 

325

    

Spectra Energy Capital LLC

    

7.50

    

09/15/38

    

373,203

    
 

275

    

TransCanada PipeLines Ltd. (Canada)

    

7.625

    

01/15/39

    

387,649

    
 

475

    

Williams Partners LP/ACMP Finance Corp.

    

4.875

    

05/15/23

    

459,772

    
         

9,583,704

    
   

Finance (31.7%)

  
 

390

    

ABB Treasury Center USA, Inc. (Switzerland) (a)

    

4.00

    

06/15/21

    

423,067

    
 

600

    

ABN Amro Bank N.V. (Netherlands) (a)

    

4.75

    

07/28/25

    

625,128

    
 

420

     AerCap Ireland Capital Ltd./AerCap Global Aviation Trust
(Netherlands)		    

3.75

    

05/15/19

    

424,200

    
 

250

    

Air Lease Corp.

    

3.375

    

06/01/21

    

257,493

    
 

275

    

Alexandria Real Estate Equities, Inc.

    

3.95

    

01/15/27

    

284,051

    
 

250

    

Ally Financial, Inc.

    

4.25

    

04/15/21

    

250,313

    
 

325

    

American Campus Communities Operating Partnership LP

    

3.75

    

04/15/23

    

335,908

    
 

125

    

American International Group, Inc.

    

4.50

    

07/16/44

    

121,404

    
 

375

    

American International Group, Inc.

    

4.875

    

06/01/22

    

418,301

    

See Notes to Financial Statements
25


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2016 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		  

VALUE

  

$

250

    

American Tower Corp.

    

3.375  

%

  

10/15/26

  

$

251,832

    
 

350

    

AvalonBay Communities, Inc., Series G

    

2.95

    

05/11/26

    

352,118

    
 

825

    

Banco de Credito del Peru (Peru) (a)

    

6.125

(c)

  

04/24/27

    

907,912

    
 

555

    

Bank of America Corp.

    

7.75

    

05/14/38

    

783,892

    
 

220

    

Bank of America Corp., MTN

    

4.00

    

04/01/24

    

235,197

    
 

440

    

Bank of America Corp., MTN

    

4.00

    

01/22/25

    

449,305

    
 

136

    

Bank of America Corp., MTN

    

4.25

    

10/22/26

    

141,338

    
 

175

    

Bank of America Corp., MTN

    

4.75

    

04/21/45

    

179,493

    
 

800

    

BBVA Bancomer SA (Mexico) (a)

    

6.50

    

03/10/21

    

882,000

    
 

475

    

BNP Paribas SA (France) (a)

    

4.375

    

05/12/26

    

481,099

    
 

400

    

Boston Properties LP

    

3.65

    

02/01/26

    

427,132

    
 

625

     BPCE SA (France) (a)    

5.15

    

07/21/24

    

651,447

    
 

450

    

Brixmor Operating Partnership LP

    

4.125

    

06/15/26

    

462,597

    
 

400

    

Brookfield Finance, Inc. (Canada)

    

4.25

    

06/02/26

    

409,670

    
 

936

    

Capital One Bank, USA NA

    

3.375

    

02/15/23

    

957,442

    
 

170

    

Citigroup, Inc.

    

6.675

    

09/13/43

    

219,026

    
 

425

    

Citigroup, Inc.

    

8.125

    

07/15/39

    

664,973

    
 

375

    

CNA Financial Corp.

    

7.35

    

11/15/19

    

433,691

    
 

1,175

    

Cooperatieve Rabobank UA (Netherlands)

    

3.95

    

11/09/22

    

1,216,863

    
 

260

    

Cooperatieve Rabobank UA (Netherlands) (a)

    

11.00

(c)

  

06/30/19(d)

    

311,025

    
 

270

    

Credit Agricole SA (France) (a)

    

7.875

(c)

  

01/23/24(d)

    

259,200

    
 

825

    

Credit Suisse AG (Switzerland) (a)

    

6.50

    

08/08/23

    

866,456

    
 

300

    

Crown Castle International Corp.

    

4.45

    

02/15/26

    

326,318

    
 

425

    

Discover Bank

    

7.00

    

04/15/20

    

484,440

    
 

715

    

Discover Financial Services

    

3.85

    

11/21/22

    

727,171

    
 

300

    

Discover Financial Services

    

3.95

    

11/06/24

    

308,011

    
 

300

    

Extra Space Storage LP (a)

    

3.125

    

10/01/35

    

342,938

    
 

450

    

Five Corners Funding Trust (a)

    

4.419

    

11/15/23

    

486,422

    
 

400

    

Ford Motor Credit Co., LLC

    

5.875

    

08/02/21

    

459,274

    
 

750

    

GE Capital International Funding Co. (a)

    

4.418

    

11/15/35

    

842,877

    
 

375

    

Goldman Sachs Group, Inc. (The)

    

6.25

    

02/01/41

    

486,988

    
 

900

    

Goldman Sachs Group, Inc. (The)

    

6.75

    

10/01/37

    

1,113,587

    
 

200

    

Goldman Sachs Group, Inc. (The), MTN

    

4.80

    

07/08/44

    

222,276

    
 

950

    

Goodman Funding Pty Ltd. (Australia) (a)

    

6.375

    

04/15/21

    

1,112,749

    
 

400

    

Healthcare Trust of America Holdings LP

    

3.70

    

04/15/23

    

410,617

    
 

375

    

Hospitality Properties Trust

    

5.25

    

02/15/26

    

395,906

    
 

410

    

HSBC Finance Corp.

    

6.676

    

01/15/21

    

459,860

    
 

200

    

HSBC Holdings PLC (United Kingdom)

    

6.375

(c)

  

09/17/24(d)

    

189,250

    
 

705

    

HSBC Holdings PLC (United Kingdom)

    

6.50

    

05/02/36

    

848,979

    
 

400

    

ING Bank N.V. (Netherlands) (a)

    

5.80

    

09/25/23

    

439,620

    
 

200

    

ING Groep N.V. (Netherlands)

    

6.00

(c)

  

04/16/20(d)

    

188,500

    

See Notes to Financial Statements
26


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2016 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		  

VALUE

  

$

220

    

Intesa Sanpaolo SpA (Italy)

    

5.25   

%

  

01/12/24

  

$

234,519

    
 

250

    

Intesa Sanpaolo SpA (Italy) (a)

    

5.71

    

01/15/26

    

237,455

    
 

480

    

JPMorgan Chase & Co.

    

4.95

    

06/01/45

    

528,291

    
 

650

    

JPMorgan Chase & Co.

    

5.50

    

10/15/40

    

815,421

    
 

575

    

LeasePlan Corp. N.V. (Netherlands) (a)

    

2.875

    

01/22/19

    

575,624

    
 

200

    

Liberty Mutual Group, Inc. (a)

    

4.85

    

08/01/44

    

205,536

    
 

275

    

Lincoln National Corp.

    

7.00

    

06/15/40

    

355,294

    
 

475

    

Lloyds Banking Group PLC (United Kingdom)

    

3.10

    

07/06/21

    

474,649

    
 

125

    

Massachusetts Mutual Life Insurance Co. (a)

    

4.50

    

04/15/65

    

119,802

    
 

1,000

    

MetLife, Inc. (See Note 7)

    

3.00

    

03/01/25

    

1,013,620

    
 

525

    

Nationwide Building Society (United Kingdom) (a)

    

3.90

    

07/21/25

    

561,954

    
 

425

    

Principal Financial Group, Inc.

    

8.875

    

05/15/19

    

504,639

    
 

675

    

Prudential Financial, Inc.

    

5.625

(c)

  

06/15/43

    

704,747

    
 

135

    

Prudential Financial, Inc., MTN

    

6.625

    

12/01/37

    

174,605

    
 

575

    

Realty Income Corp.

    

3.25

    

10/15/22

    

590,472

    
 

550

    

Santander UK Group Holdings PLC (United Kingdom)

    

3.125

    

01/08/21

    

551,914

    
 

325

    

Santander UK PLC (United Kingdom) (a)

    

5.00

    

11/07/23

    

334,717

    
 

600

    

Skandinaviska Enskilda Banken AB (Sweden) (a)

    

2.625

    

11/17/20

    

619,066

    
 

350

    

TD Ameritrade Holding Corp.

    

3.625

    

04/01/25

    

375,343

    
 

425

    

Visa, Inc.

    

4.30

    

12/14/45

    

493,329

    
 

325

     WEA Finance LLC/Westfield UK & Europe Finance PLC
(Australia) (a)		    

3.25

    

10/05/20

    

338,561

    
 

575

    

Weingarten Realty Investors

    

3.375

    

10/15/22

    

587,273

    
 

284

    

Wells Fargo & Co.

    

5.606

    

01/15/44

    

340,507

    
 

450

    

Wells Fargo & Co., MTN

    

4.10

    

06/03/26

    

481,915

    
         

35,748,609

    
   

Industrials (3.9%)

  
 

500

    

Brambles USA, Inc. (Australia) (a)

    

4.125

    

10/23/25

    

537,328

    
 

375

    

Burlington Northern Santa Fe LLC

    

4.55

    

09/01/44

    

432,384

    
 

330

    

CEVA Group PLC (United Kingdom) (a)

    

7.00

    

03/01/21

    

285,450

    
 

480

    

CRH America, Inc. (Ireland)

    

8.125

    

07/15/18

    

539,181

    
 

175

    

Harris Corp.

    

4.854

    

04/27/35

    

192,707

    
 

510

    

Heathrow Funding Ltd. (United Kingdom) (a)

    

4.875

    

07/15/21

    

562,461

    
 

425

    

Lockheed Martin Corp.

    

3.55

    

01/15/26

    

462,575

    
 

510

    

MasTec, Inc.

    

4.875

    

03/15/23

    

475,575

    
 

700

    

Trinity Industries, Inc.

    

4.55

    

10/01/24

    

661,896

    
 

225

    

Tyco International Finance SA

    

3.90

    

02/14/26

    

242,789

    
         

4,392,346

    

See Notes to Financial Statements
27


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2016 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		  

VALUE

  
   

Technology (1.4%)

  

$

375

    

Citrix Systems, Inc.

    

0.50  

%

  

04/15/19

  

$

419,062

    
 

200

    

Diamond 1 Finance Corp./Diamond 2 Finance Corp. (a)

    

8.10

    

07/15/36

    

216,155

    
 

300

    

Lam Research Corp.

    

3.90

    

06/15/26

    

316,473

    
 

350

    

Microsoft Corp.

    

4.45

    

11/03/45

    

395,682

    
 

264

    

Nuance Communications, Inc.

    

2.75

    

11/01/31

    

266,970

    
         

1,614,342

    
   

Utilities (9.2%)

  
 

400

    

Alabama Power Co.

    

3.75

    

03/01/45

    

417,064

    
 

475

    

Appalachian Power Co.

    

3.40

    

06/01/25

    

505,030

    
 

525

    

Boston Gas Co. (a)

    

4.487

    

02/15/42

    

571,449

    
 

125

    

Cleco Corporate Holdings LLC (a)

    

3.743

    

05/01/26

    

128,723

    
 

495

    

CMS Energy Corp.

    

5.05

    

03/15/22

    

566,586

    
 

280

    

CMS Energy Corp.

    

6.25

    

02/01/20

    

322,592

    
 

275

    

Duke Energy Carolinas LLC

    

3.75

    

06/01/45

    

291,129

    
 

330

    

EDP Finance BV (Portugal) (a)

    

5.25

    

01/14/21

    

350,625

    
 

225

    

Enel Finance International N.V. (Italy) (a)

    

6.00

    

10/07/39

    

266,780

    
 

210

    

Enel SpA (Italy) (a)

    

8.75

(c)

  

09/24/73

    

239,662

    
 

300

    

Entergy Arkansas, Inc.

    

3.50

    

04/01/26

    

329,198

    
 

150

    

Entergy Louisiana LLC

    

3.05

    

06/01/31

    

153,924

    
 

700

    

Exelon Generation Co., LLC

    

4.00

    

10/01/20

    

747,370

    
 

193

    

Fermaca Enterprises S de RL de CV (Mexico) (a)

    

6.375

    

03/30/38

    

193,382

    
 

200

    

GNL Quintero SA (Chile) (a)

    

4.634

    

07/31/29

    

204,999

    
 

850

    

Jersey Central Power & Light Co. (a)

    

4.70

    

04/01/24

    

933,267

    
 

275

    

Oncor Electric Delivery Co., LLC

    

2.95

    

04/01/25

    

286,678

    
 

325

    

Origin Energy Finance Ltd. (Australia) (a)

    

3.50

    

10/09/18

    

327,165

    
 

590

    

Puget Energy, Inc.

    

6.50

    

12/15/20

    

687,948

    
 

675

    

Sempra Energy

    

2.40

    

03/15/20

    

689,639

    
 

250

    

South Carolina Electric & Gas Co.

    

4.50

    

06/01/64

    

259,293

    
 

870

    

TransAlta Corp. (Canada)

    

4.50

    

11/15/22

    

793,776

    
 

475

    

Virginia Electric & Power Co., Series B

    

4.20

    

05/15/45

    

531,316

    
 

250

    

WEC Energy Group, Inc.

    

3.55

    

06/15/25

    

268,763

    
 

250

    

Xcel Energy, Inc.

    

3.30

    

06/01/25

    

264,169

    
         

10,330,527

    
    Total Corporate Bonds
(Cost $100,260,605)		    

105,684,554

    

See Notes to Financial Statements
28


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2016 (unaudited) continued

PRINCIPAL
AMOUNT
(000)		  

  COUPON
RATE		   MATURITY
DATE		  

VALUE

  
   

U.S. Treasury Security (1.2%)

  

$

1,313

     U.S. Treasury Inflation Indexed Bond
(Cost $1,300,013)		    

0.25

%

  

01/15/25

  

$

1,334,105

    
   

Variable Rate Senior Loan Interests (1.2%)

  
   

Basic Materials (0.3%)

  
 

350

     FMG Resources August 2006 Pty Ltd.,
Term B (Australia)		    

4.25

    

06/30/19

    

336,000

    
   

Consumer, Cyclical (0.6%)

  
 

278

    

Diamond Resorts Corp., Term Loan

    

5.50

    

05/09/21

    

278,353

    
 

166

    

Graton Economic Development Authority, Term B

    

4.75

    

07/28/22

    

166,300

    
 

274

    

Navistar International Corp., Term B

    

6.50

    

08/17/17

    

259,488

    
         

704,141

    
   

Industrials (0.3%)

  
 

293

    

Gates Global, Inc., Term B

    

4.25

    

07/05/21

    

279,123

    
    Total Variable Rate Senior Loan Interests
(Cost $1,320,826)		    

1,319,264

    
   

Asset-Backed Securities (1.0%)

  
   

CVS Pass-Through Trust

  
 

847

              

6.036

    

12/10/28

    

962,844

    
 

101

    

(a)

    

8.353

    

07/10/31

    

132,624

    
    Total Asset-Backed Securities
(Cost $948,793)		    

1,095,468

    
   

Sovereign (0.5%)

  
 

550

     Sinopec Group Overseas Development 2015 Ltd. (China) (a)
(Cost $548,460)		    

2.50

    

04/28/20

    

556,436

    
   

Short-Term Investments (2.0%)

  
   

U.S. Treasury Security (1.2%)

  
 

1,389

     U.S. Treasury Bill (e)(f)
(Cost $1,387,585)		    

0.336

    

10/20/16

    

1,388,037

    

See Notes to Financial Statements
29


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2016 (unaudited) continued

NUMBER OF
SHARES (000)		  

 
 
 

VALUE

  
   

Investment Company (0.8%)

  
 

943

     Morgan Stanley Institutional Liquidity Funds - Government
Portfolio - Institutional Class (See Note 7)
(Cost $942,706)		  

$

942,706

    
    Total Short-Term Investments
(Cost $2,330,291)		    

2,330,743

    
    Total Investments
(Cost $106,708,988) (g)(h)		        

99.6

%

    

112,320,570

    
   

Other Assets in Excess of Liabilities

        

0.4

      

417,093

    
   

Net Assets

        

100.0

%

  

$

112,737,663

    

  MTN  Medium Term Note.

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

  (b)  Capital appreciation bond.

  (c)  Variable/Floating Rate Security — Interest rate changes on these instruments are based on changes in a designated base rate. The rates shown are those in effect on June 30, 2016.

  (d)  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 June 30, 2016.

  (e)  Rate shown is the yield to maturity at June 30, 2016.

  (f)  All or a portion of the security was pledged to cover margin requirements for futures contracts and swap agreements.

  (g)  Securities are available for collateral in connection with purchase of open foreign currency forward exchange contracts, futures contracts and swap agreements.

  (h)  At June 30, 2016, the aggregate cost for Federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $6,728,026 and the aggregate gross unrealized depreciation is $1,116,444 resulting in net unrealized appreciation of $5,611,582.

FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS OPEN AT JUNE 30, 2016:

COUNTERPARTY

   CONTRACTS
TO DELIVER		   IN EXCHANGE
FOR		   DELIVERY
DATE		   UNREALIZED
APPRECIATION
(DEPRECIATION)		  

HSBC Bank PLC

  

HKD

2,082,500

    

$

268,278

    

07/08/16

  

$

(160

)

  

UBS AG

  

EUR

114,252

    

$

127,421

    

07/08/16

    

617

    

UBS AG

  

$

273,653

    

HKD

2,123,000

    

07/08/16

    

6

    

Net Unrealized Appreciation

  

$

463

    

See Notes to Financial Statements
30


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2016 (unaudited) continued

FUTURES CONTRACTS OPEN AT JUNE 30, 2016:

NUMBER OF
CONTRACTS		  

LONG/SHORT

   DESCRIPTION, DELIVERY
MONTH AND YEAR		   UNDERLYING FACE
AMOUNT AT VALUE		   UNREALIZED
APPRECIATION
(DEPRECIATION)		  
 

56

    

Long

   U.S. Treasury 2 yr. Note,
Sep-16		  

$

12,282,375

    

$

84,894

    
 

41

    

Long

   U.S. Treasury 5 yr. Note,
Sep-16		    

5,008,726

      

41,797

    
 

1

    

Long

   U.S. Treasury Long Bond,
Sep-16		    

172,344

      

5,843

    
 

6

    

Short

   U.S. Treasury Ultra Bond,
Sep-16		    

(1,118,250

)

    

(55,000

)

  
 

60

    

Short

   U.S. Treasury 10 yr. Note,
Sep-16		    

(7,979,062

)

    

(211,547

)

  
 

57

    

Short

   U.S. Treasury Ultra Long Bond,
Sep-16		    

(8,303,297

)

    

(297,484

)

  

Net Unrealized Depreciation

  

$

(431,497

)

  

CREDIT DEFAULT SWAP AGREEMENTS OPEN AT JUNE 30, 2016:

SWAP
COUNTERPARTY &
REFERENCE
OBLIGATION		   BUY/SELL
PROTECTION		   NOTIONAL
AMOUNT
(000)		   INTEREST
RATE		   TERMINATION
DATE		   UNREALIZED
APPRECIATION
(DEPRECIATION)		   UPFRONT
PAYMENTS
PAID
(RECEIVED)		  

VALUE

   CREDIT
RATING OF
REFERENCE
OBLIGATION†		  
Barclays Bank PLC
Quest Diagnostics, Inc.		  

Buy

  

$

845

      

1.00

%

  

3/20/19

  

$

(33,192

)

  

$

16,218

    

$

(16,974

)

  

BBB+

  
Morgan Stanley &
Co., LLC* 
CDX.NA.HY.24		  

Buy

    

3,234

      

5.00

    

6/20/20

    

52,084

      

(250,540

)

    

(198,456

)

  

NR

  
Morgan Stanley &
Co., LLC* 
CDX.NA.IG.26		  

Buy

    

5,500

      

1.00

    

6/20/21

    

(7,151

)

    

(52,486

)

    

(59,637

)

  

NR

  
Total Credit Default
Swaps		      

$

9,579

            

$

11,741

    

$

(286,808

)

  

$

(275,067

)

      

  NR  Not rated.

  †  Credit rating as issued by Standard & Poor's.

  *  Cleared swap agreement, the broker is Morgan Stanley & Co., LLC.

See Notes to Financial Statements
31


Morgan Stanley Variable Investment Series - Income Plus

Portfolio of Investments n June 30, 2016 (unaudited) continued

Currency Abbreviations:

EUR  Euro.

HKD  Hong Kong Dollar.

LONG TERM CREDIT ANALYSIS+

AAA

    

3.0

%

  

AA

    

4.6

    

A

    

39.1

    

BBB

    

44.7

    

BB

    

4.2

    

B or Below

    

2.3

    

Not Rated

    

2.1

    
     

100.0

%++

  

+  The ratings shown are based on the Portfolio's security ratings as determined by Standard & Poor's, Moody's or Fitch, each a Nationally Recognized Statistical Ratings Organization ("NRSRO").

++  Does not include open long/short futures contracts with an underlying face amount of $34,864,054 with net unrealized depreciation of $431,497. Does not include open foreign currency forward exchange contracts with net unrealized appreciation of $463. Also does not include open swap agreements with net unrealized appreciation of $11,741.

See Notes to Financial Statements
32



Morgan Stanley Variable Investment Series - European Equity

Portfolio of Investments n June 30, 2016 (unaudited)

NUMBER OF
SHARES		  

 

VALUE

  
    Common Stocks (98.1%)
Denmark (3.2%)		  
   

Pharmaceuticals

  
 

18,844

     Novo Nordisk A/S,
Series B		  

$

1,013,375

    
   

France (15.4%)

  
   

Aerospace & Defense

  
 

12,516

    

Airbus Group SE

    

726,784

    
   

Banks

  
 

14,096

    

BNP Paribas SA

    

633,728

    
   

Electrical Equipment

  
 

13,336

    

Schneider Electric SE

    

789,240

    
   

Hotels, Restaurants & Leisure

  
 

18,055

    

Accor SA

    

699,979

    
   

Insurance

  
 

36,926

    

AXA SA

    

741,829

    
   

Media

  
 

9,856

    

Publicis Groupe SA

    

667,725

    
   

Multi-Utilities

  
 

37,973

    

Suez

    

598,077

    
       

Total France

    

4,857,362

    
   

Germany (9.7%)

  
   

Automobiles

  
 

9,503

    

Daimler AG (Registered)

    

566,718

    
    Health Care Providers &
Services		  
 

11,234

    

Fresenius SE & Co., KGaA

    

827,781

    
   

Industrial Conglomerates

  
 

8,493

    

Siemens AG (Registered)

    

870,006

    
   

Software

  
 

10,754

    

SAP SE

    

803,836

    
       

Total Germany

    

3,068,341

    
   

Ireland (2.5%)

  
   

Construction Materials

  
 

26,989

    

CRH PLC

    

778,275

    
   

Italy (1.0%)

  
   

Capital Markets

  
 

19,497

    

Azimut Holding SpA

    

317,738

    
NUMBER OF
SHARES		  

 

VALUE

  
   

Netherlands (12.1%)

  
   

Banks

  
 

54,451

    

ING Groep N.V. CVA

  

$

565,954

    
    Diversified Telecommunication
Services		  
 

208,861

    

Koninklijke KPN N.V. (a)

    

757,569

    
   

Media

  
 

51,286

    

RELX N.V.

    

895,016

    
   

Personal Products

  
 

18,218

    

Unilever N.V. CVA

    

849,306

    
    Semiconductors &
Semiconductor Equipment		  
 

7,541

    

ASML Holding N.V.

    

747,487

    
       

Total Netherlands

    

3,815,332

    
   

Spain (4.3%)

  
   

Banks

  
 

85,183

     Banco Bilbao Vizcaya
Argentaria SA		    

488,149

    
    Information Technology
Services		  
 

19,444

     Amadeus IT Holding SA,
Class A		    

851,812

    
       

Total Spain

    

1,339,961

    
   

Sweden (1.4%)

  
   

Machinery

  
 

43,299

    

Volvo AB, Class B

    

427,583

    
   

Switzerland (18.3%)

  
   

Chemicals

  
 

843

    

Syngenta AG (Registered)

    

324,029

    
   

Food Products

  
 

22,314

    

Nestle SA (Registered)

    

1,721,206

    
   

Insurance

  
 

2,984

    

Zurich Insurance Group AG (b)

    

738,305

    
   

Pharmaceuticals

  
 

15,893

    

Novartis AG (Registered)

    

1,307,418

    
 

5,192

     Roche Holding AG
(Genusschein)		    

1,370,847

    
     

2,678,265

    

See Notes to Financial Statements
33


Morgan Stanley Variable Investment Series - European Equity

Portfolio of Investments n June 30, 2016 (unaudited) continued

NUMBER OF
SHARES		  

 

VALUE

  
    Textiles, Apparel & Luxury
Goods		  
 

1,118

    

Swatch Group AG (The) (a)

  

$

325,004

    
       

Total Switzerland

    

5,786,809

    
   

United Kingdom (30.2%)

  
   

Banks

  
 

230,962

    

Barclays PLC

    

439,710

    
 

808,495

    

Lloyds Banking Group PLC

    

594,511

    
     

1,034,221

    
   

Household Products

  
 

11,073

    

Reckitt Benckiser Group PLC

    

1,114,006

    
   

Insurance

  
 

52,233

    

Prudential PLC

    

889,831

    
   

Oil, Gas & Consumable Fuels

  
 

198,094

     BP PLC    

1,156,737

    
 

41,330

     Royal Dutch Shell PLC,
Class A		    

1,128,449

    
     

2,285,186

    
   

Pharmaceuticals

  
 

38,900

    

GlaxoSmithKline PLC

    

836,283

    
   

Tobacco

  
 

21,087

    

British American Tobacco PLC

    

1,372,141

    
 

18,055

    

Imperial Brands PLC

    

980,112

    
     

2,352,253

    
    Wireless Telecommunication
Services		  
 

337,693

    

Vodafone Group PLC

    

1,028,002

    
       

Total United Kingdom

    

9,539,782

    
        Total Common Stocks
(Cost $25,150,616)		    

30,944,558

    
NUMBER OF
SHARES (000)		  

 

VALUE

  
    Short-Term Investments (4.4%)
Securities held as Collateral
on Loaned Securities (3.4%)		  
   

Investment Company (2.8%)

  
 

880

     Morgan Stanley Institutional
Liquidity Funds - Treasury
Securities Portfolio -
Institutional Class
(See Note 7)		  

$

879,852

    
PRINCIPAL
AMOUNT
(000)		  

 

 
   

Repurchase Agreements (0.6%)

  

$

203

     Barclays Capital, Inc.
(0.42%, dated 06/30/16, due
07/01/16; proceeds
$203,289; fully collateralized
by a U.S. Government
obligation; 2.00% due
08/15/25; valued at
$207,352)		    

203,286

    
 

8

     Merrill Lynch & Co., Inc.
(0.44%, dated 06/30/16,
due 07/01/16; proceeds
$8,298; fully collateralized by
a U.S. Government agency
security; 4.50% due 04/20/44;
valued at $8,463)		    

8,298

    
     

211,584

    
        Total Securities held as
Collateral on Loaned
Securities
(Cost $1,091,436)		    

1,091,436

    

See Notes to Financial Statements
34


Morgan Stanley Variable Investment Series - European Equity

Portfolio of Investments n June 30, 2016 (unaudited) continued

NUMBER OF
SHARES (000)		  

 

VALUE

  
   

Investment Company (1.0%)

      
 

306

     Morgan Stanley Institutional
Liquidity Funds - Treasury
Securities Portfolio -
Institutional Class
(See Note 7)
(Cost $305,832)		  

$

305,832

    
    Total Short-Term
Investments
(Cost $1,397,268)		    

1,397,268

    
Total Investments
(Cost $26,547,884) (c)(d)		    

102.5

%

    

32,341,826

    
Liabilities in Excess of
Other Assets		    

(2.5

)

    

(798,614

)

  

Net Assets

    

100.0

%

  

$

31,543,212

    

CVA  Certificaten Van Aandelen.

  (a)  All or a portion of this security was on loan at June 30, 2016.

  (b)  Non-income producing security.

  (c)  The fair value and percentage of net assets, $30,944,558 and 98.1%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note 1A within the Notes to the Financial Statements.

  (d)  At June 30, 2016, the aggregate cost for Federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $8,212,811 and the aggregate gross unrealized depreciation is $2,418,869 resulting in net unrealized appreciation of $5,793,942.

SUMMARY OF INVESTMENTS
INDUSTRY		  

VALUE

   PERCENT OF
TOTAL
INVESTMENTS		  

Pharmaceuticals

  

$

4,527,923

      

14.5

%

  

Banks

    

2,722,052

      

8.7

    

Insurance

    

2,369,965

      

7.6

    

Tobacco

    

2,352,253

      

7.5

    
Oil, Gas & Consumable
Fuels		    

2,285,186

      

7.3

    

Food Products

    

1,721,206

      

5.5

    

Media

    

1,562,741

      

5.0

    

Household Products

    

1,114,006

      

3.6

    
Wireless Telecommunication
Services		    

1,028,002

      

3.3

    

Industrial Conglomerates

    

870,006

      

2.8

    
Information Technology
Services		    

851,812

      

2.7

    

Personal Products

    

849,306

      

2.7

    
Health Care Providers &
Services		    

827,781

      

2.7

    

Software

    

803,836

      

2.6

    

Electrical Equipment

    

789,240

      

2.5

    

Construction Materials

    

778,275

      

2.5

    
Diversified
Telecommunication
Services		    

757,569

      

2.4

    
Semiconductors &
Semiconductor
Equipment		    

747,487

      

2.4

    

Aerospace & Defense

    

726,784

      

2.3

    
Hotels, Restaurants &
Leisure		    

699,979

      

2.2

    

Multi-Utilities

    

598,077

      

1.9

    

Automobiles

    

566,718

      

1.8

    

Machinery

    

427,583

      

1.4

    
Textiles, Apparel & Luxury
Goods		    

325,004

      

1.1

    

Chemicals

    

324,029

      

1.0

    

Capital Markets

    

317,738

      

1.0

    

Investment Company

    

305,832

      

1.0

    
   

$

31,250,390

+

    

100.0

%

  

+  Does not reflect the value of securities held as collateral on loaned securities.

See Notes to Financial Statements
35


Morgan Stanley Variable Investment Series - Multi Cap Growth

Portfolio of Investments n June 30, 2016 (unaudited)

NUMBER OF
SHARES		  

 

VALUE

  
   

Common Stocks (93.0%)

  
   

Automobiles (4.4%)

  
 

44,466

    

Tesla Motors, Inc. (a)(b)

  

$

9,439,242

    
   

Biotechnology (0.8%)

  
 

10,991

     Alnylam Pharmaceuticals,
Inc. (b)		    

609,891

    
 

26,466

    

Intrexon Corp. (a)(b)

    

651,328

    
 

12,645

    

Juno Therapeutics, Inc. (b)

    

486,074

    
     

1,747,293

    
    Diversified Financial
Services (5.0%)		  
 

99,744

    

S&P Global, Inc.

    

10,698,541

    
   

Food Products (3.5%)

  
 

82,237

    

Mead Johnson Nutrition Co.

    

7,463,008

    
    Health Care Equipment &
Supplies (5.2%)		  
 

16,950

    

Intuitive Surgical, Inc. (b)

    

11,210,900

    
   

Health Care Technology (5.3%)

  
 

81,985

    

athenahealth, Inc. (b)

    

11,314,750

    
    Information Technology
Services (6.9%)		  
 

99,376

    

Mastercard, Inc., Class A

    

8,751,050

    
 

82,781

    

Visa, Inc., Class A

    

6,139,867

    
     

14,890,917

    
    Internet & Catalog
Retail (14.8%)		  
 

28,766

    

Amazon.com, Inc. (b)

    

20,585,525

    
 

84,833

    

JD.com, Inc. ADR (China) (b)

    

1,801,004

    
 

50,444

    

Netflix, Inc. (b)

    

4,614,617

    
 

3,775

     Priceline Group, Inc.
(The) (Netherlands) (b)		    

4,712,748

    
     

31,713,894

    
    Internet Software &
Services (20.0%)		  
 

15,316

    

Alphabet, Inc., Class C (b)

    

10,600,204

    
 

168,118

    

Facebook, Inc., Class A (b)

    

19,212,525

    
 

33,233

    

LinkedIn Corp., Class A (b)

    

6,289,345

    
NUMBER OF
SHARES		  

 

VALUE

  
 

104,200

     Tencent Holdings Ltd.
(China) (c)		  

$

2,373,854

    
 

256,485

    

Twitter, Inc. (b)

    

4,337,161

    
     

42,813,089

    
    Life Sciences Tools &
Services (5.0%)		  
 

77,068

    

Illumina, Inc. (b)

    

10,818,806

    
   

Pharmaceuticals (3.2%)

  
 

144,768

    

Zoetis, Inc.

    

6,870,689

    
    Semiconductors &
Semiconductor
Equipment (0.6%)		  
 

28,880

    

NVIDIA Corp.

    

1,357,649

    
   

Software (12.0%)

  
 

26,710

    

Mobileye N.V. (a)(b)

    

1,232,400

    
 

140,534

    

Salesforce.com, Inc. (b)

    

11,159,805

    
 

107,533

    

Splunk, Inc. (b)

    

5,826,138

    
 

100,408

    

Workday, Inc., Class A (b)

    

7,497,465

    
     

25,715,808

    
    Tech Hardware, Storage &
Peripherals (6.3%)		  
 

141,081

    

Apple, Inc.

    

13,487,344

    
        Total Common Stocks
(Cost $124,935,005)		    

199,541,930

    
   

Preferred Stocks (5.8%)

  
    Electronic Equipment,
Instruments &
Components (0.2%)		  
 

18,954

     Magic Leap, Series C (b)(d)(e)(f)
(acquisition cost - $436,567;
acquired 12/22/15)		    

439,922

    
    Hotels, Restaurants &
Leisure (0.9%)		  
 

114,561

     Blue Bottle Coffee, Inc.,
Series B (b)(d)(e)(f)
(acquisition cost - $1,657,606;
acquired 01/24/14)		    

2,033,458

    

See Notes to Financial Statements
36


Morgan Stanley Variable Investment Series - Multi Cap Growth

Portfolio of Investments n June 30, 2016 (unaudited) continued

NUMBER OF
SHARES		  

 

VALUE

  
   

Internet & Catalog Retail (3.0%)

  
 

42,717

     Airbnb, Inc., Series D (b)(d)(e)(f)
(acquisition cost - $1,739,139;
acquired 04/16/14)		  

$

3,867,597

    
 

50,711

     Uber Technologies,
Series G (b)(d)(e)(f)
(acquisition cost - $2,473,289;
acquired 12/03/15)		    

2,473,288

    
     

6,340,885

    
    Life Sciences Tools &
Services (1.4%)		  
 

627,809

     10X Genomics, Inc.,
Series B (b)(d)(e)(f)
(acquisition cost - $2,052,935;
acquired 12/19/14)		    

2,906,756

    
   

Software (0.3%)

  
 

141,612

     Lookout, Inc.,
Series F (b)(d)(e)(f)
(acquisition cost - $1,617,648;
acquired 06/17/14)		    

681,154

    
        Total Preferred Stocks
(Cost $9,977,184)		    

12,402,175

    
NOTIONAL
AMOUNT
(000)		  

 

 
   

Call Option Purchased (0.0%)

  
   

Foreign Currency Option

  
 

24,487

     USD/CNY December 2016
@ CNY 7.60, Royal Bank of
Scotland
(Cost $113,188)		    

42,999

    
NUMBER OF
SHARES (000)		  

 

VALUE

  
    Short-Term Investments (5.0%)
Securities held as Collateral
on Loaned Securities (3.7%)		  
   

Investment Company (3.0%)

  
 

6,484

     Morgan Stanley Institutional
Liquidity Funds - Treasury
Securities Portfolio -
Institutional Class
(See Note 7)		  

$

6,483,996

    
PRINCIPAL
AMOUNT
(000)		  

 

 
   

Repurchase Agreements (0.7%)

  

$

1,498

     Barclays Capital, Inc.
(0.42%, dated 06/30/16,
due 07/01/16; proceeds
$1,498,117; fully collateralized
by a U.S. Government
obligation; 2.00% due
08/15/25; valued at
$1,528,062)		    

1,498,100

    
 

61

     Merrill Lynch & Co., Inc.
(0.44%, dated 06/30/16,
due 07/01/16; proceeds
$61,148; fully collateralized
by a U.S. Government agency
security; 4.50% due 04/20/44;
valued at $62,370)		    

61,147

    
     

1,559,247

    
        Total Securities held as
Collateral on Loaned
Securities
(Cost $8,043,243)		    

8,043,243

    

See Notes to Financial Statements
37


Morgan Stanley Variable Investment Series - Multi Cap Growth

Portfolio of Investments n June 30, 2016 (unaudited) continued

NUMBER OF
SHARES (000)		  

 

VALUE

  
   

Investment Company (1.3%)

      
 

2,727

     Morgan Stanley Institutional
Liquidity Funds - Treasury
Securities Portfolio -
Institutional Class
(See Note 7)
(Cost $2,727,251)		  

$

2,727,251

    
    Total Short-Term
Investments
(Cost $10,770,494)		    

10,770,494

    
Total Investments
(Cost $145,795,871) (g)(h)		    

103.8

%

    

222,757,598

    
Liabilities in Excess of
Other Assets		    

(3.8

)

    

(8,178,485

)

  

Net Assets

    

100.0

%

  

$

214,579,113

    

ADR  American Depositary Receipt.

  (a)  All or a portion of this security was on loan at June 30, 2016.

  (b)  Non-income producing security.

  (c)  Security trades on the Hong Kong exchange.

  (d)  Illiquid security.

  (e)  At June 30, 2016, the Portfolio held fair valued securities valued at $12,402,175, representing 5.8% of net assets. These securities have been fair valued as determined in good faith under procedures established by and under the general supervision of the Fund's Trustees.

  (f)  Security cannot be offered for public resale without first being registered under the Securities Act of 1933 and related rules ("restricted security"). Acquisition date represents the day on which an enforceable right to acquire such security is obtained and is presented along with related cost in the security description. The Portfolio has registration rights for certain restricted securities. Any costs related to such registration are borne by the issuer. The aggregate value of restricted securities (excluding 144A holdings) at June 30, 2016 amounts to $12,402,175 and represents 5.8% of net assets.

  (g)  The fair value and percentage of net assets, $2,373,854 and 1.1%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note 1A within the Notes to the Financial Statements.

  (h)  At June 30, 2016, the aggregate cost for Federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $84,952,918 and the aggregate gross unrealized depreciation is $7,991,191 resulting in net unrealized appreciation of $76,961,727.

Currency Abbreviations:

CNY  Chinese Yuan Renminbi.

USD  United States Dollar.

See Notes to Financial Statements
38


Morgan Stanley Variable Investment Series - Multi Cap Growth

Summary of Investments n June 30, 2016 (unaudited)

INDUSTRY

  

VALUE

   PERCENT OF
TOTAL
INVESTMENTS		  
Internet Software &
Services		  

$

42,813,089

      

19.9

%

  

Internet & Catalog Retail

    

38,054,779

      

17.7

    

Software

    

26,396,962

      

12.3

    
Information Technology
Services		    

14,890,917

      

6.9

    
Life Sciences Tools &
Services		    

13,725,562

      

6.4

    
Tech Hardware, Storage &
Peripherals		    

13,487,344

      

6.3

    

Health Care Technology

    

11,314,750

      

5.3

    
Health Care Equipment &
Supplies		    

11,210,900

      

5.2

    
Diversified Financial
Services		    

10,698,541

      

5.0

    

Automobiles

    

9,439,242

      

4.4

    

INDUSTRY

  

VALUE

   PERCENT OF
TOTAL
INVESTMENTS		  

Food Products

  

$

7,463,008

      

3.5

%

  

Pharmaceuticals

    

6,870,689

      

3.2

    

Investment Company

    

2,727,251

      

1.3

    
Hotels, Restaurants &
Leisure		    

2,033,458

      

1.0

    

Biotechnology

    

1,747,293

      

0.8

    
Semiconductors &
Semiconductor
Equipment		    

1,357,649

      

0.6

    
Electronic Equipment,
Instruments &
Components		    

439,922

      

0.2

    

Other

    

42,999

      

0.0

    
   

$

214,714,355

+

    

100.0

%

  

+  Does not reflect the value of securities held as collateral on loaned securities.

See Notes to Financial Statements
39



Morgan Stanley Variable Investment Series

Financial Statements

Statements of Assets and Liabilities
June 30, 2016 (unaudited)

    Limited
Duration		   Income
Plus		   European
Equity		   Multi Cap
Growth		  

Assets:

  

Investments in securities, at value*

  

$

29,734,314

    

$

110,364,244

    

$

31,156,142

(1)

  

$

213,546,351

(2)

  

Investment in affiliate, at value**

    

445,661

      

1,956,326

      

1,185,684

      

9,211,247

    

Total investments in securities, at value

    

30,179,975

      

112,320,570

      

32,341,826

      

222,757,598

    

Unrealized appreciation on open foreign currency forward exchange contracts

    

—

      

623

      

—

      

—

    

Cash

    

—

      

—

      

85,562

(3)

    

—

    

Receivable for:

  

Interest

    

148,087

      

1,186,615

      

—

      

—

    

Foreign withholding taxes reclaimed

    

—

      

—

      

166,225

      

—

    

Dividends

    

—

      

—

      

59,997

      

47,676

    

Premium paid on open swap agreements

    

—

      

16,218

      

—

      

—

    

Interest and dividends from affiliate

    

834

      

10,177

      

38

      

219

    

Shares of beneficial interest sold

    

—

      

—

      

3,141

      

3,583

    

Investments sold

    

365,427

      

421,449

      

135,429

      

—

    

Variation margin on open futures contracts

    

1,712

      

34,620

      

—

      

—

    

Prepaid expenses and other assets

    

7,072

      

14,318

      

11,628

      

20,871

    

Total Assets

    

30,703,107

      

114,004,590

      

32,803,846

      

222,829,947

    

Liabilities:

  

Collateral on securities loaned, at value

    

—

      

—

      

1,091,436

      

8,043,243

    

Unrealized depreciation on open swap agreements

    

—

      

33,192

      

—

      

—

    

Unrealized depreciation on open foreign currency forward exchange contracts

    

—

      

160

      

—

      

—

    

Payable for:

  

Investments purchased

    

349,777

      

802,211

      

104,981

      

—

    

Shares of beneficial interest redeemed

    

16,571

      

286,313

      

7

      

34,840

    

Advisory fee

    

7,421

      

38,586

      

12,990

      

80,427

    

Variation margin on open swap agreements

    

—

      

20,264

      

—

      

—

    

Distribution fee (Class Y Shares)

    

4,869

      

11,325

      

1,255

      

9,467

    

Administration fee

    

1,994

      

7,370

      

2,101

      

14,140

    

Transfer agent fees

    

260

      

317

      

313

      

321

    

Accrued expenses and other payables

    

50,257

      

67,189

      

47,551

      

68,396

    

Total Liabilities

    

431,149

      

1,266,927

      

1,260,634

      

8,250,834

    

Net Assets

  

$

30,271,958

    

$

112,737,663

    

$

31,543,212

    

$

214,579,113

    

Composition of Net Assets:

  

Paid-in-capital

  

$

55,764,698

    

$

107,599,605

    

$

33,832,489

    

$

132,251,133

    

Net unrealized appreciation (depreciation)

    

542,475

      

5,192,289

      

5,782,520

      

76,961,727

    

Accumulated undistributed net investment income (net investment loss)

    

219,809

      

1,899,346

      

789,592

      

(62,054

)

  

Accumulated net realized gain (loss)

    

(26,255,024

)

    

(1,953,577

)

    

(8,861,389

)

    

5,428,307

    

Net Assets

  

$

30,271,958

    

$

112,737,663

    

$

31,543,212

    

$

214,579,113

    
* Cost  

$

29,248,531

    

$

104,779,032

    

$

25,362,200

    

$

136,584,624

    
** Affiliated Cost  

$

442,907

    

$

1,929,956

    

$

1,185,684

    

$

9,211,247

    

Class X Shares:

  

Net Assets

  

$

6,639,712

    

$

57,445,326

    

$

25,512,082

    

$

168,735,413

    
Shares Outstanding (unlimited shares authorized, $0.01 par value)    

875,435

      

5,115,571

      

1,694,073

      

4,222,243

    

Net Asset Value Per Share

  

$

7.58

    

$

11.23

    

$

15.06

    

$

39.96

    

Class Y Shares:

  

Net Assets

  

$

23,632,246

    

$

55,292,337

    

$

6,031,130

    

$

45,843,700

    
Shares Outstanding (unlimited shares authorized, $0.01 par value)    

3,116,202

      

4,928,992

      

400,682

      

1,180,039

    

Net Asset Value Per Share

  

$

7.58

    

$

11.22

    

$

15.05

    

$

38.85

    

(1)  Including securities loaned at value of $1,050,081.

(2)  Including securities loaned at value of $11,217,024.

(3)  Including foreign currency valued at $85,562 with a cost of $86,007.

See Notes to Financial Statements
40


Morgan Stanley Variable Investment Series

Financial Statements continued

Statements of Operations
For the six months ended June 30, 2016 (unaudited)

    Limited
Duration		   Income
Plus		   European
Equity		   Multi Cap
Growth		  

Net Investment Income:

  

Income

  

Interest

  

$

383,459

    

$

2,534,360

    

$

—

    

$

—

    

Dividends†

    

—

      

—

      

956,529

      

389,530

    

Income from securities loaned - net

    

—

      

—

      

7,450

      

220,522

    

Interest and dividends from affiliates (Note 7)

    

2,460

      

16,238

      

572

      

10,688

    

Total Income

    

385,919

      

2,550,598

      

964,551

      

620,740

    

†Net of foreign withholding taxes

    

—

      

—

      

94,833

      

—

    

Expenses

  

Advisory fee (Note 4)

    

45,640

      

233,832

      

141,541

      

445,306

    

Professional fees

    

50,873

      

53,001

      

43,191

      

48,828

    

Distribution fee (Class Y shares) (Note 5)

    

29,794

      

68,556

      

7,848

      

57,021

    

Administration fee (Note 4)

    

12,171

      

44,539

      

13,015

      

84,820

    

Custodian fees

    

8,115

      

8,085

      

8,121

      

14,780

    

Shareholder reports and notices

    

4,612

      

9,114

      

1,637

      

1,639

    

Transfer agent fees and expenses (Note 6)

    

1,562

      

1,636

      

11,579

      

7,494

    

Trustees' fees and expenses

    

900

      

832

      

507

      

273

    

Other

    

18,315

      

26,358

      

8,553

      

13,118

    

Total Expenses

    

171,982

      

445,953

      

235,992

      

673,279

    

Less: amounts waived

    

—

      

—

      

(65,451

)(4)

    

(11,914

)(4)

  

Less: rebate from Morgan Stanley affiliated cash sweep (Note 7)

    

(240

)

    

(425

)

    

(198

)

    

(3,160

)

  

Net Expenses

    

171,742

      

445,528

      

170,343

      

658,205

    

Net Investment Income (Loss)

    

214,177

      

2,105,070

      

794,208

      

(37,465

)

  

Realized and Unrealized Gain (Loss):

  

Realized Gain (Loss) on:

  

Investments

    

427,827

      

(952,662

)

    

(213,160

)

    

5,915,971

    

Futures contracts

    

(36,145

)

    

(746,756

)

    

—

      

—

    

Swap agreements

    

(10,512

)

    

16,024

      

—

      

—

    

Foreign currency forward exchange contracts

    

—

      

(749

)

    

—

      

—

    

Foreign currency translation

    

—

      

(1,486

)

    

(11,990

)

    

5,057

    

Net Realized Gain (Loss)

    

381,170

      

(1,685,629

)

    

(225,150

)

    

5,921,028

    

Change in Unrealized Appreciation (Depreciation) on:

  

Investments

    

610,290

      

8,045,795

      

(1,899,474

)

    

(18,384,717

)

  

Investments in affiliates (Note 7)

    

5,458

      

51,615

      

—

      

—

    

Futures contracts

    

50,569

      

(417,130

)

    

—

      

—

    

Swap agreements

    

9,739

      

(170,872

)

    

—

      

—

    

Foreign currency forward exchange contracts

    

—

      

(581

)

    

—

      

—

    

Foreign currency translation

    

—

      

—

      

(345

)

    

—

    

Net Change in Unrealized Appreciation (Depreciation)

    

676,056

      

7,508,827

      

(1,899,819

)

    

(18,384,717

)

  

Net Gain (Loss)

    

1,057,226

      

5,823,198

      

(2,124,969

)

    

(12,463,689

)

  

Net Increase (Decrease)

  

$

1,271,403

    

$

7,928,268

    

$

(1,330,761

)

  

$

(12,501,154

)

  

(4)  See Note 4.

See Notes to Financial Statements
41


Morgan Stanley Variable Investment Series

Financial Statements continued

Statements of Changes in Net Assets

   

Limited Duration

  

Income Plus

  
    For The Six
Months Ended
June 30, 2016		   For The Year
Ended
December 31, 2015		   For The Six
Months Ended
June 30, 2016		   For The Year
Ended
December 31, 2015		  
   

(unaudited)

      

(unaudited)

      

Increase (Decrease) in Net Assets:

  

Operations:

  

Net investment income (loss)

  

$

214,177

    

$

403,548

    

$

2,105,070

    

$

4,386,617

    

Net realized gain (loss)

    

381,170

      

(267,113

)

    

(1,685,629

)

    

2,251,772

    

Net change in unrealized appreciation (depreciation)

    

676,056

      

(221,323

)

    

7,508,827

      

(9,093,907

)

  

Net Increase (Decrease)

    

1,271,403

      

(84,888

)

    

7,928,268

      

(2,455,518

)

  

Dividends and Distributions to Shareholders from:

  

Net investment income

  

Class X shares

    

(98,769

)

    

(98,343

)

    

(2,195,894

)

    

(2,505,911

)

  

Class Y shares

    

(286,780

)

    

(270,785

)

    

(1,968,336

)

    

(2,354,828

)

  

Net realized gain

  

Class X shares

    

—

      

—

      

(1,365,988

)

    

(39,367

)

  

Class Y shares

    

—

      

—

      

(1,324,001

)

    

(39,986

)

  

Total Dividends and Distributions

    

(385,549

)

    

(369,128

)

    

(6,854,219

)

    

(4,940,092

)

  

Net Increase (decrease) from transactions in shares of beneficial interest

    

(1,832,031

)

    

(4,557,775

)

    

(2,884,191

)

    

(15,676,984

)

  

Net Decrease

    

(946,177

)

    

(5,011,791

)

    

(1,810,142

)

    

(23,072,594

)

  

Net Assets:

  

Beginning of period

    

31,218,135

      

36,229,926

      

114,547,805

      

137,620,399

    

End of Period

  

$

30,271,958

    

$

31,218,135

    

$

112,737,663

    

$

114,547,805

    

Accumulated Undistributed Net Investment Income (Loss)

  

$

219,809

    

$

391,181

    

$

1,899,346

    

$

3,958,506

    

See Notes to Financial Statements
42


   

European Equity

  

Multi Cap Growth

  
    For The Six
Months Ended
June 30, 2016		   For The Year
Ended
December 31, 2015		   For The Six
Months Ended
June 30, 2016		   For The Year
Ended
December 31, 2015		  
   

(unaudited)

      

(unaudited)

      

Increase (Decrease) in Net Assets:

  

Operations:

  

Net investment income (loss)

  

$

794,208

    

$

918,033

    

$

(37,465

)

  

$

(826,388

)

  

Net realized gain (loss)

    

(225,150

)

    

(640,093

)

    

5,921,028

      

34,995,492

    

Net change in unrealized appreciation (depreciation)

    

(1,899,819

)

    

(2,009,607

)

    

(18,384,717

)

    

(12,980,644

)

  

Net Increase (Decrease)

    

(1,330,761

)

    

(1,731,667

)

    

(12,501,154

)

    

21,188,460

    

Dividends and Distributions to Shareholders from:

  

Net investment income

  

Class X shares

    

(747,146

)

    

(1,678,581

)

    

—

      

—

    

Class Y shares

    

(157,314

)

    

(371,093

)

    

—

      

—

    

Net realized gain

  

Class X shares

    

—

      

—

      

(27,887,923

)

    

(34,189,702

)

  

Class Y shares

    

—

      

—

      

(7,755,377

)

    

(9,724,711

)

  

Total Dividends and Distributions

    

(904,460

)

    

(2,049,674

)

    

(35,643,300

)

    

(43,914,413

)

  

Net Increase (decrease) from transactions in shares of beneficial interest

    

(1,345,549

)

    

(3,495,957

)

    

22,524,595

      

5,987,420

    

Net Decrease

    

(3,580,770

)

    

(7,277,298

)

    

(25,619,859

)

    

(16,738,533

)

  

Net Assets:

  

Beginning of period

    

35,123,982

      

42,401,280

      

240,198,972

      

256,937,505

    

End of Period

  

$

31,543,212

    

$

35,123,982

    

$

214,579,113

    

$

240,198,972

    

Accumulated Undistributed Net Investment Income (Loss)

  

$

789,592

    

$

899,844

    

$

(62,054

)

  

$

(24,589

)

  


43


Morgan Stanley Variable Investment Series

Financial Statements continued

Statements of Changes in Net Assets continued
Summary of Transactions in Shares of Beneficial Interest

   

Limited Duration

  

Income Plus

  
    For The Six
Months Ended
June 30, 2016		   For The Year
Ended
December 31, 2015		   For The Six
Months Ended
June 30, 2016		   For The Year
Ended
December 31, 2015		  
   

(unaudited)

      

(unaudited)

      

Class X Shares

  

Shares

  

Sold

    

15,823

      

17,458

      

42,415

      

63,543

    

Reinvestment of dividends and distributions

    

13,030

      

13,254

      

317,176

      

225,047

    

Redeemed

    

(71,457

)

    

(179,494

)

    

(410,979

)

    

(868,465

)

  

Net Increase (Decrease) - Class X

    

(42,604

)

    

(148,782

)

    

(51,388

)

    

(579,875

)

  

Amount

  

Sold

  

$

119,624

    

$

129,998

    

$

489,867

    

$

726,943

    

Reinvestment of dividends and distributions

    

98,769

      

98,343

      

3,561,882

      

2,545,278

    

Redeemed

    

(534,829

)

    

(1,339,402

)

    

(4,696,514

)

    

(10,134,151

)

  

Net Increase (Decrease) - Class X

  

$

(316,436

)

  

$

(1,111,061

)

  

$

(644,765

)

  

$

(6,861,930

)

  

Class Y Shares

  

Shares

  

Sold

    

31,683

      

67,574

      

46,862

      

110,252

    

Reinvestment of dividends and distributions

    

37,834

      

36,494

      

293,435

      

212,118

    

Redeemed

    

(272,299

)

    

(565,994

)

    

(536,272

)

    

(1,076,090

)

  

Net Increase (Decrease) - Class Y

    

(202,782

)

    

(461,926

)

    

(195,975

)

    

(753,720

)

  

Amount

  

Sold

  

$

237,696

    

$

500,857

    

$

540,196

    

$

1,244,640

    

Reinvestment of dividends and distributions

    

286,780

      

270,785

      

3,292,337

      

2,394,814

    

Redeemed

    

(2,040,071

)

    

(4,218,356

)

    

(6,071,959

)

    

(12,454,508

)

  

Net Increase (Decrease) - Class Y

  

$

(1,515,595

)

  

$

(3,446,714

)

  

$

(2,239,426

)

  

$

(8,815,054

)

  

See Notes to Financial Statements
44


   

European Equity

  

Multi Cap Growth

  
    For The Six
Months Ended
June 30, 2016		   For The Year
Ended
December 31, 2015		   For The Six
Months Ended
June 30, 2016		   For The Year
Ended
December 31, 2015		  
   

(unaudited)

      

(unaudited)

      

Class X Shares

  

Shares

  

Sold

    

22,168

      

21,761

      

24,030

      

21,260

    

Reinvestment of dividends and distributions

    

49,611

      

93,775

      

697,896

      

685,439

    

Redeemed

    

(136,275

)

    

(251,158

)

    

(236,931

)

    

(554,126

)

  

Net Increase (Decrease) - Class X

    

(64,496

)

    

(135,622

)

    

484,995

      

152,573

    

Amount

  

Sold

  

$

348,005

    

$

406,956

    

$

1,146,230

    

$

1,162,087

    

Reinvestment of dividends and distributions

    

747,146

      

1,678,581

      

27,887,923

      

34,189,702

    

Redeemed

    

(2,112,908

)

    

(4,537,348

)

    

(10,980,559

)

    

(30,442,556

)

  

Net Increase (Decrease) - Class X

  

$

(1,017,757

)

  

$

(2,451,811

)

  

$

18,053,594

    

$

4,909,233

    

Class Y Shares

  

Shares

  

Sold

    

1,036

      

10,839

      

9,595

      

11,357

    

Reinvestment of dividends and distributions

    

10,453

      

20,755

      

199,624

      

199,114

    

Redeemed

    

(32,186

)

    

(87,907

)

    

(82,048

)

    

(173,537

)

  

Net Increase (Decrease) - Class Y

    

(20,697

)

    

(56,313

)

    

127,171

      

36,934

    

Amount

  

Sold

  

$

15,994

    

$

194,060

    

$

434,491

    

$

610,883

    

Reinvestment of dividends and distributions

    

157,314

      

371,093

      

7,755,377

      

9,724,711

    

Redeemed

    

(501,100

)

    

(1,609,299

)

    

(3,718,867

)

    

(9,257,407

)

  

Net Increase (Decrease) - Class Y

  

$

(327,792

)

  

$

(1,044,146

)

  

$

4,471,001

    

$

1,078,187

    


45



Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited)

1. Organization and Accounting Policies

Morgan Stanley Variable Investment Series (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as an open-end management investment company. The Fund is offered exclusively to life insurance companies in connection with particular life insurance and/or annuity contracts they offer. The Fund applies investment company accounting and reporting guidance.

The Fund, organized on February 25, 1983 as a Massachusetts business trust, consists of four portfolios ("Portfolios") which commenced operations as follows:

PORTFOLIO

   COMMENCEMENT OF
OPERATIONS		  

PORTFOLIO

   COMMENCEMENT OF
OPERATIONS		  

Limited Duration

  

May 4, 1999

  

European Equity

  

March 1, 1991

  

Income Plus

  

March 1, 1987

  

Multi Cap Growth

  

March 9, 1984

  

Each Portfolio is classified as diversified. On June 5, 2000, the Fund commenced offering one additional class of shares (Class Y shares). Each Portfolio currently offers two share classes — Class X shares and Class Y shares. The two classes are identical except that Class Y shares incur distribution expenses. Class X shares are generally available to holders of contracts offered before May 1, 2000. Class Y shares are available to holders of contracts offered on or after June 5, 2000.

The investment objectives of each Portfolio are as follows:

PORTFOLIO  

INVESTMENT OBJECTIVE

  
Limited Duration  

Seeks to provide a high level of current income, consistent with the preservation of capital.

  
Income Plus  

Seeks, as its primary objective, to provide a high level of current income by investing primarily in U.S. government securities and other fixed-income securities. As a secondary objective, the Portfolio seeks capital appreciation but only when consistent with its primary objective.

  
European Equity  

Seeks to maximize the capital appreciation of its investments.

  
Multi Cap Growth  

Seeks, as its primary objective, growth of capital through investments in common stocks of companies believed by the "Adviser" Morgan Stanley Investment Management Inc. to have potential for superior growth. As a secondary objective, the Portfolio seeks income but only when consistent with its primary objective.

  


46


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

The following is a summary of significant accounting policies:

A. Valuation of Investments — (1) An equity portfolio security listed or traded on an exchange is valued at its latest reported sales price (or at the exchange official closing price if such exchange reports an official closing price), and if there were no sales on a given day, and if there is no official exchange closing price for that day, the security is valued at the mean between the last reported bid and asked prices if such bid and asked prices are available on the relevant exchanges; (2) all other equity portfolio securities for which over-the-counter ("OTC") market quotations are readily available are valued at the latest reported sales price (or at the market official closing price if such market reports an official closing price), and if there was no trading in the security on a given day and if there is no official closing price from relevant markets for that day, the security is valued at the mean between the last reported bid and asked prices if such bid and asked prices are available on the relevant markets. Listed equity securities not traded on the valuation date with no reported bid and asked prices available on the exchange are valued at the mean between the current bid and asked prices obtained from one or more reputable brokers or dealers. An unlisted equity security that does not trade on the valuation date and for which bid and asked prices from the relevant markets are unavailable is valued at the mean between the current bid and asked prices obtained from one or more reputable brokers or dealers. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (3) quotations of foreign portfolio securities, other assets and liabilities and forward contracts stated in foreign currency are translated into U.S. dollar equivalents at the prevailing market rates prior to the close of the New York Stock Exchange ("NYSE"); (4) futures are valued at the latest price published by the commodities exchange on which they trade; (5) swaps are marked-to-market daily based upon quotations from market makers; (6) listed options are valued at the last reported sales price on the exchange on which they are listed (or at the exchange official closing price if such exchange reports an official closing price). If an official closing price or last reported sales price is unavailable, the listed option should be fair valued at the mean between their latest bid and asked price. Unlisted options and swaps are valued by an outside pricing service approved by the Fund's Board of Trustees (the "Trustees") or quotes from a broker or dealer; (7) certain senior collateralized loans ("Senior Loans") are valued based on quotations received from an independent pricing service; (8) when market quotations are not readily available, including circumstances under which the Adviser or Morgan Stanley Investment Management Limited (the "Sub-Adviser"), each a wholly owned subsidiary of Morgan Stanley, determines that the closing price, last sale price or the mean between the last reported bid and asked prices are not reflective of a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the 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


47


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

securities trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Trustees or by the Adviser using a pricing service and/or procedures approved by the Trustees; (9) certain portfolio securities may be valued by an outside pricing service approved by the Trustees. The pricing service may utilize a matrix system or other model incorporating attributes such as security quality, maturity and coupon as the evaluation model parameters, and/or research evaluations by its staff, including review of broker-dealer market price quotations in determining what it believes is the fair valuation of the portfolio securities valued by such pricing service; (10) investments in mutual funds, including the Morgan Stanley Institutional Liquidity Funds, are valued at the NAV as of the close of each business day; and (11) short-term taxable debt securities with remaining maturities of 60 days or less at the time of purchase may be valued at amortized cost, unless the Adviser determines such price does not reflect the securities' market value, in which case these securities will be valued at their fair market value determined by the Adviser. Other taxable short-term debt securities with maturities of more than 60 days will be valued on a mark-to-market basis until such time as they reach a maturity of 60 days, whereupon they will be valued at amortized cost using their value on the 61st day unless the Adviser determines such price does not reflect the securities' fair value, in which case these securities will be valued at their fair market value as determined by the Adviser.

The Trustees have responsibility for determining in good faith the fair value of the investments, and the Trustees may appoint others, such as the Fund's Adviser or a valuation committee, to assist the Trustees in determining fair value and to make the actual calculations pursuant to the fair valuation methodologies previously approved by the Trustees. Under procedures approved by the Trustees, the Fund's Adviser has formed a Valuation Committee whose members are approved by the Trustees. The Valuation Committee provides administration and oversight of the Fund's valuation policies and procedures, which are reviewed at least annually by the Trustees. These procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value.

The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available. Under these procedures, the Valuation Committee convenes on a regular and ad hoc basis to review such securities and considers a number of factors, including valuation methodologies and significant unobservable valuation inputs, when arriving at fair value. The Valuation Committee may employ a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An income-based valuation approach may also be used in which


48


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The Valuation Committee employs various methods for calibrating these valuation approaches including a regular review of valuation methodologies, key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity.

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, except for certain dividends on foreign securities which are recorded as soon as the Fund is informed after the ex-dividend date. Interest income is accrued daily as earned except where collection is not expected. Discounts are accreted and premiums are amortized over the life of the respective securities and are included in interest income.

C. Repurchase Agreements — Certain Portfolios may enter into repurchase agreements under which the Portfolio lends cash and takes possession of securities with an agreement that the counterparty will repurchase such securities. In connection with transactions in repurchase agreements, a bank as custodian for the Portfolio takes possession of the underlying securities which are held as collateral, with a market value at least equal to the amount of the repurchase transaction, including principal and accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market on a daily basis 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. In the event of default on the obligation to repurchase, the Portfolio 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 cost and delays. The Portfolio, along with other affiliated investment companies, may utilize a joint trading account for the purpose of entering into repurchase agreements.

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.


49


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

E. Foreign Currency Translation and Foreign Investments — The books and records of the Portfolios are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars as follows:

—  investments, other assets and liabilities at the prevailing rate of exchange on the valuation date;

—  investment transactions and investment income at the prevailing rates of exchange on the dates of  such transactions.

Although the net assets of the Portfolios are presented at the foreign exchange rates and market values at the close of the period, the Portfolios do not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from changes in the market prices of securities held at period end. Similarly, the Portfolios do not isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of securities sold during the period. Accordingly, realized and unrealized foreign currency gains (losses) on investments in securities are included in the reported net realized and unrealized gains (losses) on investment transactions and balances. However, pursuant to U.S. Federal income tax regulations, gains and losses from certain foreign currency transactions and the foreign currency portion of gains and losses realized on sales and maturities of foreign denominated debt securities are treated as ordinary income for U.S. Federal income tax purposes.

Net realized gains (losses) on foreign currency transactions represent net foreign exchange gains (losses) from foreign currency forward exchange contracts, disposition of foreign currencies, currency gains (losses) realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Portfolios' books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains (losses) from valuing foreign currency denominated assets and liabilities at period end exchange rates are reflected as a component of unrealized appreciation (depreciation) in the Statements of Assets and Liabilities. The change in unrealized currency gains (losses) on foreign currency translations for the period is reflected in the Statements of Operations.

F. Restricted Securities — Certain Portfolios may invest in unregistered or otherwise restricted securities. The term "restricted securities" refers to securities that are unregistered or are held by control persons of the issuer and securities that are subject to contractual restrictions on their resale. As a result, restricted securities may be more difficult to value and the Portfolio may have difficulty disposing of such assets either in a timely manner or for a reasonable price. In order to dispose of an unregistered security, the Portfolio, where it has contractual rights to do so, may have to cause such security to be registered. A considerable period may elapse between the time the decision is made to sell the security and the time the


50


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

security is registered so that the Portfolio could sell it. Contractual restrictions on the resale of securities vary in length and scope and are generally the result of a negotiation between the issuer and acquirer of the securities. The Portfolio would, in either case, bear market risks during that period. Restricted securities, if any, are identified in the Portfolio of Investments.

G. Senior Loans — Senior Loans are typically structured by a syndicate of lenders ("Lenders"), one or more of which administers the Senior Loan on behalf of the Lenders ("Agent"). Lenders may sell interests in Senior Loans to third parties ("Participations") or may assign all or a portion of their interest in a Senior Loan to third parties ("Assignments"). Senior Loans are exempt from registration under the Securities Act of 1933. Presently, Senior Loans are not readily marketable and are often subject to restrictions on resale.

H. When-Issued/Delayed Delivery Securities — Certain Portfolios may purchase or sell when-issued and delayed delivery securities. Securities purchased on a when-issued or delayed delivery basis are purchased for delivery beyond the normal settlement date at a stated price, and no income accrues to the Portfolio on such securities prior to delivery date. Payment and delivery for when-issued and delayed delivery securities can take place a month or more after the date of the transaction. When a Portfolio enters into a purchase transaction on a when-issued or delayed delivery basis, securities are available for collateral in an amount at least equal in value to a Portfolio's commitments to purchase such securities. Purchasing securities on a when-issued or delayed delivery basis may involve a risk that the market price at the time of delivery may be lower than the agreed upon purchase price, in which case there could be an unrealized loss at the time of delivery. Purchasing investments on a when-issued or delayed delivery basis may be considered a form of leverage which may increase the impact that gains (losses) may have on a Portfolio.

I. Securities Lending — Certain Portfolios may lend securities to qualified financial institutions, such as broker-dealers, to earn additional income. Any increase or decrease in the fair value of the securities loaned that might occur and any interest earned or dividends declared on those securities during the term of the loan would remain in the Portfolio. The Portfolio receives cash or securities as collateral in an amount equal to or exceeding 100% of the current fair value of the loaned securities. The collateral is marked-to-market daily by State Street Bank and Trust Company ("State Street"), the securities lending agent, to ensure that a minimum of 100% collateral coverage is maintained.

Based on pre-established guidelines, the securities lending agent invests any cash collateral that is received in an affiliated money market portfolio and repurchase agreements. Securities lending income is generated from the earnings on the invested collateral and borrowing fees, less any rebates owed to the borrowers and compensation to the lending agent, and is recorded as "Income from Securities Loaned — Net" in the Portfolio's Statement of Operations.


51


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

A Portfolio has the right under the lending agreement to recover the securities from the borrower on demand.

The following table presents financial instruments that are subject to enforceable netting arrangements as of June 30, 2016.

   

GROSS AMOUNTS NOT OFFSET IN THE STATEMENTS OF ASSETS AND LIABILITIES

  

PORTFOLIO

   GROSS ASSET AMOUNTS
PRESENTED IN STATEMENTS
OF ASSETS AND LIABILITIES		   FINANCIAL
INSTRUMENT		   COLLATERAL
RECEIVED		   NET AMOUNT
(NOT LESS THAN $0)		  

European Equity

  

$

1,050,081

(a)

  

$

—

    

$

(1,050,081

)(b)(d)

  

$

0

    

Multi Cap Growth

    

11,217,024

(a)

    

—

      

(11,217,024

)(c)(d)

    

0

    

(a)  Represents market value of loaned securities at period end.

(b)  The Portfolio received cash collateral of $1,091,436, which was subsequently invested in Repurchase Agreements and Morgan Stanley Institutional Liquidity Funds as reported in the Portfolio of Investments.

(c)  The Portfolio received cash collateral of $8,043,243, which was subsequently invested in Repurchase Agreements and Morgan Stanley Institutional Liquidity Funds as reported in the Portfolio of Investments. In addition, the Portfolio received non-cash collateral of $3,219,431in the form of U.S. Government obligations, which the Portfolio cannot sell or repledge, and accordingly are not reflected in the Portfolio of Investment.

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

The Fund has adopted the disclosure provisions of FASB Accounting Standards Update No. 2014-11 ("ASU No. 2014-11"), "Transfers & Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures". ASU No. 2014-11 is intended to provide increased transparency about the types of collateral pledged in securities lending transactions and other similar transactions that are accounted for as secured borrowing.

The following tables display a breakdown of transactions accounted for as secured borrowings, the gross obligations by class of collateral pledged, and the remaining contractual maturity of those transactions as of June 30, 2016.

   

REMAINING CONTRACTUAL MATURITY OF THE AGREEMENTS

  

PORTFOLIO

   OVERNIGHT AND
CONTINUOUS		  

<30 DAYS

   BETWEEN
30 & 90 DAYS		  

>90 DAYS

  

TOTAL

  

European Equity

  

Securities Lending Transactions

  

Common Stocks

  

$

1,091,436

    

$

—

    

$

—

    

$

—

    

$

1,091,436

    

Total Borrowings

  

$

1,091,436

    

$

—

    

$

—

    

$

—

    

$

1,091,436

    

Gross amount of recognized liabilities for securities lending transactions

                  

$

1,091,436

    


52


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

   

REMAINING CONTRACTUAL MATURITY OF THE AGREEMENTS

  

PORTFOLIO

   OVERNIGHT AND
CONTINUOUS		  

<30 DAYS

   BETWEEN
30 & 90 DAYS		  

>90 DAYS

  

TOTAL

  

Multi Cap Growth

  

Securities Lending Transactions

  

Common Stocks

  

$

8,043,243

    

$

—

    

$

—

    

$

—

    

$

8,043,243

    

Total Borrowings

  

$

8,043,243

    

$

—

    

$

—

    

$

—

    

$

8,043,243

    

Gross amount of recognized liabilities for securities lending transactions

                  

$

8,043,243

    

J. Dividends and Distributions to Shareholders — Dividends and distributions to shareholders are recorded on the ex-dividend date. Dividends from net investment income, if any, are declared and paid annually. Net realized capital gains, if any, are distributed at least annually.

K. Expenses — Direct expenses are charged to the respective Portfolio and general Fund expenses are allocated on the basis of relative net assets or equally among the Portfolios.

L. 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.

M. 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 CodificationTM ("ASC") 820, "Fair Value Measurement" ("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


53


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

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.

The following is a summary of the inputs used to value each Portfolio's investments as of June 30, 2016.

Investment Type

   Level 1
Unadjusted
Quoted prices		   Level 2
Other
Significant
Observable
Inputs		   Level 3
Significant
Unobservable
Inputs		  

Total

  

Limited Duration

  

Assets:

  

Fixed Income Securities

  

Corporate Bonds

  

$

—

    

$

23,571,218

    

$

—

    

$

23,571,218

    

Asset-Backed Securities

    

—

      

3,026,245

      

—

      

3,026,245

    

Mortgages — Other

    

—

      

1,858,186

      

—

      

1,858,186

    

Commercial Mortgage-Backed Securities

    

—

      

703,543

      

—

      

703,543

    
Collateralized Mortgage Obligations —
Agency Collateral Series		    

—

      

335,447

      

—

      

335,447

    

Sovereign

    

—

      

245,631

      

—

      

245,631

    

Agency Fixed Rate Mortgages

    

—

      

120,065

      

—

      

120,065

    

Total Fixed Income Securities

    

—

      

29,860,335

      

—

      

29,860,335

    


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Notes to Financial Statements n June 30, 2016 (unaudited) continued

Investment Type

   Level 1
Unadjusted
Quoted prices		   Level 2
Other
Significant
Observable
Inputs		   Level 3
Significant
Unobservable
Inputs		  

Total

  

Short-Term Investments

  

U.S. Treasury Security

  

$

—

    

$

50,965

    

$

—

    

$

50,965

    

Investment Company

    

268,675

      

—

      

—

      

268,675

    

Total Short-Term Investments

    

268,675

      

50,965

      

—

      

319,640

    

Futures Contracts

    

87,969

      

—

      

—

      

87,969

    

Total Assets

    

356,644

      

29,911,300

      

—

      

30,267,944

    

Liabilities:

  

Futures Contract

    

(34,031

)

    

—

      

—

      

(34,031

)

  

Total

  

$

322,613

    

$

29,911,300

    

$

—

    

$

30,233,913

    

Income Plus

  

Assets:

  

Fixed Income Securities

  

Corporate Bonds

  

$

—

    

$

105,684,554

    

$

—

    

$

105,684,554

    

U.S. Treasury Security

    

—

      

1,334,105

      

—

      

1,334,105

    

Variable Rate Senior Loan Interests

    

—

      

1,319,264

      

—

      

1,319,264

    

Asset-Backed Securities

    

—

      

1,095,468

      

—

      

1,095,468

    

Sovereign

    

—

      

556,436

      

—

      

556,436

    

Total Fixed Income Securities

    

—

      

109,989,827

      

—

      

109,989,827

    

Short-Term Investments

  

U.S. Treasury Security

    

—

      

1,388,037

      

—

      

1,388,037

    

Investment Company

    

942,706

      

—

      

—

      

942,706

    
Total Short-Term Investments    

942,706

      

1,388,037

      

—

      

2,330,743

    

Foreign Currency Forward Exchange Contracts

    

—

      

623

      

—

      

623

    

Futures Contracts

    

132,534

      

—

      

—

      

132,534

    

Credit Default Swap Agreement

    

—

      

52,084

      

—

      

52,084

    

Total Assets

    

1,075,240

      

111,430,571

      

—

      

112,505,811

    

Liabilities:

  

Foreign Currency Forward Exchange Contract

    

—

      

(160

)

    

—

      

(160

)

  

Futures Contracts

    

(564,031

)

    

—

      

—

      

(564,031

)

  

Credit Default Swap Agreements

    

—

      

(40,343

)

    

—

      

(40,343

)

  

Total Liabilities

    

(564,031

)

    

(40,503

)

    

—

      

(604,534

)

  

Total

  

$

511,209

    

$

111,390,068

    

$

—

    

$

111,901,277

    


55


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

Investment Type

   Level 1
Unadjusted
Quoted prices		   Level 2
Other
Significant
Observable
Inputs		   Level 3
Significant
Unobservable
Inputs		  

Total

  

European Equity

  

Assets:

  

Common Stocks

  
Aerospace & Defense  

$

—

    

$

726,784

    

$

—

    

$

726,784

    

Automobiles

    

—

      

566,718

      

—

      

566,718

    

Banks

    

—

      

2,722,052

      

—

      

2,722,052

    

Capital Markets

    

—

      

317,738

      

—

      

317,738

    

Chemicals

    

—

      

324,029

      

—

      

324,029

    

Construction Materials

    

—

      

778,275

      

—

      

778,275

    

Diversified Telecommunication Services

    

—

      

757,569

      

—

      

757,569

    

Electrical Equipment

    

—

      

789,240

      

—

      

789,240

    

Food Products

    

—

      

1,721,206

      

—

      

1,721,206

    
Health Care Providers & Services    

—

      

827,781

      

—

      

827,781

    
Hotels, Restaurants & Leisure    

—

      

699,979

      

—

      

699,979

    

Household Products

    

—

      

1,114,006

      

—

      

1,114,006

    

Industrial Conglomerates

    

—

      

870,006

      

—

      

870,006

    

Information Technology Services

    

—

      

851,812

      

—

      

851,812

    

Insurance

    

—

      

2,369,965

      

—

      

2,369,965

    

Machinery

    

—

      

427,583

      

—

      

427,583

    

Media

    

—

      

1,562,741

      

—

      

1,562,741

    

Multi-Utilities

    

—

      

598,077

      

—

      

598,077

    
Oil, Gas & Consumable Fuels    

—

      

2,285,186

      

—

      

2,285,186

    

Personal Products

    

—

      

849,306

      

—

      

849,306

    

Pharmaceuticals

    

—

      

4,527,923

      

—

      

4,527,923

    
Semiconductors & Semiconductor Equipment    

—

      

747,487

      

—

      

747,487

    

Software

    

—

      

803,836

      

—

      

803,836

    
Textiles, Apparel & Luxury Goods    

—

      

325,004

      

—

      

325,004

    

Tobacco

    

—

      

2,352,253

      

—

      

2,352,253

    

Wireless Telecommunication Services

    

—

      

1,028,002

      

—

      

1,028,002

    

Total Common Stocks

    

—

      

30,944,558

      

—

      

30,944,558

    

Short-Term Investments

  

Investment Company

    

1,185,684

      

—

      

—

      

1,185,684

    

Repurchase Agreements

    

—

      

211,584

      

—

      

211,584

    

Total Short-Term Investments

    

1,185,684

      

211,584

      

—

      

1,397,268

    

Total Assets

  

$

1,185,684

    

$

31,156,142

    

$

—

    

$

32,341,826

    


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Notes to Financial Statements n June 30, 2016 (unaudited) continued

Investment Type

   Level 1
Unadjusted
Quoted prices		   Level 2
Other
Significant
Observable
Inputs		   Level 3
Significant
Unobservable
Inputs		  

Total

  

Mid Cap Growth

  

Assets:

  

Common Stocks

  

Automobiles

  

$

9,439,242

    

$

—

    

$

—

    

$

9,439,242

    

Biotechnology

    

1,747,293

      

—

      

—

      

1,747,293

    

Diversified Financial Services

    

10,698,541

      

—

      

—

      

10,698,541

    

Food Products

    

7,463,008

      

—

      

—

      

7,463,008

    
Health Care Equipment & Supplies    

11,210,900

      

—

      

—

      

11,210,900

    

Health Care Technology

    

11,314,750

      

—

      

—

      

11,314,750

    

Information Technology Services

    

14,890,917

      

—

      

—

      

14,890,917

    
Internet & Catalog Retail    

31,713,894

      

—

      

—

      

31,713,894

    
Internet Software & Services    

40,439,235

      

2,373,854

      

—

      

42,813,089

    
Life Sciences Tools & Services    

10,818,806

      

—

      

—

      

10,818,806

    

Pharmaceuticals

    

6,870,689

      

—

      

—

      

6,870,689

    
Semiconductors & Semiconductor Equipment    

1,357,649

      

—

      

—

      

1,357,649

    

Software

    

25,715,808

      

—

      

—

      

25,715,808

    
Tech Hardware, Storage & Peripherals    

13,487,344

      

—

      

—

      

13,487,344

    

Total Common Stocks

    

197,168,076

      

2,373,854

      

—

      

199,541,930

    

Preferred Stocks

    

—

      

—

      

12,402,175

      

12,402,175

    

Call Option Purchased

    

—

      

42,999

      

—

      

42,999

    

Short-Term Investments

  

Investment Company

    

9,211,247

      

—

      

—

      

9,211,247

    

Repurchase Agreements

    

—

      

1,559,247

      

—

      

1,559,247

    

Total Short-Term Investments

    

9,211,247

      

1,559,247

      

—

      

10,770,494

    

Total Assets

  

$

206,379,323

    

$

3,976,100

    

$

12,402,175

    

$

222,757,598

    

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 June 30, 2016, the Fund did not have any investments transfer between investment levels. At June 30, 2016, the fair value of certain securities were adjusted due to developments which occurred between the time of the close of the foreign markets on which they trade and the close of business on the NYSE which resulted in their Level 2 classification.


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Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

Following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value:

   

Multi Cap Growth

  
   

Preferred Stocks

  

Beginning Balance

  

$

11,611,351

    

Purchases

    

—

    

Sales

    

—

    

Amortization of discount

    

—

    

Transfers in

    

—

    

Transfers out

    

—

    

Corporate actions

    

—

    

Change in unrealized appreciation (depreciation)

    

790,824

    

Realized gains (losses)

    

—

    

Ending Balance

  

$

12,402,175

    
Net change in unrealized appreciation
(depreciation) from investments still held
as of June 30, 2016		  

$

790,824

    


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Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

The following table presents additional information about valuation techniques and inputs used for investments that are measured at fair value and categorized within Level 3 as of June 30, 2016. Various valuation techniques were used in the valuation of certain investments and weighted based on the level of significance.

Multi Cap Growth

    Fair Value at
June 30,
2016		  

Valuation Technique

  

Unobservable Input

  

Range

   Selected
Value		   Impact
to
Valuation
from an
Increase
in Input		  
Electronic
Equipment,
Instruments &
Components		  
Preferred
Stock 		  $ 439,922

   Discounted Cash
Flow
  		   Weighted
Average Cost of
Capital		    

27.0

%

    

29.0

%

    

28.0

%

  

Decrease

  
             
  		   Perpetual Growth
Rate		    

3.0

%

    

4.0

%

    

3.5

%

  

Increase

  
        Market Comparable
Companies		   Enterprise Value/
Revenue		    

10.8

x

    

24.1

x

    

19.6

x

  

Increase

  
            Discount for Lack
of Marketability		    

20.0

%

    

20.0

%

    

20.0

%

  

Decrease

  
Hotels,
Restaurants &
Leisure		  
Preferred
Stock		  

$

 2,033,458

   Discounted Cash
Flow
  		   Weighted
Average Cost of
Capital		    

20.0

%

    

22.0

%

    

21.0

%

  

Decrease

  
             
  		   Perpetual Growth
Rate		    

2.5

%

    

3.5

%

    

3.0

%

  

Increase

  
        Market Comparable
Companies		   Enterprise Value/
Revenue		    

2.1

x

    

4.2

x

    

3.2

x

  

Increase

  
                Discount for Lack
of Marketability		    

20.0

%

    

20.0

%

    

20.0

%

  

Decrease

  


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Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

    Fair Value at
June 30,
2016		  

Valuation Technique

  

Unobservable Input

  

Range

   Selected
Value		   Impact
to
Valuation
from an
Increase
in Input		  
Internet &
Catalog Retail		  
Preferred
Stocks		  

$

 3,867,597

   Discounted Cash
Flow
 		   Weighted
Average Cost of
Capital		    

16.0

%

    

18.0

%

    

17.0

%

  

Decrease

  
             
  		   Perpetual Growth
Rate		    

3.0

%

    

4.0

%

    

3.5

%

  

Increase

  
        Market Comparable
Companies		   Enterprise Value/
Revenue		    

8.8

x

    

14.5

x

    

12.0

x

  

Increase

  
                Discount for Lack
of Marketability		    

20.0

%

    

20.0

%

    

20.0

%

  

Decrease

  
   

$

 2,473,288
   Market Transaction
Method		   Precedent
Transaction		  

$

48.77

    

$

48.77

    

$

48.77

    

Increase

  
Life Sciences
Tools & Services		  
Preferred
Stock		  

$

 2,906,756
   Market Transaction
Method		   Precedent
Transaction		  

$

4.48

    

$

4.48

    

$

4.48

    

Increase

  
        Discounted Cash
Flow
  		   Weighted
Average Cost of
Capital		    

26.5

%

    

28.5

%

    

27.5

%

  

Decrease

  
         
  		   Perpetual Growth
Rate		    

3.0

%

    

4.0

%

    

3.5

%

  

Increase

  
        Market Comparable
Companies		   Enterprise Value/
Revenue		    

2.0

x

    

5.2

x

    

4.4

x

  

Increase

  
                Discount for Lack
of Marketability		    

20.0

%

    

20.0

%

    

20.0

%

  

Decrease

  


60


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

    Fair Value at
June 30,
2016		  

Valuation Technique

  

Unobservable Input

  

Range

   Selected
Value		   Impact
to
Valuation
from an
Increase
in Input		  

Software

  
Preferred
Stock		   $ 681,154

   Discounted Cash
Flow
  		   Weighted
Average Cost of
Capital		    

19.0

%

    

21.0

%

    

20.0

%

  

Decrease

  
             
  		   Perpetual Growth
Rate		    

3.0

%

    

4.0

%

    

3.5

%

  

Increase

  
        Market Comparable
Companies		   Enterprise Value/
Revenue		    

7.9

x

    

11.1

x

    

9.2

x

  

Increase

  
                Discount for Lack
of Marketability		    

20.0

%

    

20.0

%

    

20.0

%

  

Decrease

  

3. Derivatives

Certain Portfolios may, but are not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. Derivatives are financial instruments whose value is based, in part, on the value of an underlying asset, interest rate, index or financial instrument. Prevailing interest rates and volatility levels, among other things, also affect the value of derivative instruments. A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which the derivative instrument relates, risks that the transactions may not be liquid and risks arising from margin requirements. The use of derivatives involves risks that are different from, and possibly greater than, the risks associated with other portfolio investments. Derivatives may involve the use of highly specialized instruments that require investment techniques and risk analyses different from those associated with other portfolio investments. All of a Portfolio's holdings, including derivative instruments, are marked-to-market each day with the change in value reflected in unrealized appreciation (depreciation). Upon disposition, a realized gain or loss is recognized.

Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and risk of loss. Leverage associated with derivative transactions may cause a Portfolio to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet earmarking or


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Notes to Financial Statements n June 30, 2016 (unaudited) continued

segregation requirements, pursuant to applicable Securities and Exchange Commission ("SEC") rules and regulations, or may cause a Portfolio to be more volatile than if the Portfolio had not been leveraged. Although the Adviser and/or Sub-Adviser seek to use derivatives to further the Portfolio's investment objectives, there is no assurance that the use of derivatives will achieve this result.

Following is a description of the derivative instruments and techniques that a Portfolio used during the period and their associated risks:

Options With respect to options, certain Portfolios are subject to equity risk, interest rate risk and foreign currency exchange risk in the normal course of pursuing its investment objectives. If a Portfolio buys an option, it buys a legal contract giving it the right to buy or sell a specific amount of the underlying instrument or foreign currency, or futures contract on the underlying instrument or foreign currency, at an agreed-upon price typically in exchange for a premium paid by a Portfolio. A Portfolio may purchase and/or sell put and call options. Purchasing call options tends to increase a Portfolio's exposure to the underlying (or similar) instrument. Purchasing put options tends to decrease a Portfolio's exposure to the underlying (or similar) instrument. When entering into purchased option contracts, a Portfolio bears the risk of interest or exchange rates or securities prices moving unexpectedly, in which case, a Portfolio may not achieve the anticipated benefits of the purchased option contracts; however the risk of loss is limited to the premium paid. Purchased options are reported as part of "Total Investments in Securities" in the Statements of Assets and Liabilities. Premium paid for purchasing options which expired are treated as realized losses. If a Portfolio sells an option, it sells to another party the right to buy from or sell to a Portfolio a specific amount of the underlying instrument or foreign currency, or futures contract on the underlying instrument or foreign currency, at an agreed upon price typically in exchange for a premium received by a Portfolio. When options are purchased OTC, a Portfolio bears the risk that the counterparty that wrote the option will be unable or unwilling to perform its obligations under the option contract. Options may also be illiquid and a Portfolio may have difficulty closing out its position. A decision as to whether, when and how to use options involves the exercise of skill and judgment and even a well-conceived option transaction may be unsuccessful because of market behavior or unexpected events. The prices of options can be highly volatile and the use of options can lower total returns.

Foreign Currency Forward Exchange Contracts In connection with their investments in foreign securities, certain Portfolios entered into contracts with banks, brokers or dealers to purchase or sell securities or foreign currencies at a future date. A foreign currency forward exchange contract ("currency contract") is a negotiated agreement between the contracting parties to exchange a specified amount of currency at a specified future time at a specified rate. The rate can be higher or lower than the spot rate


62


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Notes to Financial Statements n June 30, 2016 (unaudited) continued

between the currencies that are the subject of the contract. Currency contracts may be used to protect against uncertainty in the level of future foreign currency exchange rates or to gain or modify exposure to a particular currency. To the extent hedged by the use of currency contracts, the precise matching of the currency contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date on which the contract is entered into and the date it matures. Furthermore, such transactions may reduce or preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken. There is additional risk to the extent that currency contracts create exposure to currencies in which a Portfolio's securities are not denominated. Unanticipated changes in currency prices may result in poorer overall performance for a Portfolio than if it had not entered into such currency contracts. The use of currency contracts involves the risk of loss from the insolvency or bankruptcy of the counterparty to the contract or the failure of the counterparty to make payments or otherwise comply with the term of the contract. A currency contract is marked-to-market daily and the change in market value is recorded by a Portfolio as unrealized gain or loss. A Portfolio records realized gains (losses) when the currency contract is closed equal to the difference between the value of the currency contract at the time it was opened and the value at the time it was closed.

Futures A futures contract is a standardized, exchange-traded agreement to buy or sell a specific quantity of an underlying asset, reference rate or index at a specific price at a specific future time. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying instrument. Depending on the terms of the particular contract, futures contracts are settled through either physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. During the period the futures contract is open, payments are received from or made to the broker based upon changes in the value of the contract (the variation margin). A decision as to whether, when and how to use futures contracts involves the exercise of skill and judgment and even a well-conceived futures transaction may be unsuccessful because of market behavior or unexpected events. In addition to the derivatives risks discussed above, the prices of futures contracts can be highly volatile, using futures contracts can lower total return, and the potential loss from futures contracts can exceed a Portfolio's initial investment in such contracts. No assurance can be given that a liquid market will exist for any particular futures contract at any particular time. There is also the risk of loss by a Portfolio of margin deposits in the event of bankruptcy of a broker with which a Portfolio has open positions in the futures contract.

Swaps A Portfolio may enter into OTC swap contracts or cleared swap transactions. A swap contract is an agreement between two parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional amount, with the payments calculated by reference to specified securities,


63


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

indices, reference rates, currencies or other instruments. Typically swap agreements provide that when the period payment dates for both parties are the same, the payments are made on a net basis (i.e., the two payment streams are netted out, with only the net amount paid by one party to the other). A Portfolio's obligations or rights under a swap contract entered into on a net basis will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each party. Cleared swap transactions help reduce counterparty credit risk. In a cleared swap, a Portfolio's ultimate counterparty is a clearinghouse rather than a swap dealer, bank or other financial institution. OTC swap agreements are not entered into or traded on exchanges and often there is no central clearing or guaranty function for OTC swaps. These OTC swaps are often subject to credit risk or the risk of default or non-performance by the counterparty. Both OTC and cleared swaps could result in losses if interest rates, foreign currency exchange rates or other factors are not correctly anticipated by a Portfolio or if the reference index, security or investments do not perform as expected. During the period swap agreements are open, payments are received from or made to the clearinghouse or counterparty based upon changes in the value of the contract (variation margin). The Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulatory developments require the clearing and exchange-trading of certain standardized swap transactions. Mandatory exchange-trading and clearing is occurring on a phased-in basis.

A Portfolio's use of swaps during the period included those based on the credit of an underlying security commonly referred to as credit default swaps. A Portfolio may be either the buyer or seller in a credit default swap. As the buyer in a credit default swap, a Portfolio would pay to the counterparty the periodic stream of payments. If no default occurs, a Portfolio would receive no benefit from the contract. As the seller in a credit default swap, a Portfolio would receive the stream of payments but would be subject to exposure on the notional amount of the swap, which it would be required to pay in the event of default. The use of credit default swaps could result in losses to a Portfolio if the Adviser fails to correctly evaluate the creditworthiness of the issuer of the referenced debt obligation.

If the Portfolio is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Portfolio will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap agreement and take delivery of the referenced obligation, other deliverable obligations or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap agreement less the recovery value of the referenced obligation or underlying securities comprising the referenced index. If the Portfolio is a buyer of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Portfolio will either (i) receive from the seller of protection an amount equal to the notional amount of the


64


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swap agreement and deliver the referenced obligation, other deliverable obligations or underlying securities comprising the referenced index or (ii) receive a net settlement amount in the form of cash or securities equal to the notional amount of the swap agreement less the recovery value of the referenced obligation or underlying securities comprising the referenced index. Recovery values are estimated by market makers considering either industry standard recovery rates or entity specific factors and considerations until a credit event occurs. If a credit event has occurred, the recovery value is determined by a facilitated auction whereby a minimum number of allowable broker bids, together with a specified valuation method, are used to calculate the settlement value. The Portfolio's maximum risk of loss from counterparty risk, either as the protection seller or as the protection buyer, is the fair value of the swap agreement.

The current credit rating of each individual issuer is listed in the table following the Portfolio of Investments and serves as an indicator of the current status of the payment/performance risk of the credit derivative. Alternatively, for credit default swaps on an index of credits, the quoted market prices and current values serve as an indicator of the current status of the payment/performance risk of the credit derivative. Generally, lower credit ratings and increasing market values, in absolute terms, represent a deterioration of the credit and a greater likelihood of an adverse credit event of the issuer.

When a Portfolio has an unrealized loss on a swap agreement, the Portfolio has instructed the custodian to pledge cash or liquid securities as collateral with a value approximately equal to the amount of the unrealized loss. Collateral pledges are monitored and subsequently adjusted if and when the swap valuations fluctuate. If applicable, cash collateral is included with "Due from (to) Broker" in the Statements of Assets and Liabilities.

Upfront payments received or paid by a Portfolio will be reflected as an asset or liability, respectively, in the Statements of Assets and Liabilities.

FASB ASC 815, "Derivatives and Hedging" ("ASC 815"), is intended to improve financial reporting about derivative instruments by requiring enhanced disclosures to enable investors to better understand how and why a Portfolio uses derivative instruments, how these derivative instruments are accounted for and their effects on a Portfolio's financial position and results of operations.


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Notes to Financial Statements n June 30, 2016 (unaudited) continued

The following table sets forth the fair value of each Portfolio's derivative contracts by primary risk exposure as of June 30, 2016.

PORTFOLIO

   PRIMARY RISK
EXPOSURE		   ASSET DERIVATIVES
STATEMENTS OF
ASSETS AND
LIABILITIES LOCATION		  

FAIR VALUE

   LIABILITY DERIVATIVES
STATEMENTS OF
ASSETS AND
LIABILITIES LOCATION		  

FAIR VALUE

  

Limited Duration

   Interest Rate
Risk		   Variation margin on
open futures contracts		  

$

87,969

(e)

   Variation margin on
open futures contract		  

$

(34,031

)(e)

  

Income Plus

   Interest Rate
Risk		   Variation margin on
open futures contracts		  

$

132,534

(e)

   Variation margin on
open futures contracts		  

$

(564,031

)(e)

  
   

Credit Risk

   Variation margin on
open swap agreement		    

52,084

(e)

   Variation margin on
open swap agreement		    

(7,151

)(e)

  
        Unrealized appreciation on
open swap agreement		    

—

     Unrealized depreciation on
open swap agreement		    

(33,192

)

  
    Foreign
Currency Risk		   Unrealized appreciation on
open foreign currency
forward exchange
contracts		    

623

     Unrealized depreciation on
open foreign currency
forward exchange
contract		    

(160

)

  
           

$

185,241

        

$

(604,534

)

  

Multi Cap Growth

   Foreign
Currency Risk		   Investments, at Value
(Call Option Purchased)		  

$

42,999

(f)

   Investments, at Value
(Call Option Purchased)		  

$

—

    

(e)  Includes cumulative appreciation (depreciation) as reported in the Portfolio of Investments. Only current day's net variation margin is reported within the Statements of Assets and Liabilities.

(f)  Amounts are included in Investments in securities in the Statements of Assets and Liabilities.


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The following tables set forth by primary risk exposure of each Portfolio's realized gains (losses) and change in unrealized appreciation (depreciation) by type of derivative contract for the six months ended June 30, 2016 in accordance with ASC 815.

AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVE CONTRACTS

PORTFOLIO

   PRIMARY RISK
EXPOSURE		  

FUTURES

   CALL
OPTION
PURCHASED(g) 		   FOREIGN
CURRENCY
FORWARD
EXCHANGE		   SWAP
AGREEMENTS		  

Limited Duration

  

Interest Rate Risk

  

$

(36,145

)

  

$

—

    

$

—

    

$

—

    
   

Credit Risk

    

—

      

—

      

—

      

(10,512

)

  
   

Total

  

$

(36,145

)

  

$

—

    

$

—

    

$

(10,512

)

  

Income Plus

  

Interest Rate Risk

  

$

(746,756

)

  

$

—

    

$

—

    

$

—

    
   

Credit Risk

    

—

      

—

      

—

      

16,024

    
   

Foreign Currency Risk

    

—

      

—

      

(749

)

    

—

    
   

Total

  

$

(746,756

)

  

$

—

    

$

(749

)

  

$

16,024

    

Multi Cap Growth

  

Foreign Currency Risk

  

$

—

    

$

(131,898

)

  

$

—

    

$

—

    

CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVE CONTRACTS

PORTFOLIO

   PRIMARY RISK
EXPOSURE		  

FUTURES

   CALL
OPTION
PURCHASED(g) 		   FOREIGN
CURRENCY
FORWARD
EXCHANGE		   SWAP
AGREEMENTS		  

Limited Duration

  

Interest Rate Risk

  

$

50,569

    

$

—

    

$

—

    

$

—

    
   

Credit Risk

    

—

      

—

      

—

      

9,739

    
   

Total

  

$

50,569

    

$

—

    

$

—

    

$

9,739

    

Income Plus

  

Interest Rate Risk

  

$

(417,130

)

  

$

—

    

$

—

    

$

—

    
   

Credit Risk

    

—

      

—

      

—

      

(170,872

)

  
   

Foreign Currency Risk

    

—

      

—

      

(581

)

    

—

    
   

Total

  

$

(417,130

)

  

$

—

    

$

(581

)

  

$

(170,872

)

  

Multi Cap Growth

  

Foreign Currency Risk

  

$

—

    

$

(522,721

)

  

$

—

    

$

—

    

(g)  Amounts are included in Investments in the Statements of Operations.


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Notes to Financial Statements n June 30, 2016 (unaudited) continued

At June 30, 2016, each Portfolio's derivative assets and liabilities are as follows:

GROSS AMOUNTS OF ASSETS AND LIABILITIES PRESENTED
IN THE STATEMENTS OF ASSETS AND LIABILITIES

PORTFOLIO

  

DERIVATIVES(h)

  

ASSETS(i)

  

LIABILITIES(i)

  

Income Plus

   Foreign Currency
Forward Exchange Contracts		  

$

623

    

$

(160

)

  
   

Swap Agreement

    

—

      

(33,192

)

  
   

Total

  

$

623

    

$

(33,352

)

  

Multi Cap Growth

  

Call Option Purchased

  

$

42,999

(f)

  

$

—

    

(f)  Amounts are included in Investments in securities in the Statements of Assets and Liabilities.

(h)  Excludes exchange traded derivatives.

(i)  Absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statements of Assets and Liabilities.

Certain Portfolios typically enter into International Swaps and Derivatives Association, Inc. Master Agreements ("ISDA Master Agreements") or similar master agreements (collectively, "Master Agreements") with their respective contract counterparties for certain OTC derivatives in order to, among other things, reduce its credit risk to counterparties. ISDA Master Agreements include provisions for general obligations, representations, collateral and events of default or termination. Under an ISDA Master Agreement, a Portfolio typically may offset with the counterparty certain OTC derivative financial instruments' payables and/or receivables with collateral held and/or posted and create one single net payment (close-out netting) in the event of default, termination and/or potential deterioration in the credit quality of the counterparty. Various Master Agreements govern the terms of certain transactions with counterparties, including transactions such as swap, forward, repurchase and reverse repurchase agreements. These Master Agreements typically attempt to reduce the counterparty risk associated with such transactions by specifying credit protection mechanisms and providing standardization that improves legal certainty. Cross-termination provisions under Master Agreements typically provide that a default in connection with one transaction between a Portfolio and a counterparty gives the non-defaulting party the right to terminate any other transactions in place with the defaulting party to create one single net payment due to/due from the defaulting party and may be a feature in certain Master Agreements. In the event a Portfolio exercises its right to terminate a Master Agreement after a counterparty experiences a termination event as defined in the Master Agreement, the return of collateral with market value in excess of a Portfolio's net liability may be delayed or denied.


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Notes to Financial Statements n June 30, 2016 (unaudited) continued

The following tables present derivative financial instruments that are subject to enforceable netting arrangements as of June 30, 2016.

GROSS AMOUNTS NOT OFFSET IN THE STATEMENTS OF ASSETS AND LIABILITIES

PORTFOLIO

  

COUNTERPARTY

   GROSS
ASSET
DERIVATIVES
PRESENTED IN
STATEMENTS OF
ASSETS AND
LIABILITIES		   FINANCIAL
INSTRUMENT		   COLLATERAL
RECEIVED		   NET AMOUNT
(NOT LESS
THAN $0)		  

Income Plus

  

UBS AG

  

$

623

    

$

—

    

$

—

    

$

623

    

Multi Cap Growth

  

Royal Bank of Scotland

  

$

42,999

    

$

—

    

$

—

    

$

42,999

    

GROSS AMOUNTS NOT OFFSET IN THE STATEMENTS OF ASSETS AND LIABILITIES

PORTFOLIO

  

COUNTERPARTY

   GROSS
LIABILITIES
DERIVATIVES
PRESENTED IN
STATEMENTS OF
ASSETS AND
LIABILITIES		   FINANCIAL
INSTRUMENT		   COLLATERAL
PLEDGED		   NET AMOUNT
(NOT LESS
THAN $0)		  

Income Plus

  

Barclays Bank PLC

  

$

33,192

    

$

—

    

$

—

    

$

33,192

    
   

HSBC Bank PLC

    

160

      

—

      

—

      

160

    
   

Total

  

$

33,352

    

$

—

    

$

—

    

$

33,352

    

For the six months ended June 30, 2016, the average monthly amount outstanding for each derivative type is as follows:

Limited Duration:

  

Futures Contracts:

  

Average monthly original value

  

$

7,780,861

    

Income Plus:

  

Foreign Currency Forward Exchange Contracts:

  

Average monthly principal amount

  

$

705,307

    

Future Contracts:

  

Average monthly original value

  

$

43,727,548

    

Swap Agreements:

  

Average monthly notional amount

  

$

10,388,500

    

Multi Cap Growth:

  

Call Options Purchased:

  

Average monthly notional amount

    

36,395,612

    


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Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

4. Advisory/Administration and Sub-Advisory Agreements

Pursuant to an Investment Advisory Agreement with the Adviser and Sub-Adviser, the Fund pays an advisory fee, accrued daily and payable monthly, by applying the annual rates listed below to each Portfolio's net assets determined at the close of each business day.

Limited Duration — 0.30%.

Income Plus — 0.42% to the portion of the daily net assets not exceeding $500 million; 0.35% to the portion of the daily net assets exceeding $500 million but not exceeding $1.25 billion; and 0.22% to the portion of the daily net assets in excess of $1.25 billion. For the six months ended June 30, 2016, the advisory fee rate (net of rebate) was equivalent to an annual effective rate of 0.42% of the Portfolio's average daily net assets.

European Equity — 0.87% to the portion of the daily net assets not exceeding $500 million; 0.82% to the portion of the daily net assets exceeding $500 million but not exceeding $2 billion; 0.77% to the portion of the daily net assets exceeding $2 billion but not exceeding $3 billion; and 0.745% to the portion of the daily net assets in excess of $3 billion. For the six months ended June 30, 2016, the advisory fee rate (net of waivers/rebate) was equivalent to an annual effective rate of 0.47% of the Portfolio's average daily net assets.

Multi Cap Growth — 0.42% to the portion of the daily net assets not exceeding $1 billion; 0.395% to the portion of the daily net assets exceeding $1 billion but not exceeding $2 billion; and 0.37% to the portion of the daily net assets in excess of $2 billion. For the six months ended June 30, 2016, the advisory fee rate (net of waivers/rebate) was equivalent to an annual effective rate of 0.41% of the Portfolio's average daily net assets.

Under the Sub-Advisory Agreement between the Adviser and Sub-Adviser, the Sub-Adviser provides European Equity Portfolio with advisory services subject to the overall supervision of the Adviser and the Fund's Officers and Trustees. The Adviser pays the Sub-Adviser on a monthly basis a portion of the net advisory fees the Adviser receives from the Portfolio.

The Adviser also serves as the Administrator to the Fund and provides administrative services pursuant to an Administration Agreement for an annual fee, accrued daily and paid monthly, of 0.08% of each Portfolio's average daily net assets.

The Adviser/Administrator has agreed to reduce its advisory fee, its administration fee and/or reimburse European Equity Portfolio so that total annual Portfolio operating expenses, excluding certain investment related expenses, 12b-1 fees, taxes, interest and other extraordinary expenses (including litigation), will not exceed 1.00%. The fee waivers and/or expense reimbursements will continue for at least one year from the date of the Portfolio's prospectus(es) or until such time that the Trustees act to discontinue all or a portion of


70


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

such waivers and/or reimbursements when they deem such action is appropriate. For the six months ended June 30, 2016, $65,451 of advisory fees were waived pursuant to this arrangement.

The Adviser/Administrator has agreed to reduce its advisory fee, its administration fee and/or reimburse Multi Cap Growth Portfolio so that total Portfolio operating expenses, excluding certain investment related expenses, 12b-1 fees, taxes, interest and other extraordinary expenses (including litigation), will not exceed 0.57%. The fee waivers and/or expense reimbursements will continue for at least one year from the date of the Portfolio's prospectus(es) or until such time that the Trustees act to discontinue all or a portion of such waivers and/or reimbursements when they deem such action is appropriate. For the six months ended June 30, 2016, $11,914 of other expenses were reimbursed by the Adviser pursuant to this arrangement.

Under a Sub-Administration agreement between the Administrator and 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 each Portfolio.

5. Plan of Distribution

Shares of the Fund are distributed by Morgan Stanley Distribution, Inc. (the "Distributor"), an affiliate of the Adviser/Administrator and Sub-Adviser. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. Under the Plan, Class Y shares of each Portfolio bear a distribution fee which is accrued daily and paid monthly at the annual rate of 0.25% of the average daily net assets of the class.

6. Dividend Disbursing and Transfer Agent

The Fund's dividend disbursing and transfer agent is Boston Financial Data Services, Inc. ("BFDS"). Pursuant to a Transfer Agency Agreement, the Fund pays BFDS a fee based on the number of classes, accounts and transactions relating to the Portfolios of the Fund.

7. Security Transactions and Transactions with Affiliates

For the six months ended June 30, 2016, purchases and sales of investment securities, excluding short-term investments, were as follows:

   

U.S. GOVERNMENT SECURITIES

  

OTHER

  

PORTFOLIO

  

PURCHASES

  

SALES

  

PURCHASES

  

SALES

  

Limited Duration

  

$

—

    

$

31,943

    

$

3,203,275

    

$

4,434,395

    

Income Plus

    

1,285,764

      

—

      

21,809,079

      

31,370,706

    

European Equity

    

—

      

—

      

5,178,328

      

6,718,269

    

Multi Cap Growth

    

—

      

—

      

35,731,164

      

40,933,633

    


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Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

Each Portfolio invests in the Institutional Class of the Morgan Stanley Institutional Liquidity Funds (the "Liquidity Funds"), an open-end management investment company managed by the Adviser, both directly and as a portion of the securities held as collateral on loaned securities. Advisory fees paid by the Portfolio are reduced by an amount equal to its pro-rata share of advisory and administrative fees paid by the Portfolio due to its investment in the Liquidity Funds.

A summary of each Portfolio's transactions in shares of the Liquidity Funds during the six months ended June 30, 2016 is as follows:

PORTFOLIO

   VALUE
DECEMBER 31, 2015		   PURCHASES
AT COST		  

SALES

   DIVIDEND
INCOME		   VALUE
JUNE 30, 2016		  

Limited Duration

  

$

173,128

    

$

4,611,285

    

$

4,515,738

    

$

710

    

$

268,675

    

Income Plus

    

854,873

      

15,081,710

      

14,993,877

      

1,238

      

942,706

    

European Equity

    

416,469

      

4,540,520

      

3,771,305

      

572

      

1,185,684

    

Multi Cap Growth

    

21,360,718

      

39,425,039

      

51,574,510

      

10,688

      

9,211,247

    

For the six months ended June 30, 2016, advisory fees paid were reduced by the following relating to each Portfolio's investment in the Liquidity Funds:

PORTFOLIO

   ADVISORY FEE
REDUCTION		  

Limited Duration

  

$

240

    

Income Plus

    

425

    

European Equity

    

198

    

Multi Cap Growth

    

3,160

    

The Fund is permitted to purchase and sell securities ("cross-trade") from and to other Morgan Stanley Funds as well as other funds and client accounts for which the Adviser or an affiliate of the Adviser serves as investment adviser, pursuant to procedures approved by the Trustees in compliance with Rule 17a-7 under the Act (the "Rule"). Each cross-trade is executed at the current market price in compliance with provisions of the Rule. For the six months ended June 30, 2016, Multi Cap Growth Portfolio engaged in cross-trade purchases of $393,797.

The following Portfolios had transactions with the following affiliates of the Fund:

PORTFOLIO

  

ISSUER

   VALUE
DECEMBER 31,
2015		   PURCHASES
AT COST		  

SALES

   NET
REALIZED
GAIN		   INTEREST
INCOME		   VALUE
JUNE 30,
2016		  
Limited
Duration		   Metropolitan Life
Global Funding I		  

$

171,528

    

$

—

    

$

—

    

$

—

    

$

1,750

    

$

176,986

    
Income
Plus		  

MetLife, Inc.

    

962,005

      

—

      

—

      

—

      

15,000

      

1,013,620

    


72


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

The Fund has an unfunded noncontributory defined benefit pension plan covering certain independent Trustees of the Fund who will have served as independent Trustees for at least five years at the time of retirement. Benefits under this plan are based on factors which include years of service and compensation. The Trustees voted to close the plan to new participants and eliminate the future benefits growth due to increases to compensation after July 31, 2003.

Aggregate pension costs for the six months ended June 30, 2016, included in "Trustees' fees and expenses" in the Statements of Operations and the accrued pension liability included in "Accrued expenses and other payables" in the Statements of Assets and Liabilities are as follows:

  

AGGREGATE PENSION LIABILITY

  
LIMITED
DURATION		   INCOME
PLUS		   EUROPEAN
EQUITY		   MULTI CAP
GROWTH		  
$

1,833

    

$

6,686

    

$

1,915

    

$

12,219

    

The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan"), which allows each independent Trustee to defer payment of all, or a portion, of the fees he or she 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 NAV of the Fund.

8. Federal Income Tax Status

It is the Portfolios' 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.

A Portfolio may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based on net investment income, net realized gains and net unrealized appreciation as such income and/or gains are earned. Taxes may also be based on transactions in foreign currency and are accrued based on the value of investments denominated in such currency.

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


73


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

statements. If applicable, the Portfolios recognize interest accrued related to unrecognized tax benefits in "Interest Expense" and penalties in "Other Expenses" in the Statements of Operations. The Portfolios file 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 December 31, 2015, 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 2015 and 2014 was as follows:

   

2015 DISTRIBUTIONS PAID FROM:

  

2014 DISTRIBUTIONS PAID FROM:

  

PORTFOLIO

  ORDINARY
INCOME		   LONG-TERM
CAPITAL GAIN		   ORDINARY
INCOME		   LONG-TERM
CAPITAL GAIN		  

Limited Duration

  

$

369,128

    

$

—

    

$

614,382

    

$

—

    

Income Plus

    

4,860,741

      

79,353

      

5,980,752

      

—

    

European Equity

    

2,049,674

      

—

      

1,189,630

      

—

    

Multi Cap Growth

    

1,218,034

      

42,696,379

      

4,912,286

      

29,304,452

    

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 primarily due 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, primarily due to differing treatments of gains (losses) related to foreign currency transactions, swap transactions, paydown adjustments, expiring capital losses, net operating losses, book amortization of premium on debt securities and nondeductible expenses, resulted in the following reclassifications among the Portfolios' components of net assets at December 31, 2015:

PORTFOLIO

  ACCUMULATED UNDISTRIBUTED
(DISTRIBUTION IN EXCESS OF)
NET INVESTMENT INCOME		   ACCUMULATED
NET REALIZED GAIN (LOSS)		  

PAID-IN-CAPITAL

  

Limited Duration

  

$

(17,237

)

  

$

1,080,562

    

$

(1,063,325

)

  

Income Plus

    

(330,800

)

    

330,800

      

—

    

European Equity

    

(13,713

)

    

13,713

      

—

    

Multi Cap Growth

    

824,969

      

278,257

      

(1,103,226

)

  


74


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

At December 31, 2015, the components of distributable earnings on a tax basis were as follows:

PORTFOLIO

  UNDISTRIBUTED
ORDINARY
INCOME		   UNDISTRIBUTED
LONG-TERM
CAPITAL GAIN		  

Limited Duration

  

$

385,547

    

$

—

    

Income Plus

    

4,164,220

      

2,689,896

    

European Equity

    

904,460

      

—

    

Multi Cap Growth

    

—

      

35,643,269

    

At December 31, 2015, the following Portfolios had available for Federal income tax purposes unused short term and/or long term capital losses that will not expire:

PORTFOLIO

   SHORT TERM LOSSES
(NO EXPIRATION)		   LONG TERM LOSSES
(NO EXPIRATION)		  

Limited Duration

  

$

153,803

    

$

330,411

    

European Equity

    

774,401

      

—

    

In addition, At December 31, 2015, the following Portfolios had available capital loss carryforwards to offset future net capital gains, to the extent provided by regulations, through the indicated expiration dates:

   

AMOUNTS IN THOUSANDS AVAILABLE THROUGH DECEMBER 31,

  

PORTFOLIO

  

2016

  

2017

  

2018

  

Total

  

Limited Duration

  

$

17,119

    

$

8,980

    

$

—

    

$

26,099

    

European Equity

    

—

      

4,122

      

3,315

      

7,437

    

During the year ended December 31, 2015, the following Portfolio expired capital loss carryforwards for U.S. Federal income tax purposes as follows:

PORTFOLIO

  EXPIRED CAPITAL LOSS
CARRYFORWARDS		  

Limited Duration

  

$

1,063,325

    

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 Portfolio for gains realized and not distributed. To the extent that capital gains are offset, such gains will not be distributed to the shareholders.


75


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

9. Purposes of and Risks Relating to Certain Financial Instruments

Certain Portfolios may lend securities to qualified financial institutions, such as broker-dealers, to earn additional income. Risks in securities lending transactions are that a borrower may not provide additional collateral when required or return the securities when due, and that the value of the short-term investments will be less than the amount of cash collateral plus any rebate that is required to be returned to the borrower.

Certain Portfolios may invest in mortgage securities, including securities issued by the Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"). These are fixed income securities that derive their value from or represent interests in a pool of mortgages or mortgage securities. An unexpectedly high rate of defaults on the mortgages held by a mortgage pool may adversely affect the value of a mortgage-backed security and could result in losses to the Portfolios. The risk of such defaults is generally higher in the case of mortgage pools that include sub-prime mortgages. Sub-prime mortgages refer to loans made to borrowers with weakened credit histories or with a lower capacity to make timely payments on their mortgages. The securities issued by FNMA and FHLMC that are held by the Portfolios are not backed by sub-prime mortgages.

Additionally, securities issued by FNMA and FHLMC are not backed by or entitled to the full faith and credit of the United States; rather, they 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.

Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, fluctuations of exchange rates in relation to the U.S. dollar, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.

At June 30, 2016, European Equity Portfolio's investments in securities of issuers in the United Kingdom, France and Switzerland represented 30.2%, 15.4% and 18.3%, respectively of the Portfolio's net assets. These investments, as well as other non-U.S. investments, which involve risks and considerations not present with respect to U.S. securities, may be affected by economic or political developments in these countries.


76


Morgan Stanley Variable Investment Series

Notes to Financial Statements n June 30, 2016 (unaudited) continued

10. Credit Facility

As of April 4, 2016, the Fund and other Morgan Stanley funds participate in a $150,000,000 committed, unsecured revolving line of credit facility (the "facility") with State Street. This facility is to be used for temporary emergency purposes or funding of shareholder redemption requests. The interest rate on borrowings is based on the federal funds rate or one month libor rate plus a spread. The facility also has a commitment fee of 0.25% per annum based on the unused portion of the facility. During the period ended June 30, 2016, the Fund did not have any borrowings under the facility.

11. Other

At June 30, 2016, certain Portfolios had record owners of 10% or greater. Investment activities of these shareholders could have a material impact on these Portfolios. These Portfolios and the aggregate percentage of such owners were as follows:

    PERCENTAGE OF
OWNERSHIP		  

Limited Duration

    

96.49

 %  

Income Plus

    

94.80

    

European Equity

    

92.57

    

Multi Cap Growth

    

94.96

    


77



Morgan Stanley Variable Investment Series

Financial Highlights

                               
FOR THE YEAR
ENDED
DECEMBER 31		   NET ASSET
VALUE
BEGINNING
OF PERIOD		   NET
INVESTMENT
INCOME(a)		   NET REALIZED
AND
UNREALIZED
GAIN (LOSS)		   TOTAL FROM
INVESTMENT
OPERATIONS		   DIVIDENDS
TO
SHAREHOLDERS		   DISTRIBUTIONS
TO
SHAREHOLDERS		   TOTAL
DIVIDENDS
AND
DISTRIBUTIONS		  
LIMITED DURATION
CLASS X SHARES		      

2011

  

$

7.74

    

$

0.17

    

$

0.04

    

$

0.21

    

$

(0.26

)

    

—

    

$

(0.26

)

  

2012

    

7.69

      

0.12

      

0.13

      

0.25

      

(0.23

)

    

—

      

(0.23

)

  

2013

    

7.71

      

0.10

      

(0.07

)

    

0.03

      

(0.20

)

    

—

      

(0.20

)

  

2014

    

7.54

      

0.08

      

0.01

      

0.09

      

(0.14

)

    

—

      

(0.14

)

  

2015

    

7.49

      

0.10

      

(0.11

)

    

(0.01

)

    

(0.10

)

    

—

      

(0.10

)

  
2016^^    

7.38

      

0.06

      

0.25

      

0.31

      

(0.11

)

    

—

      

(0.11

)

  

CLASS Y SHARES

      

2011

    

7.72

      

0.15

      

0.04

      

0.19

      

(0.24

)

    

—

      

(0.24

)

  

2012

    

7.67

      

0.10

      

0.13

      

0.23

      

(0.21

)

    

—

      

(0.21

)

  

2013

    

7.69

      

0.08

      

(0.07

)

    

0.01

      

(0.18

)

    

—

      

(0.18

)

  

2014

    

7.52

      

0.06

      

—

      

0.06

      

(0.11

)

    

—

      

(0.11

)

  

2015

    

7.47

      

0.08

      

(0.10

)

    

(0.02

)

    

(0.08

)

    

—

      

(0.08

)

  
2016^^    

7.37

      

0.05

      

0.25

      

0.30

      

(0.09

)

    

—

      

(0.09

)

  
INCOME PLUS
CLASS X SHARES		      

2011

    

11.26

      

0.57

      

(0.02

)

    

0.55

      

(0.68

)

    

—

      

(0.68

)

  

2012

    

11.13

      

0.48

      

1.04

      

1.52

      

(0.68

)

    

—

      

(0.68

)

  

2013

    

11.97

      

0.45

      

(0.35

)

    

0.10

      

(0.59

)

    

—

      

(0.59

)

  

2014

    

11.48

      

0.42

      

0.47

      

0.89

      

(0.51

)

    

—

      

(0.51

)

  

2015

    

11.86

      

0.42

      

(0.66

)

    

(0.24

)

    

(0.47

)

  

$

(0.01

)

    

(0.48

)

  
2016^^    

11.14

      

0.22

      

0.61

      

0.83

      

(0.46

)

    

(0.28

)

    

(0.74

)

  

CLASS Y SHARES

      

2011

    

11.22

      

0.54

      

(0.02

)

    

0.52

      

(0.65

)

    

—

      

(0.65

)

  

2012

    

11.09

      

0.45

      

1.04

      

1.49

      

(0.65

)

    

—

      

(0.65

)

  

2013

    

11.93

      

0.41

      

(0.33

)

    

0.08

      

(0.56

)

    

—

      

(0.56

)

  

2014

    

11.45

      

0.39

      

0.45

      

0.84

      

(0.47

)

    

—

      

(0.47

)

  

2015

    

11.82

      

0.39

      

(0.64

)

    

(0.25

)

    

(0.44

)

    

(0.01

)

    

(0.45

)

  
2016^^    

11.12

      

0.21

      

0.59

      

0.80

      

(0.42

)

    

(0.28

)

    

(0.70

)

  
EUROPEAN EQUITY
CLASS X SHARES		      

2011

    

16.05

      

0.41

      

(1.90

)

    

(1.49

)

    

(0.37

)

    

—

      

(0.37

)

  

2012

    

14.19

      

0.53

      

2.03

      

2.56

      

(0.43

)

    

—

      

(0.43

)

  

2013

    

16.32

      

0.42

      

3.95

      

4.37

      

(0.53

)

    

—

      

(0.53

)

  

2014

    

20.16

      

0.82

      

(2.61

)

    

(1.79

)

    

(0.48

)

    

—

      

(0.48

)

  

2015

    

17.89

      

0.41

      

(1.24

)

    

(0.83

)

    

(0.94

)

    

—

      

(0.94

)

  
2016^^    

16.12

      

0.38

      

(0.99

)

    

(0.61

)

    

(0.45

)

    

—

      

(0.45

)

  

See Notes to Financial Statements
78


                RATIO TO AVERAGE
NET ASSETS		          
FOR THE YEAR
ENDED
DECEMBER 31		   NET ASSET
VALUE
END OF
PERIOD		   TOTAL
RETURN(b)		   NET ASSETS
END OF
PERIOD
(000'S)		  

EXPENSES

   NET
INVESTMENT
INCOME		   REBATE FROM
MORGAN STANLEY
AFFILIATE		   PORTFOLIO
TURNOVER
RATE		  
LIMITED DURATION
CLASS X SHARES		  

2011

  

$

7.69

      

2.75

%

  

$

12,693

      

0.60

%(d)

    

2.15

%(d)

    

0.00

%(c)

    

45

%

  

2012

    

7.71

      

3.34

      

10,628

      

0.63

(d)

    

1.52

(d)

    

0.00

(c)

    

58

    

2013

    

7.54

      

0.39

      

9,346

      

0.75

(d)

    

1.27

(d)

    

0.00

(c)

    

53

    

2014

    

7.49

      

1.13

      

7,986

      

0.80

(d)

    

1.09

(d)

    

0.00

(c)

    

51

    

2015

    

7.38

      

(0.16

)

    

6,773

      

0.94

(d)

    

1.38

(d)

    

0.00

(c)

    

39

    
2016^^    

7.58

      

4.26

(g)(i)

    

6,640

      

0.93

(d)(h)

    

1.60

(d)(h)

    

0.00

(c)(h)

    

11

(g)

  

CLASS Y SHARES

  

2011

    

7.67

      

2.45

      

44,085

      

0.85

(d)

    

1.90

(d)

    

0.00

(c)

    

45

    

2012

    

7.69

      

3.05

      

38,736

      

0.88

(d)

    

1.27

(d)

    

0.00

(c)

    

58

    

2013

    

7.52

      

0.09

      

32,974

      

1.00

(d)

    

1.02

(d)

    

0.00

(c)

    

53

    

2014

    

7.47

      

0.84

      

28,244

      

1.05

(d)

    

0.84

(d)

    

0.00

(c)

    

51

    

2015

    

7.37

      

(0.32

)

    

24,445

      

1.19

(d)

    

1.13

(d)

    

0.00

(c)

    

39

    
2016^^    

7.58

      

4.11

(g)(i)

    

23,632

      

1.18

(d)(h)

    

1.35

(d)(h)

    

0.00

(c)(h)

    

11

(g)

  
INCOME PLUS
CLASS X SHARES		  

2011

    

11.13

      

5.01

      

90,876

      

0.59

(d)

    

5.01

(d)

    

0.00

(c)

    

43

    

2012

    

11.97

      

14.09

      

86,765

      

0.61

(d)

    

4.14

(d)

    

0.00

(c)

    

68

    

2013

    

11.48

      

1.03

      

73,998

      

0.62

(d)

    

3.82

(d)

    

0.00

(c)

    

55

    

2014

    

11.86

      

7.79

      

68,129

      

0.64

(d)

    

3.52

(d)

    

0.00

(c)

    

43

    

2015

    

11.14

      

(2.09

)

    

57,579

      

0.67

(d)

    

3.57

(d)

    

0.00

(c)

    

44

    
2016^^    

11.23

      

7.46

(g)

    

57,445

      

0.68

(d)(h)

    

3.90

(d)(h)

    

0.00

(c)(h)

    

21

(g)

  

CLASS Y SHARES

  

2011

    

11.09

      

4.71

      

102,948

      

0.84

(d)

    

4.76

(d)

    

0.00

(c)

    

43

    

2012

    

11.93

      

13.82

      

97,579

      

0.86

(d)

    

3.89

(d)

    

0.00

(c)

    

68

    

2013

    

11.45

      

0.81

      

82,429

      

0.87

(d)

    

3.57

(d)

    

0.00

(c)

    

55

    

2014

    

11.82

      

7.40

      

69,491

      

0.89

(d)

    

3.27

(d)

    

0.00

(c)

    

43

    

2015

    

11.12

      

(2.22

)

    

56,969

      

0.92

(d)

    

3.32

(d)

    

0.00

(c)

    

44

    
2016^^    

11.22

      

7.26

(g)

    

55,292

      

0.93

(d)(h)

    

3.65

(d)(h)

    

0.00

(c)(h)

    

21

(g)

  
EUROPEAN EQUITY
CLASS X SHARES		  

2011

    

14.19

      

(9.64

)

    

41,181

      

1.00

(d)(e)

    

2.56

(d)(e)

    

0.00

(c)

    

11

    

2012

    

16.32

      

18.51

      

40,141

      

1.00

(d)(e)

    

3.50

(d)(e)

    

0.00

(c)

    

11

    

2013

    

20.16

      

27.50

      

43,414

      

1.00

(d)(e)

    

2.32

(d)(e)

    

0.00

(c)

    

10

    

2014

    

17.89

      

(9.14

)

    

33,884

      

1.00

(d)(e)

    

4.17

(d)(e)

    

0.00

(c)

    

21

    

2015

    

16.12

      

(5.17

)

    

28,348

      

1.00

(d)(e)

    

2.29

(d)(e)

    

0.00

(c)

    

21

    
2016^^    

15.06

      

(3.76

)(g)

    

25,512

      

1.00

(d)(e)(h)

    

4.93

(d)(e)(h)

    

0.00

(c)(h)

    

16

(g)

  


79


Morgan Stanley Variable Investment Series

Financial Highlights continued

                              
FOR THE YEAR
ENDED
DECEMBER 31		   NET ASSET
VALUE
BEGINNING
OF PERIOD		   NET
INVESTMENT
INCOME
(LOSS)(a)		   NET REALIZED
AND
UNREALIZED
GAIN (LOSS)		   TOTAL FROM
INVESTMENT
OPERATIONS		   DIVIDENDS
TO
SHAREHOLDERS		   DISTRIBUTIONS
TO
SHAREHOLDERS		   TOTAL
DIVIDENDS
AND
DISTRIBUTIONS		  

CLASS Y SHARES

      
 

2011

    

$

15.98

    

$

0.37

    

$

(1.90

)

  

$

(1.53

)

  

$

(0.33

)

    

—

    

$

(0.33

)

  
 

2012

      

14.12

      

0.49

      

2.03

      

2.52

      

(0.38

)

    

—

      

(0.38

)

  
 

2013

      

16.26

      

0.33

      

3.98

      

4.31

      

(0.48

)

    

—

      

(0.48

)

  
 

2014

      

20.09

      

0.77

      

(2.60

)

    

(1.83

)

    

(0.43

)

    

—

      

(0.43

)

  
 

2015

      

17.83

      

0.37

      

(1.24

)

    

(0.87

)

    

(0.88

)

    

—

      

(0.88

)

  
 

2016

^^

    

16.08

      

0.36

      

(0.99

)

    

(0.63

)

    

(0.40

)

    

—

      

(0.40

)

  
MULTI CAP GROWTH
CLASS X SHARES		      
 

2011

      

40.07

      

0.01

      

(2.70

)

    

(2.69

)

    

(0.07

)

    

—

      

(0.07

)

  
 

2012

      

37.31

      

0.20

      

4.40

      

4.60

      

—

    

$

(0.90

)

    

(0.90

)

  
 

2013

      

41.01

      

(0.03

)

    

20.55

      

20.52

      

(0.20

)

    

(0.66

)

    

(0.86

)

  
 

2014

      

60.67

      

(0.06

)

    

3.23

      

3.17

      

—

      

(7.79

)

    

(7.79

)

  
 

2015

      

56.05

      

(0.15

)

    

4.86

      

4.71

      

—

      

(10.37

)

    

(10.37

)

  
 

2016

^^

    

50.39

      

(0.00

)(c)

    

(2.52

)

    

(2.52

)

    

—

      

(7.91

)

    

(7.91

)

  

CLASS Y SHARES

      
 

2011

      

39.77

      

(0.09

)

    

(2.68

)

    

(2.77

)

    

—

      

—

      

—

    
 

2012

      

37.00

      

0.09

      

4.37

      

4.46

      

—

      

(0.90

)

    

(0.90

)

  
 

2013

      

40.56

      

(0.15

)

    

20.32

      

20.17

      

(0.11

)

    

(0.66

)

    

(0.77

)

  
 

2014

      

59.96

      

(0.20

)

    

3.18

      

2.98

      

—

      

(7.79

)

    

(7.79

)

  
 

2015

      

55.15

      

(0.28

)

    

4.78

      

4.50

      

—

      

(10.37

)

    

(10.37

)

  
 

2016

^^

    

49.28

      

(0.05

)

    

(2.47

)

    

(2.52

)

    

—

      

(7.91

)

    

(7.91

)

  

^^  For the six months ended June 30, 2016 (unaudited).

(a)  The per share amounts were computed using an average number of shares outstanding during the period.

(b)  Calculated based on the net asset value as of the last business day of the period. Performance shown does not reflect fees and expenses imposed by your insurance company. If performance information included the effect of these additional charges, the total returns would be lower.

(c)  Amount is less than 0.005%.

(d)  The ratios reflect the rebate of certain Portfolio expenses in connection with investments in a Morgan Stanley affiliate during the period. The effect of the rebate on the ratios is disclosed in the above table as "Rebate from Morgan Stanley affiliate."

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

PERIOD ENDED

   EXPENSE
RATIO		   NET INVESTMENT INCOME
RATIO		  

June 30, 2016

                  

Class X

    

1.40

%

    

4.53

%

  

Class Y

    

1.65

      

4.28

    

December 31, 2015

                  

Class X

    

1.32

      

1.97

    

Class Y

    

1.57

      

1.72

    

December 31, 2014

                  

Class X

    

1.26

      

3.91

    

Class Y

    

1.51

      

3.66

    

December 31, 2013

                  

Class X

    

1.22

      

2.10

    

Class Y

    

1.47

      

1.85

    

See Notes to Financial Statements
80


                RATIO TO AVERAGE
NET ASSETS		          
FOR THE YEAR
ENDED
DECEMBER 31		   NET ASSET
VALUE
END OF
PERIOD		   TOTAL
RETURN(b)		   NET ASSETS
END OF
PERIOD
(000'S)		  

EXPENSES

   NET
INVESTMENT
INCOME (LOSS)		   REBATE FROM
MORGAN STANLEY
AFFILIATE		   PORTFOLIO
TURNOVER
RATE		  

CLASS Y SHARES

  
 

2011

    

$

14.12

      

(9.85

)%

  

$

11,668

      

1.25

%(d)(e)

    

2.31

%(d)(e)

    

0.00

%(c)

    

11

%

  
 

2012

      

16.26

      

18.16

      

11,773

      

1.25

(d)(e)

    

3.25

(d)(e)

    

0.00

(c)

    

11

    
 

2013

      

20.09

      

27.20

      

11,807

      

1.25

(d)(e)

    

2.07

(d)(e)

    

0.00

(c)

    

10

    
 

2014

      

17.83

      

(9.37

)

    

8,518

      

1.25

(d)(e)

    

3.92

(d)(e)

    

0.00

(c)

    

21

    
 

2015

      

16.08

      

(5.39

)

    

6,776

      

1.25

(d)(e)

    

2.04

(d)(e)

    

0.00

(c)

    

21

    
 

2016

^^

    

15.05

      

(3.90

)(g)

    

6,031

      

1.25

(d)(e)(h)

    

4.68

(d)(e)(h)

    

0.00

(c)(h)

    

16

(g)

  
MULTI CAP GROWTH
CLASS X SHARES		  
 

2011

      

37.31

      

(6.74

)

    

173,284

      

0.56

(d)

    

0.03

(d)

    

0.00

(c)

    

24

    
 

2012

      

41.01

      

12.37

      

164,917

      

0.58

(d)

    

0.48

(d)

    

0.00

(c)

    

44

    
 

2013

      

60.67

      

50.76

      

223,689

      

0.57

(d)

    

(0.06

)(d)

    

0.00

(c)

    

34

    
 

2014

      

56.05

      

5.71

      

200,910

      

0.54

(d)

    

(0.11

)(d)

    

0.00

(c)

    

29

    
 

2015

      

50.39

      

8.60

      

188,317

      

0.57

(d)(f)

    

(0.27

)(d)(f)

    

0.00

(c)

    

34

    
 

2016

^^

    

39.96

      

(5.00

)(g)

    

168,735

      

0.57

(d)(f)(h)

    

0.02

(d)(f)(h)

    

0.00

(c)(h)

    

17

(g)

  

CLASS Y SHARES

  
 

2011

      

37.00

      

(6.97

)

    

49,678

      

0.81

(d)

    

(0.22

)(d)

    

0.00

(c)

    

24

    
 

2012

      

40.56

      

12.09

      

45,556

      

0.83

(d)

    

0.23

(d)

    

0.00

(c)

    

44

    
 

2013

      

59.96

      

50.37

      

72,135

      

0.82

(d)

    

(0.31

)(d)

    

0.00

(c)

    

34

    
 

2014

      

55.15

      

5.44

      

56,027

      

0.79

(d)

    

(0.36

)(d)

    

0.00

(c)

    

29

    
 

2015

      

49.28

      

8.34

      

51,882

      

0.82

(d)(f)

    

(0.52

)(d)(f)

    

0.00

(c)

    

34

    
 

2016

^^

    

38.85

      

(5.11

)(g)

    

45,844

      

0.82

(d)(f)(h)

    

(0.23

)(d)(f)(h)

    

0.00

(c)(h)

    

17

(g)

  

(e)  continued

PERIOD ENDED

   EXPENSE
RATIO		   NET INVESTMENT INCOME
RATIO		  

December 31, 2012

                  

Class X

    

1.22

%

    

3.28

%

  

Class Y

    

1.47

      

3.03

    

December 31, 2011

                  

Class X

    

1.17

      

2.39

    

Class Y

    

1.42

      

2.14

    

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

PERIOD ENDED

   EXPENSE
RATIO		   NET INVESTMENT INCOME
(LOSS) RATIO		  

June 30, 2016

                  
Class X    

0.58

%

    

0.01

%

  
Class Y    

0.83

      

(0.24

)

  

December 31, 2015

                  

Class X

    

0.58

      

(0.28

)

  

Class Y

    

0.83

      

(0.53

)

  

(g)  Not annualized.

(h)  Annualized.

(i)  Performance was positively impacted by approximately 2.06% for both Class X and Class Y shares due to the receipt of proceeds from the settlement of a class action suit involving the Portfolio's past holdings. This was a one time settlement, and as a result, the impact on the NAV and consequently the performance will not likely be repeated in the future. Had this settlement not occurred, the total return for Class X and Class Y shares would have been approximately 2.20% and 2.05%, respectively.


81



Morgan Stanley Variable Investment Series

Investment Advisory Agreement Approval n June 30, 2016 (unaudited)

Nature, Extent and Quality of Services

The Board reviewed and considered the nature and extent of the investment advisory services provided by Morgan Stanley Investment Management Inc. (the "Adviser") under the advisory agreement, including portfolio management, investment research and equity and fixed income securities trading. The Board reviewed similar information and factors regarding Morgan Stanley Investment Management Limited (the "Sub-Adviser"), for the European Equity Portfolio. The Board also reviewed and considered the nature and extent of the non-advisory, administrative services provided by the Adviser under the administration agreement, including accounting, operations, clerical, bookkeeping, compliance, business management and planning, legal services and the provision of supplies, office space and utilities at the Adviser's expense. The Board also considered the Adviser's investment in personnel and infrastructure that benefits the Portfolios. (The Adviser and Sub-Adviser together are referred to as the "Adviser" and the advisory, sub-advisory and administration agreements together are referred to as the "Management Agreement.") The Board also considered that the Adviser serves a variety of other investment advisory clients and has experience overseeing service providers. The Board also compared the nature of the services provided by the Adviser with similar services provided by non-affiliated advisers as reported to the Board by Broadridge Financial Solutions, Inc. ("Broadridge").

The Board reviewed and considered the qualifications of the portfolio managers, the senior administrative managers and other key personnel of the Adviser who provide the administrative and advisory services to the Portfolios. The Board determined that the Adviser's portfolio managers and key personnel are well qualified by education and/or training and experience to perform the services in an efficient and professional manner. The Board concluded that the nature and extent of the advisory and administrative services provided were necessary and appropriate for the conduct of the business and investment activities of the Portfolios and supported its decision to approve the Management Agreement.

Performance, Fees and Expenses of the Portfolios

The Board reviewed the performance, fees and expenses of the Portfolios compared to their peers, as determined by Broadridge, and to appropriate benchmarks where applicable. The Board discussed with the Adviser the performance goals and the actual results achieved in managing the Portfolios. When considering a fund's performance, the Board and the Adviser place emphasis on trends and longer-term returns (focusing on one-year, three-year and five-year performance, as of December 31, 2015, or since inception, as applicable). When a fund underperforms its benchmark and/or its peer group average, they discuss the causes of such underperformance and, where necessary, they discuss specific changes to investment strategy or investment personnel.


82


Morgan Stanley Variable Investment Series

Investment Advisory Agreement Approval n June 30, 2016 (unaudited) continued

Performance

The Board noted that the performance of the Multi Cap Growth Portfolio was better than its peer group average for the one-, three- and five-year periods.

The Board noted that the performance of the European Equity Portfolio was equal to its peer group average for the three-year period, better than its peer group average for the five-year period but below its peer group average for the one-year period.

The Board noted that the performance of the Income Plus Portfolio was better than its peer group average for the three- and five-year periods, but below its peer group average for the one-year period.

The Board noted that the performance of the Limited Duration Portfolio was below its peer group average for the one-, three- and five-year periods.

Performance Conclusions

With respect to the Multi Cap Growth and Income Plus Portfolios, after discussion, the Board concluded that performance was competitive with their peer group averages.

With respect to the Limited Duration and European Equity Portfolios, after discussion, the Board concluded that performance was acceptable.

Fees and Expenses

The Board members discussed with the Adviser the level of the advisory and administration fees (together, the "management fee") for the Portfolios relative to comparable funds and/or other accounts advised by the Adviser and/or compared to their respective peers as determined by Broadridge. In addition to the management fee, the Board also reviewed the Portfolios' total expense ratios. When a fund's management fee and/or its total expense ratio are higher than its peers, the Board and the Adviser discuss the reasons for this and, where appropriate, they discuss possible waivers and/or caps.

The Board noted that the contractual management fee for the European Equity Portfolio was higher but close to its peer group average, the actual management fee was lower than its peer group average and the total expense ratio was higher but close to its peer group average.

The Board noted that the management fee and total expense ratio for the Multi Cap Growth Portfolio were lower than its peer group averages.


83


Morgan Stanley Variable Investment Series

Investment Advisory Agreement Approval n June 30, 2016 (unaudited) continued

The Board noted that the contractual management fee for the Income Plus Portfolio was lower than its peer group average and the actual management fee and the total expense ratio were higher than its peer group averages.

The Board noted that while the Limited Duration Portfolio's management fee was lower than its peer group average, the total expense ratio was higher than its peer group average.

Fee and Expense Conclusions

With respect to the European Equity and Multi Cap Growth Portfolios, after discussion, the Board concluded that the management fees and total expense ratios were competitive with those of their peer group averages.

With respect to the Income Plus Portfolio, after discussion, the Board concluded that the management fee and the total expense ratio were acceptable.

With respect to the Limited Duration Portfolio, after discussion, the Board concluded that (i) the management fee was competitive with its peer group average and (ii) the total expense ratio was acceptable.

Economies of Scale

The Board considered the size and growth prospects of the Portfolios and how that relates to the Portfolios' total expense ratios and particularly the Portfolios' management fee rates (which, for all the Portfolios except Limited Duration, include one or more breakpoints). In conjunction with its review of the Adviser's profitability, the Board discussed with the Adviser how a change in assets can affect the efficiency or effectiveness of managing the Portfolios and whether the management fee level is appropriate relative to current and projected asset levels and/or whether the management fee structure reflects economies of scale as asset levels change. The Board has determined that its review of the actual and/or potential economies of scale of each Portfolio supports its decision to approve the Management Agreement.

Profitability of the Adviser and Affiliates

The Board considered information concerning the costs incurred and profits realized by the Adviser and its affiliates during the last year from their relationship with the Portfolios and during the last two years from their relationship with the Morgan Stanley Fund Complex and reviewed with the Adviser the cost allocation methodology used to determine the profitability of the Adviser and affiliates. The Board has determined that its review of the analysis of the Adviser's expenses and profitability supports its decision to approve the Management Agreement.

Other Benefits of the Relationship

The Board considered other direct and indirect benefits to the Adviser and/or its affiliates derived from their relationship with the Portfolios and other funds advised by the Adviser. These benefits may include, among other


84


Morgan Stanley Variable Investment Series

Investment Advisory Agreement Approval n June 30, 2016 (unaudited) continued

things, fees for trading, distribution and/or shareholder servicing and for transaction processing and reporting platforms used by securities lending agents, and research received by the Adviser generated from commission dollars spent on funds' portfolio trading. The Board reviewed with the Adviser these arrangements and the reasonableness of the Adviser's costs relative to the services performed. The Board has determined that its review of the other benefits received by the Adviser or its affiliates supports its decision to approve the Management Agreement.

Resources of the Adviser and Historical Relationship Between the Portfolios and the Adviser

The Board considered whether the Adviser is financially sound and has the resources necessary to perform its obligations under the Management Agreement. The Board also reviewed and considered the historical relationship between the Portfolios and the Adviser, including the organizational structure of the Adviser, the policies and procedures formulated and adopted by the Adviser for managing the Portfolios' operations and the Board's confidence in the competence and integrity of the senior managers and key personnel of the Adviser. The Board concluded that the Adviser has the financial resources necessary to fulfill its obligations under the Management Agreement and that it is beneficial for the Portfolios to continue their relationship with the Adviser.

Other Factors and Current Trends

The Board considered the controls and procedures adopted and implemented by the Adviser and monitored by the Fund's Chief Compliance Officer and concluded that the conduct of business by the Adviser indicates a good faith effort on its part to adhere to high ethical standards in the conduct of the Portfolios' business.

General Conclusion

After considering and weighing all of the above factors, with various written materials and verbal information presented by the Adviser, the Board concluded that it would be in the best interest of the Portfolios and their shareholders to approve renewal of the Management Agreement for another year. In reaching this conclusion the Board did not give particular weight to any single piece of information or factor referenced above. The Board considered these factors and information over the course of the year and in numerous meetings, some of which were in executive session with only the independent Board members and their counsel present. It is possible that individual Board members may have weighed these factors, and the information presented, differently in reaching their individual decisions to approve the Management Agreement.


85


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Trustees

  
       

Frank L. Bowman

  

Joseph J. Kearns

  
   

Kathleen A. Dennis

  

Michael F. Klein

  
   

Nancy C. Everett

  

Michael E. Nugent

  
   

Jakki L. Haussler

  

Chair of the Board

  
   

James F. Higgins

  

W. Allen Reed

  
   

Dr. Manuel H. Johnson

  

Fergus Reid

  

 

   

Officers

  
    John H. Gernon
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  

Custodian

  
Boston Financial Data Services, Inc.
2000 Crown Colony Drive
Quincy, Massachusetts 02169		   State Street Bank and Trust Company
One Lincoln Street
Boston, Massachusetts 02111		  
Independent Registered Public Accounting Firm  

Legal Counsel

  
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116		   Dechert LLP
1095 Avenue of the Americas
New York, New York 10036		  
Counsel to the Independent Trustees  

Adviser and Administrator

  
Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, New York 10036		   Morgan Stanley Investment Management Inc.
522 Fifth Avenue
New York, New York 10036		  
   

Sub-Adviser (solely with respect to European Equity Portfolio)

  
   

Morgan Stanley Investment Management Limited
25 Cabot Square, Canary Wharf
London, E14 4QA, England

  

This report is submitted for the general information of 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) 548-7786.

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.

Morgan Stanley Distribution, Inc., member FINRA.


#40113A

VARINSAN
1557037 EXP 8.31.17



 

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 annual 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 Variable Investment Series

 

/s/ John H. Gernon

 

John H. Gernon

 

Principal Executive Officer

 

August 17, 2016

 

 

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/ John H. Gernon

 

John H. Gernon

 

Principal Executive Officer

 

August 17, 2016

 

 

 

/s/ Francis Smith

 

Francis Smith

 

Principal Financial Officer

 

August 17, 2016