N-CSRS 1 y55143nvcsrs.txt FORM 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: 811-04310 Morgan Stanley Convertible Securities Trust (Exact name of registrant as specified in charter) 522 Fifth Avenue, New York, New York 10036 (Address of principal executive offices) (Zip code) Ronald E. Robison 522 Fifth Avenue, New York, New York 10036 (Name and address of agent for service) Registrant's telephone number, including area code: 212-296-6990 Date of fiscal year end: September 30, 2008 Date of reporting period: March 31, 2008 Item 1 - Report to Shareholders Welcome, Shareholder: In this report, you'll learn about how your investment in Morgan Stanley Convertible Securities Trust performed during the semiannual period. We will provide an overview of the market conditions, and discuss some of the factors that affected performance during the reporting period. In addition, this report includes the Fund's financial statements and a list of Fund investments. THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING OFFERED. MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THIS FUND. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE INFORMATION ON INVESTMENT RISKS. FUND REPORT For the six months ended March 31, 2008 TOTAL RETURN FOR THE 6 MONTHS ENDED MARCH 31, 2008
MERRILL LYNCH LIPPER ALL CONVERTIBLE CONVERTIBLE SECURITIES SECURITIES FUNDS CLASS A CLASS B CLASS C CLASS I(+) INDEX(1) INDEX(2) -7.01% -7.38% -7.36% -6.89% -8.68% -8.03%
(+) Formerly Class D shares. Renamed Class I shares effective March 31, 2008. The performance of the Fund's four share classes varies because each has different expenses. The Fund's total returns assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. Such costs would lower performance. See Performance Summary for standardized performance and benchmark information. MARKET CONDITIONS In the six-month period ended March 31, 2008, the convertible securities market exhibited weak performance but outperformed broad equity markets, as represented by the S&P 500(R) Index and Nasdaq Composite Index. In September, the Federal Open Market Committee (the "Fed") began reducing its target federal funds rate amid increasing evidence of economic slowdown and higher probabilities of recession. Together with high gasoline prices, high rates of home foreclosures and unemployment took a toll on consumers, who began to significantly curb their spending. With investors still preferring the relative safety of U.S. Treasury bonds in the uncertain economic environment, credit spreads continued to widen and equity markets remained volatile through the end of the year. In the first quarter of 2008, the weak conditions persisted. The convertible securities market continued to decline against a backdrop of volatility in the equity and credit markets. The Fed again lowered the target rate on the back of ongoing economic weakness. Energy and commodity prices soared to new highs, contributing to concerns about inflationary pressures. The financial sector remained especially turbulent, as billion dollar losses resulting from mortgage- related investments were widely reported. Bear Stearns, the fifth largest investment bank in the U.S., teetered on bankruptcy until JP Morgan Chase, with the assistance of the Fed, agreed to acquire it for a fraction of its former value. During the period under review, new issuance in the convertibles market continued to be strong, however. With the availability of funding in the credit markets all but evaporated, companies looked to the convertibles market for raising capital, fueling demand for convertible securities. New issue proceeds totaled $40 billion during the period, as compared to $50 billion for the same time last year. PERFORMANCE ANALYSIS All share classes of Morgan Stanley Convertible Securities Trust outperformed the Merrill Lynch All Convertible Securities Index and the Lipper Convertible Securities Funds Index for the six months ended March 31, 2008, assuming no deduction of applicable sales charges. The primary contributors to the Fund's outperformance relative to the Merrill Lynch All Convertible Securities Index were the consumer staples, energy and materials (specifically metals) sectors. The consumer 2 staples group benefited from increased global demand for agricultural products as well as renewed interest from investors seeking a "safe haven" during a time of economic uncertainty. Given that consumers need food and other staples regardless of whether the economy is expanding or contracting, investors tend to rotate into consumer staples stocks in periods of economic slowdown or recession. In the energy sector, rising oil and natural gas prices continued to bolster energy companies' earnings growth. Moreover, the weakening U.S. dollar during the period also benefited hard assets such as commodities and metals, which are priced in U.S. dollars and therefore offer increased purchasing power when the dollar's value is weaker, which attracts investors looking to hedge against inflation. However, other investments detracted from relative performance during the period. Although the Fund held an underweight allocation in the financials sector, the ongoing credit crisis continued to roil the share prices of banks, mortgage lenders, and large diversified financial stocks. The technology sector was another source of negative performance for the Fund. Slowing economic growth hurt demand for technology products and services, which led to lowered earnings expectations for a number of companies and caused even greater concern among investors already worried about the direction of the economy. As of the end of the reporting period, the Fund remained underweighted relative to the Merrill Lynch All Convertible Securities Index in the financials and consumer discretionary sectors, while the technology sector represented the Fund's largest absolute weight. In addition to monitoring the economic picture, we are keeping a close watch on the political situation, in particular the 2008 presidential election. Political risk may increase or decrease for certain sectors such as health care and financials, as certain policy proposals favored by the party in power may affect the profitability of companies in those sectors. There is no guarantee that any sectors mentioned will continue to perform as discussed herein or that securities in such sectors will be held by the Fund in the future. 3
TOP 10 HOLDINGS Lifepoint Hospitals Inc. 2.5% Illumina, Inc - 144A 2.3 L-3 Communications Corp. 1.9 Biomarin Pharmaceutical 1.6 Fisher Scientific International 1.6 Molson Coors Brewing Co. 1.6 Genzyme Corp. 1.5 Nii Holdings Inc. 1.5 Liberty Media Corp. 1.5 Eastman Kodak Co. 1.4
TOP FIVE INDUSTRIES Biotechnology 11.3% Medical Specialties 5.7 Aerospace & Defense 5.4 Oil & Gas Production 3.8 Wholesale Distributors 3.8
Data as of March 31, 2008. Subject to change daily. All percentages for top 10 holdings and top five industries are as a percentage of net assets. These data are provided for informational purposes only and should not be deemed a recommendation to buy or sell the securities mentioned. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. INVESTMENT STRATEGY THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN CONVERTIBLE SECURITIES. A CONVERTIBLE SECURITY IS A BOND, PREFERRED STOCK OR OTHER SECURITY THAT MAY BE CONVERTED INTO A PRESCRIBED AMOUNT OF COMMON STOCK AT A PRESTATED PRICE. THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS INC., MAY RETAIN THAT COMMON STOCK TO PERMIT ITS ORDERLY SALE OR TO ESTABLISH LONG- TERM HOLDING PERIODS FOR TAX PURPOSES. THE FUND IS NOT REQUIRED TO SELL THE STOCK TO ASSURE THAT THE REQUIRED PERCENTAGE OF ITS ASSETS IS INVESTED IN CONVERTIBLE SECURITIES. THE FUND'S CONVERTIBLE SECURITIES MAY INCLUDE LOWER RATED FIXED-INCOME SECURITIES COMMONLY KNOWN AS "JUNK BONDS." THE CONVERTIBLE SECURITIES ALSO MAY INCLUDE "EXCHANGEABLE" AND "SYNTHETIC" CONVERTIBLE SECURITIES. THE FUND MAY ALSO USE DERIVATIVE INSTRUMENTS. THESE DERIVATIVE INSTRUMENTS WILL BE COUNTED TOWARD THE 80 PERCENT POLICY DISCUSSED ABOVE TO THE EXTENT THEY HAVE ECONOMIC CHARACTERISTICS SIMILAR TO THE SECURITIES INCLUDED WITHIN THAT POLICY. IN DECIDING WHICH SECURITIES TO BUY, HOLD OR SELL, THE FUND'S INVESTMENT ADVISER CONSIDERS MARKET, ECONOMIC AND POLITICAL CONDITIONS. FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND AND FOURTH FISCAL QUARTERS. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM N-CSRS AND FORM N-CSR, RESPECTIVELY. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF 4 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 20549-0102. PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD YOU MAY OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICY AND PROCEDURES WITHOUT CHARGE, UPON REQUEST, BY CALLING TOLL FREE (800) 869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT WWW.MORGANSTANLEY.COM. IT IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV. YOU MAY OBTAIN INFORMATION REGARDING HOW THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JUNE 30 WITHOUT CHARGE BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT WWW.MORGANSTANLEY.COM. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV. HOUSEHOLDING NOTICE TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS. YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE DOCUMENTS BY CALLING (800) 869-NEWS, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS. 5 PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED MARCH 31, 2008
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS I SHARES++ (since 07/28/97) (since 10/31/85) (since 07/28/97) (since 07/28/97) SYMBOL CNSAX CNSBX CNSCX CNSDX 1 YEAR (1.45)%(3) (2.17)%(3) (2.16)%(3) (1.04)%(3) (6.63) (4) (6.98) (4) (3.12) (4) -- 5 YEARS 8.49 (3) 7.67 (3) 7.71 (3) 8.78 (3) 7.32 (4) 7.37 (4) 7.71 (4) -- 10 YEARS 5.31 (3) 4.65 (3) 4.54 (3) 5.57 (3) 4.75 (4) 4.65 (4) 4.54 (4) -- SINCE INCEPTION 5.95 (3) 7.37 (3) 5.17 (3) 6.21 (3) 5.42 (4) 7.37 (4) 5.17 (4) --
Performance data quoted represents past performance, which is no guarantee of future results and current performance may be lower or higher than the figures shown. For most recent month-end performance figures, please visit www.morganstanley.com/msim or speak with your Financial Advisor. Investment returns and principal value will fluctuate and fund shares, when redeemed, may be worth more or less than their original cost. The table does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance for Class A, Class B, Class C, and Class I shares will vary due to differences in sales charges and expenses. * The maximum front-end sales charge for Class A is 5.25%. ** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The CDSC declines to 0% after six years. Effective April 2005, Class B shares will generally convert to Class A shares approximately eight years after the end of the calendar month in which the shares were purchased. Performance for periods greater than eight years reflects this conversion (beginning April 2005). + The maximum contingent deferred sales charge for Class C is 1.0% for shares redeemed within one year of purchase. ++ Class I has no sales charge. (1) The Merrill Lynch All Convertible Securities Index is a market- capitalization weighted index of domestic corporate convertible securities. In order to be included in the index, bonds and preferred stocks must be convertible only to common stock and have a market value or original par value of at least $50 million. 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. (2) The Lipper Convertible Securities Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Convertible Securities Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 10 funds represented in this Index. The Fund is in the Lipper Convertible Securities Funds classification as of the date of this report. (3) Figure shown assumes reinvestment of all distributions and does not reflect the deduction of any sales charges. (4) Figure shown assumes reinvestment of all distributions and the deduction of the maximum applicable sales charge. See the Fund's current prospectus for complete details on fees and sales charges. 6 EXPENSE EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption fees; and (2) ongoing costs, including advisory fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 10/01/07 - 03/31/08. ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD@ ------------- ------------- -------------- 10/01/07 - 10/01/07 03/31/08 03/31/08 ------------- ------------- -------------- CLASS A Actual (-7.01% return)........................ $1,000.00 $ 929.90 $5.36 Hypothetical (5% annual return before expenses)................................... $1,000.00 $1,019.45 $5.60 CLASS B Actual (-7.38% return)........................ $1,000.00 $ 926.20 $9.00 Hypothetical (5% annual return before expenses)................................... $1,000.00 $1,015.65 $9.42 CLASS C Actual (-7.36% return)........................ $1,000.00 $ 926.40 $9.01 Hypothetical (5% annual return before expenses)................................... $1,000.00 $1,015.65 $9.42 CLASS I@@ Actual (-6.89% return)........................ $1,000.00 $ 931.10 $4.20 Hypothetical (5% annual return before expenses)................................... $1,000.00 $1,020.65 $4.39
--------- @ Expenses are equal to the fund's annualized expense ratios of 1.11%, 1.87%, 1.87% and 0.87% for Class A, Class B, Class C and Class I shares, respectively, multiplied by the average account value over the period, multiplied by 183/366 (to reflect the one-half year period). If the Fund had borne all of its expenses, the annualized expense ratios would have been 1.12%, 1.88%, 1.88% and 0.88% for Class A, Class B, Class C and Class I shares, respectively. @@ Formerly Class D shares. Renamed Class I shares effective March 31, 2008. 7 Morgan Stanley Convertible Securities Trust PORTFOLIO OF INVESTMENT - MARCH 31, 2008 (UNAUDITED)
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------------ Convertible Bonds (74.0%) Aerospace & Defense (5.4%) $1,500 AAR Corp. ................................. 1.75 % 02/01/26 $ 1,691,250 1,360 Ceradyne, Inc. ............................ 2.875 12/15/35 1,212,100 1,565 DRS Technologies Inc. - 144A (b)........... 2.00 02/01/26 1,770,406 2,030 L-3 Communications Corp. .................. 3.00 08/01/35 2,545,113 ------------- 7,218,869 ------------- Agricultural Commodities/Milling (1.0%) 1,120 Archer Daniels Midland Co. - 144A (b)...... 0.875 02/15/14 1,306,200 ------------- Alternative Power Generation (1.5%) 1,750 Covanta Holding Corp. ..................... 1.00 02/01/27 1,946,875 ------------- Apparel/Footwear (1.1%) 1,700 Iconix Brad Group, Inc. - 144A (b)......... 1.875 06/30/12 1,549,125 ------------- Beverages: Alcoholic (1.6%) 1,700 Molson Coors Brewing Co. .................. 2.50 07/30/13 2,097,375 ------------- Biotechnology (11.3%) 1,295 Affymetrix, Inc. .......................... 3.50 01/15/38 1,225,394 400 Alexion Pharmaceuticals, Inc. ............. 1.375 02/01/12 793,000 1,160 Biomarin Pharmaceutical.................... 1.875 04/23/17 2,182,250 1,750 Genzyme Corp. ............................. 1.25 12/01/23 2,036,563 1,120 Gilead Sciences Inc. ...................... 0.50 05/01/11 1,593,200 1,690 Illumina, inc. - 144A (b).................. 0.625 02/15/14 3,058,900 1,405 Invitrogen Corp. .......................... 1.50 02/15/24 1,433,100 540 Isis Pharmaceuticals, Inc. ................ 2.625 02/15/27 661,500 480 Millipore Corp. ........................... 3.75 06/01/26 493,800 1,270 Millipore Corp. - 144A (b)................. 3.75 06/01/26 1,306,512 1,360 Oscient Pharmaceuticals Corp. ............. 3.50 04/15/11 442,000 ------------- 15,226,219 ------------- Cable/Satellite TV (1.5%) 2,000 Liberty Media Corp. ....................... 0.75 03/30/23 1,990,000 ------------- Coal (0.9%) 1,100 Peabody Energy Corp. ...................... 4.75 12/15/41 1,254,000 ------------- Computer Peripherals (2.2%) 1,350 EMC Corp. - 144A (b)....................... 1.75 12/01/11 1,594,688 660 Maxtor Corp. .............................. 6.80 04/30/10 708,674 680 Synaptics, Inc. ........................... 0.75 12/01/24 634,950 ------------- 2,938,312 =============
See Notes to Financial Statements 8 Morgan Stanley Convertible Securities Trust PORTFOLIO OF INVESTMENT - MARCH 31, 2008 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------------ Contract Drilling (2.5%) $1,400 Nabors Industries, Inc. ................... 0.94 % 05/15/11 $ 1,438,500 750 Transocean Inc. (Series A)................. 1.625 12/15/37 824,062 1,000 Transocean Inc. (Series B)................. 1.50 12/15/37 1,101,250 ------------- 3,363,812 ============= Electrical Products (0.7%) 820 SunPower Corp. ............................ 0.75 08/01/27 951,200 ------------- Electronic Distributors (0.9%) 1,050 Anixter International Inc. - 144A (b)...... 1.00 02/15/13 1,232,438 ------------- Electronics/Appliance Stores (0.7%) 900 Best Buy Co., Inc. ........................ 2.25 01/15/22 972,000 ------------- Electronics/Appliances (1.4%) 2,000 Eastman Kodak Co. ......................... 3.375 10/15/33 1,947,500 ------------- Environmental Services (1.0%) 1,200 Waste Connections, Inc. ................... 3.75 04/01/26 1,333,500 ------------- Financial Services (1.3%) 1,660 Nasdaq OMX Group, Inc. - 144A (b).......... 2.50 08/15/13 1,716,025 ------------- Hospital/Nursing Management (2.5%) 4,000 Lifepoint Hospitals, Inc. ................. 3.50 05/15/14 3,380,000 ------------- Industrial Machinery (0.4%) 325 Actuant Corp. ............................. 2.00 11/15/23 511,469 ------------- Information Technology Services (1.5%) 1,020 Lawson Software - 144A (b)................. 2.50 04/15/12 944,775 1,190 Level 3 Communications Inc. ............... 6.00 09/15/09 1,062,075 ------------- 2,006,850 ============= Internet Software/Services (1.6%) 1,700 Equinix Inc. .............................. 2.50 04/15/12 1,532,125 850 GSI Commerce, Inc. - 144A (b).............. 2.50 06/01/27 653,438 ------------- 2,185,563 ============= Marine Shipping (0.9%) 1,360 Horizon Lines, Inc. - 144A (b)............. 4.25 08/15/12 1,184,900 ------------- Medical Specialties (5.7%) 1,360 Fisher Scientific International............ 3.25 03/01/24 2,116,500 1,415 Hologic, Inc. ............................. 2.00 12/15/37 1,367,244 1,200 Medtronic Inc. ............................ 1.50 04/15/11 1,270,500 1,320 Sonosite, Inc. ............................ 3.75 07/15/14 1,344,750 1,650 Wright Medical Group, Inc. ................ 2.625 12/01/14 1,623,187 ------------- 7,722,181 =============
See Notes to Financial Statements 9 Morgan Stanley Convertible Securities Trust PORTFOLIO OF INVESTMENT - MARCH 31, 2008 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------------ Metal Fabrications (1.1%) $1,485 General Cable Corp. - 144A (b)............. 1.00 % 10/15/12 $ 1,472,006 ------------- Miscellaneous Commercial Services (0.9%) 475 FTI Consulting Inc. ....................... 3.75 07/15/12 1,145,937 ------------- Oil & Gas Production (3.8%) 1,260 Chesapeake Energy Corp. ................... 2.75 11/15/35 1,688,400 1,800 Delta Petroleum Corp. ..................... 3.75 05/01/37 1,946,250 590 GMX Resources, Inc. - 144A (b)............. 5.00 02/01/13 747,088 660 St. Mary Land & Exploration Co. ........... 3.50 04/01/27 669,900 ------------- 5,051,638 ============= Oilfield Services/Equipment (2.1%) 1,100 Helix Energy Solutions..................... 3.25 12/15/25 1,350,250 500 Cameron International Corp. ............... 2.50 06/15/26 703,125 308 SESI LLC................................... 1.50 (c) 12/15/26 334,180 437 SESI LLC - 144A (b)........................ 1.50 (c) 12/15/26 474,145 ------------- 2,861,700 ============= Other Consumer Services (0.2%) 425 Ambassadors International, Inc. ........... 3.75 04/15/27 270,406 ------------- Packaged Software (2.4%) 1,565 Blackboard Inc. ........................... 3.25 07/01/27 1,498,487 1,020 Sybase, Inc. .............................. 1.75 02/22/25 1,197,225 510 Symantec Corp. ............................ 0.75 06/15/11 545,700 ------------- 3,241,412 ============= Pharmaceuticals: Major (1.2%) 1,650 Wyeth...................................... 3.581 (d) 01/15/24 1,663,150 ------------- Pharmaceuticals: Other (2.0%) 1,030 Inverness Medical Innovations, Inc. - 144A (b)...................................... 3.00 05/15/16 970,775 1,700 Sciele Pharma, Inc. ....................... 2.625 05/15/27 1,636,250 ------------- 2,607,025 ============= Precious Metals (0.5%) 575 Newmont Mining Corp. ...................... 1.25 07/15/14 701,500 ------------- Real Estate Development (0.6%) 850 Icahn Enterprises LP....................... 4.00 08/15/13 756,755 ------------- Recreational Products (0.4%) 600 Scientific Games Corp. .................... 0.75 (e) 12/01/24 597,000 -------------
See Notes to Financial Statements 10 Morgan Stanley Convertible Securities Trust PORTFOLIO OF INVESTMENT - MARCH 31, 2008 (UNAUDITED) continued
PRINCIPAL AMOUNT IN COUPON MATURITY THOUSANDS RATE DATE VALUE ------------------------------------------------------------------------------------------------ Semiconductors (4.2%) $ 500 Cypress Semiconductor Co. - 144A (b)....... 1.00 % 09/15/09 $ 595,625 1,750 Intel Corp. - 144A (b)..................... 2.95 12/15/35 1,725,938 1,320 Microchip Technology, Inc. - 144A (b)...... 2.125 12/15/37 1,442,100 1,400 On Semiconductor Corp. - 144A (b).......... 2.625 12/15/26 1,167,250 800 Xilinx, Inc. - 144A (b).................... 3.125 03/15/37 726,000 ------------- 5,656,913 ============= Services to the Health Industry (1.2%) 1,400 Trizetto Group............................. 2.75 10/01/25 1,561,000 ------------- Telecommunication Equipment (0.5%) 1,015 Arris Group Inc. .......................... 2.00 11/15/26 729,278 ------------- Wholesale Distributors (3.8%) 2,000 Sport Supply Group, Inc. .................. 5.75 12/01/09 1,940,000 1,750 Electronic Data Systems Corp. ............. 3.875 07/15/23 1,712,812 300 WESCO International Inc. .................. 1.75 11/15/26 250,125 1,400 WESCO International. Inc. - 144A (b)....... 1.75 11/15/26 1,167,250 ------------- 5,070,187 ============= Wireless Telecommunications (1.5%) 2,000 NII Holdings, Inc. ........................ 3.125 06/15/12 1,597,500 400 NII Holdings, Inc. ........................ 2.75 08/15/25 398,000 ------------- 1,995,500 ============= Total Convertible Bonds (Cost $98,194,383).......................... 99,415,820 =============
NUMBER OF SHARES --------- Convertible Preferred Stocks (16.7%) Agricultural Commodities/Milling (0.3%) 425 Bunge Ltd. $51.25 (Bermuda)................................................. 363,239 ----------- Chemicals: Major Diversified (1.2%) 31,000 Celanese Corp. $1.0625...................................................... 1,568,910 ----------- Electric Utilities (1.5%) 10,500 Entergy Corp. $3.8125....................................................... 685,230 4,100 NRG Energy, Inc. $14.375.................................................... 1,388,055 ----------- 2,073,285 -----------
See Notes to Financial Statements 11 Morgan Stanley Convertible Securities Trust PORTFOLIO OF INVESTMENT - MARCH 31, 2008 (UNAUDITED) continued
NUMBER OF SHARES VALUE ----------------------------------------------------------------------------------------------------- Finance/Rental/Leasing (1.0%) 19 Federal National Mortgage Assoc. $5,375.00.................................. $ 1,387,000 ----------- Financial Conglomerates (1.4%) 39,050 Citigroup, Inc. (Series T) $3.25............................................ 1,854,094 ----------- Investment Banks/Brokers (1.4%) 59,100 Lazard Ltd. $1.6563 (Bermuda)............................................... 1,919,568 ----------- Life/Health Insurance (1.3%) 58,500 MetLife, Inc. $1.5938....................................................... 1,737,450 ----------- Major Banks (1.2%) 1,625 Bank of America Corp. (Series L) $72.50..................................... 1,678,625 ----------- Motor Vehicles (0.5%) 29,000 General Motors Corp. (Series D) $0.375...................................... 664,100 ----------- Office Equipment/Supplies (1.0%) 27,500 Avery Dennison Corp. $3.9375................................................ 1,373,625 ----------- Oil & Gas Production (0.9%) 4,950 McMoRan Exploration Co. $6.75............................................... 592,218 8,300 PetroQuest Energy, Inc. (Series B) $3.4375.................................. 563,155 ----------- 1,155,373 ----------- Pharmaceuticals: Generic Drugs (1.0%) 1,560 Mylan, Inc. $65.00.......................................................... 1,348,402 ----------- Pharmaceuticals: Major (0.8%) 6,800 Schering-Plough Corp. $15.00................................................ 1,041,624 ----------- Precious Metals (1.0%) 4,900 Freeport-McMoRan Cooper & Gold Inc. $6.75................................... 688,205 10,900 Vale Capital Ltd. $2.75 (Cayman Islands).................................... 708,500 ----------- 1,396,705 ----------- Savings Banks (0.6%) 29,600 Washington Mutual, Inc. (Series UNIT) $2.6875............................... 840,640 -----------
See Notes to Financial Statements 12 Morgan Stanley Convertible Securities Trust PORTFOLIO OF INVESTMENT - MARCH 31, 2008 (UNAUDITED) continued
NUMBER OF SHARES VALUE ----------------------------------------------------------------------------------------------------- Telecommunication Equipment (0.6%) 1,100 Lucent Technologies Capital Trust I $77.50.................................. $ 770,000 ----------- Wireless Telecommunications (1.0%) 24,000 Crown Castle International Corp. $3.125..................................... 1,320,000 ----------- Total Convertible Preferred Stocks (Cost $23,743,884)....................... 22,492,640 ----------- Common Stocks (3.3%) Containers/Packaging (1.1%) 26,422 Owens-Illinois, Inc. (a).................................................... 1,490,993 ----------- Oil & Gas Pipelines (1.5%) 58,114 Williams Companies, Inc. (The).............................................. 1,916,600 ----------- Wireless Telecommunications (0.7%) 30,492 NII Holdings Inc. (a)....................................................... 969,036 ----------- Total Common Stocks (Cost $2,641,288)....................................... 4,376,629 -----------
NUMBER OF SHARES (000) ------------ Short-Term Investment (f) (4.3%) Investment Company 5,787 Morgan Stanley Institutional Liquidity Money Market Portfolio - Institutional Class (Cost $5,786,989)................................................................. 5,786,989 ------------- Total Investments (Cost $130,366,544) (g).................................... 98.3% 132,072,078 Other Assets in Excess of Liabilities ....................................... 1.7 2,247,496 ----- ------------- Net Assets .................................................................. 100.0% $ 134,319,574 ===== =============
---------- (a) Non-income producing security. (b) Resale is restricted to qualified institutional investors. (c) Rate in effect at March 31, 2008. Rate will reset to 1.25% at a future specified date. (d) Variable rate security. Rate shown is the rate in effect at March 31, 2008. (e) Rate in effect at March 31, 2008. Rate will reset to 0.50% at a future specified date. (f) See Note 4 to the financial statements regarding investments in Morgan Stanley Institutional Liquidity Money Market Portfolio - Institutional Class. (g) The aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $10,532,477 and the aggregate gross unrealized depreciation is $9,130,484, resulting in net unrealized appreciation of $1,401,993.
See Notes to Financial Statements 13 Morgan Stanley Convertible Securities Trust SUMMARY OF INVESTMENTS - MARCH 31, 2008 (UNAUDITED)
PERCENT OF TOTAL INDUSTRY VALUE INVESTMENTS ----------------------------------------------------- Biotechnology............ $ 15,226,219 11.5% Medical Specialties...... 7,722,181 5.8 Aerospace & Defense...... 7,218,869 5.5 Oil & Gas Production..... 6,207,011 4.7 Investment Company....... 5,786,989 4.4 Semiconductors........... 5,656,913 4.3 Wholesale Distributors... 5,070,187 3.8 Wireless Telecommunications..... 4,284,536 3.2 Hospital/Nursing Management............. 3,380,000 2.6 Contract Drilling........ 3,363,812 2.5 Packaged Software........ 3,241,412 2.5 Computer Peripherals..... 2,938,312 2.2 Oilfield Services/Equipment..... 2,861,700 2.2 Pharmaceuticals: Major... 2,704,774 2.0 Pharmaceuticals: Other... 2,607,025 2.0 Internet Software/Services...... 2,185,563 1.6 Precious Metals.......... 2,098,205 1.6 Beverages: Alcoholic..... 2,097,375 1.6 Electric Utilities....... 2,073,285 1.6 Information Technology Services............... 2,006,850 1.5 Cable/Satellite Tv....... 1,990,000 1.5 Electronics/Appliances... 1,947,500 1.5 Alternative Power Generation............. 1,946,875 1.5 Investment Banks/Brokers.......... 1,919,568 1.5 Oil & Gas Pipelines...... 1,916,600 1.5 Financial Conglomerates.. 1,854,094 1.4 Life/Health Insurance.... 1,737,450 1.3 Financial Services....... 1,716,025 1.3 Major Banks.............. 1,678,625 1.3 Agricultural Commodities/Milling.... 1,669,439 1.3 Chemicals: Major Diversified............ 1,568,910 1.2 Services To The Health Industry............... 1,561,000 1.2 Apparel/Footwear......... 1,549,125 1.2 Telecommunication Equipment.............. 1,499,278 1.1 Containers/Packaging..... 1,490,993 1.1 Metal Fabrications....... 1,472,006 1.1 Finance/Rental/Leasing... 1,387,000 1.1 Office Equipment/Supplies..... 1,373,625 1.0 Pharmaceuticals: Generic Drugs.................. 1,348,402 1.0 Environmental Services... 1,333,500 1.0 Coal..................... 1,254,000 0.9 Electronic Distributors.. 1,232,438 0.9 Marine Shipping.......... 1,184,900 0.9 Miscellaneous Commercial Services............... 1,145,937 0.9 Electronics/Appliance Stores................. 972,000 0.7 Electrical Products...... 951,200 0.7 Savings Banks............ 840,640 0.6 Real Estate Development.. 756,755 0.6 Motor Vehicles........... 664,100 0.5 Recreational Products.... 597,000 0.5 Industrial Machinery..... 511,469 0.4 Other Consumer Services.. 270,406 0.2 ------------ ----- $132,072,078 100.0% ============ =====
See Notes to Financial Statements 14 Morgan Stanley Convertible Securities Trust FINANCIAL STATEMENTS Statement of Assets and Liabilities March 31, 2008 (unaudited) Assets: Investments in securities, at value (cost $124,579,555).... $126,285,089 Investment in affiliate, at value (cost $5,786,989)...... 5,786,989 Receivable for: Investments sold............ 1,861,765 Interest.................... 743,336 Dividends................... 36,913 Shares of beneficial interest sold................ 19,010 Dividends from affiliate.... 18,211 Prepaid expenses and other assets....................... 27,055 ------------ Total Assets................ 134,778,368 ------------ Liabilities: Payable for: Shares of beneficial interest redeemed............ 199,384 Investment advisory fee..... 58,684 Distribution fee............ 54,464 Transfer agent fee.......... 10,344 Administration fee.......... 9,190 Accrued expenses and other payables..................... 126,728 ------------ Total Liabilities........... 458,794 ------------ Net Assets.................. $134,319,574 ============ Composition of Net Assets: Paid-in-capital................ $132,305,737 Net unrealized appreciation.... 1,705,534 Accumulated undistributed net investment income............ 728,765 Accumulated net realized loss.. (420,462) ------------ Net Assets.................. $134,319,574 ============ Class A Shares: Net Assets..................... $94,629,371 Shares Outstanding (unlimited authorized, $.01 par value).. 5,425,514 Net Asset Value Per Share... $17.44 ====== Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value).................... $18.41 ====== Class B Shares: Net Assets..................... $32,158,759 Shares Outstanding (unlimited authorized, $.01 par value).. 1,840,633 Net Asset Value Per Share... $17.47 ====== Class C Shares: Net Assets..................... $7,433,379 Shares Outstanding (unlimited authorized, $.01 par value).. 428,305 Net Asset Value Per Share... $17.36 ====== Class I Shares@@: Net Assets..................... $98,065 Shares Outstanding (unlimited authorized, $.01 par value).. 5,615 Net Asset Value Per Share... $17.46 ======
---------- @@ Formerly Class D shares. Renamed Class I shares effective March 31, 2008 Statement of Operations For the six months ended March 31, 2008 (unaudited) Net Investment Income: Income Interest....................... $ 1,215,611 Dividends...................... 622,743 Dividends from affiliate....... 260,036 ------------ Total Income................ 2,098,390 ------------ Expenses Investment advisory fee........ 386,220 Distribution fee (Class A shares)...................... 121,652 Distribution fee (Class B shares)...................... 189,573 Distribution fee (Class C shares)...................... 40,433 Transfer agent fees and expenses..................... 90,062 Administration fee............. 59,419 Shareholder reports and notices...................... 30,749 Professional fees.............. 29,799 Registration fees.............. 28,557 Custodian fees................. 7,532 Trustees' fees and expenses.... 4,810 Other.......................... 16,525 ------------ Total Expenses.............. 1,005,331 Less: rebate from Morgan Stanley affiliated cash sweep (Note 4)..................... (7,593) Less: expense offset........... (451) ------------ Net Expenses................ 997,287 ------------ Net Investment Income....... 1,101,103 ------------ Net Realized and Unrealized Gain (Loss): Net realized gain.............. 1,305,056 Net change in unrealized appreciation/depreciation.... (13,188,486) ------------ Net Loss.................... (11,883,430) ------------ Net Decrease................... $(10,782,327) ============
15 Morgan Stanley Convertible Securities Trust FINANCIAL STATEMENTS continued Statements of Changes in Net Assets
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED MARCH 31, 2008 SEPTEMBER 30, 2007 -------------- ------------------ (unaudited) Increase (Decrease) in Net Assets: Operations: Net investment income................................... $ 1,101,103 $ 3,236,972 Net realized gain....................................... 1,305,056 12,524,757 Net change in unrealized appreciation/depreciation...... (13,188,486) 4,663,858 ------------ ------------ Net Increase (Decrease).............................. (10,782,327) 20,425,587 ------------ ------------ Dividends to Shareholders from net investment income: Class A shares.......................................... (1,288,567) (3,059,250) Class B shares.......................................... (316,006) (943,872) Class C shares.......................................... (71,149) (169,539) Class I shares@@........................................ (1,427) (75,270) ------------ ------------ Total Dividends...................................... (1,677,149) (4,247,931) ------------ ------------ Net decrease from transactions in shares of beneficial interest.............................................. (13,240,244) (31,803,608) ------------ ------------ Net Decrease......................................... (25,699,720) (15,625,952) Net Assets: Beginning of period..................................... 160,019,294 175,645,246 ------------ ------------ End of Period (Including accumulated undistributed net investment income of $728,765 and $1,304,811, respectively)........ $134,319,574 $160,019,294 ============ ============
---------- @@ Formerly Class D shares. Renamed Class I shares effective March 31, 2008. See Notes to Financial Statements 16 Morgan Stanley Convertible Securities Trust NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2008 (UNAUDITED) 1. Organization and Accounting Policies Morgan Stanley Convertible Securities Trust (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a diversified, open- end management investment company. The Fund's investment objective is to seek a high level of total return on its assets through a combination of current income and capital appreciation. The Fund was organized as a Massachusetts business trust on May 21, 1985 and commenced operations on October 31, 1985. On July 28, 1997, the Fund converted to a multiple class share structure. The Fund offers Class A shares, Class B shares, Class C shares and Class I shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within eighteen months, six years and one year, respectively. Class I shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses. Effective March 31, 2008, Class D shares were renamed Class I shares. The Fund will assess a 2% redemption fee, on Class A shares, Class B shares, Class C shares, and Class I shares, which is paid directly to the Fund, for shares redeemed or exchanged within seven days of purchase, subject to certain exceptions. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading. The following is a summary of significant accounting policies: A. Valuation of Investments -- (1) an equity portfolio security listed or traded on the New York Stock Exchange ("NYSE") or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) when market quotations are not readily available including circumstances under which Morgan Stanley Investment Advisors Inc. (the "Investment Adviser"), determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund's 17 Morgan Stanley Convertible Securities Trust NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2008 (UNAUDITED) continued Trustees. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund's Trustees or by the Investment Adviser using a pricing service and/or procedures approved by the Trustees of the Fund; (6) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees ; (7) investments in open-end mutual funds, including the Morgan Stanley Institutional Liquidity Funds, are valued at the net asset value as of the close of each business day; and (8) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark- to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. B. Accounting for Investments -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Discounts are accreted and premiums are amortized over the life of the respective securities and are included in interest income. Interest income is accrued daily. C. 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. D. Federal Income Tax Policy -- It is the Fund's policy to comply with the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no provision for federal income taxes is required. The Fund files tax returns with the U.S. Internal Revenue Service, New York State and New York City. The Fund adopted the provisions of the Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48") Accounting for Uncertainty in Income Taxes on March 30, 2008. FIN 48 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. The implementation of FIN 48 did not result in any unrecognized tax benefits in the accompanying financial statements. If applicable, the Fund recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other expenses in the Statement of Operations. Each of the tax years in the four year period ended March 31, 2008, remains subject to examination by taxing authorities. E. Dividends and Distributions to Shareholders -- Dividends and distributions to shareholders are recorded on the ex-dividend date. 18 Morgan Stanley Convertible Securities Trust NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2008 (UNAUDITED) continued F. Use of Estimates -- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. 2. Investment Advisory/Administration Agreements Pursuant to an Investment Advisory Agreement with the Investment Adviser, the Fund pays an advisory fee, accrued daily and payable monthly, by applying the following annual rates to the net assets of the Fund determined as of the close of each business day: 0.52% to the portion of the daily net assets not exceeding $750 million; 0.47% to the portion of the daily net assets exceeding $750 million but not exceeding $1 billion; 0.42% to the portion of the daily net assets exceeding $1 billion but not exceeding $1.5 billion; 0.395% to the portion of the daily net assets exceeding $1.5 billion but not exceeding $2 billion; 0.37% to the portion of the daily net assets exceeding $2 billion but not exceeding $3 billion; and 0.345% to the portion of the daily net assets in excess of $3 billion. Pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% to the Fund's daily net assets. Under an agreement between the Administrator and State Street Bank and Trust Company ("State Street"), State Street provides certain administrative services to the Fund. For such services, the Administrator pays State Street a portion of the fee the Administrator receives from the Fund. 3. Plan of Distribution Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Adviser and Administrator. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the average daily net assets of Class A shares; (ii) Class B -- up to 1.0% of the lesser of: (a) the average daily aggregate gross sales of the Class B shares since the inception of the Fund (not including reinvestment of dividend or capital gain distributions) less the average daily aggregate net asset value of the Class B shares redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or waived; or (b) the average daily net assets of Class B shares; and (iii) Class C -- up to 1.0% of the average daily net assets of Class C shares. In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B 19 Morgan Stanley Convertible Securities Trust NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2008 (UNAUDITED) continued shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $110,494,169 at March 31, 2008. In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors and other authorized financial representatives at the time of sale may be reimbursed in the subsequent calendar year. For the six months ended March 31, 2008, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.24% and 1.0%, respectively. The Distributor has informed the Fund that for the six months ended March 31, 2008, it received contingent deferred sales charges from certain redemptions of the Fund's Class A shares, Class B shares and Class C shares of $166, $31,175 and $260, respectively and received $6,981 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund. 4. Security Transactions and Transactions with Affiliates The Fund invests in Morgan Stanley Institutional Liquidity Fund -- Money Market Portfolio, an open-end management investment company managed by the Investment Adviser. Investment advisory fees paid by the Fund are reduced by an amount equal to the advisory and administrative service fees paid by Morgan Stanley Institutional Liquidity Fund -- Money Market Portfolio with respect to assets invested by the Fund in Morgan Stanley Institutional Liquidity Fund -- Money Market Portfolio. For the six months ended March 31, 2008, advisory fees paid were reduced by $7,593 relating to the Fund's investment in Morgan Stanley Institutional Liquidity Fund -- Money Market Portfolio. Income distributions earned by the Fund are recorded as dividends from affiliate in the Statement of Operations and totaled $260,036 for the six months ended March 31, 2008. During the six months ended March 31, 2008, cost of purchases and sales of investments in Morgan Stanley Institutional Liquidity Fund -- Money Market Portfolio aggregated $39,283,810 and $53,903,460, respectively. The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the six months ended March 31, 2008 aggregated $72,611,912 and $73,563,925, respectively. Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund's transfer agent. 20 Morgan Stanley Convertible Securities Trust NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2008 (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 March 31, 2008, included in Trustees' fees and expenses in the Statement of Operations amounted to $2,977. At March 31, 2008, the Fund had an accrued pension liability of $59,721 which is included in accrued expenses in the Statement of Assets and Liabilities. 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 net asset value of the Fund. 5. Expense Offset The expense offset represents a reduction of the fees and expenses for interest earned on cash balances maintained by the Fund with the transfer agent. 21 Morgan Stanley Convertible Securities Trust NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2008 (UNAUDITED) continued 6. Shares of Beneficial Interest Transactions in shares of beneficial interest were as follows:
FOR THE SIX MONTHS ENDED FOR THE YEAR MARCH 31, 2008 ENDED ---------------------- SEPTEMBER 30, 2007 (unaudited) ------------------------- SHARES AMOUNT SHARES SHARES -------- ----------- ---------- ------------ CLASS A SHARES Sold............................................ 142,344 2,641,787 79,957 $ 1,442,848 Conversion from Class B......................... 3,656 65,420 167,844 3,055,341 Reinvestment of dividends....................... 64,227 1,154,381 136,809 2,512,041 Redeemed........................................ (498,358) (9,191,212) (1,100,385) (20,082,209) -------- ----------- ---------- ------------ Net decrease - Class A.......................... (288,131) (5,329,624) (715,775) (13,071,979) -------- ----------- ---------- ------------ CLASS B SHARES Sold............................................ 26,996 502,854 192,179 3,475,391 Conversion to Class A........................... (3,660) (65,420) (167,728) (3,055,341) Reinvestment of dividends....................... 14,908 268,290 36,462 669,905 Redeemed........................................ (424,439) (7,794,022) (820,904) (14,982,749) -------- ----------- ---------- ------------ Net decrease - Class B.......................... (386,195) (7,088,298) (759,991) (13,892,794) -------- ----------- ---------- ------------ CLASS C SHARES Sold............................................ 30,680 560,513 30,690 559,935 Reinvestment of dividends....................... 3,365 59,974 6,582 120,242 Redeemed........................................ (52,718) (955,536) (75,083) (1,362,784) -------- ----------- ---------- ------------ Net decrease - Class C.......................... (18,673) (335,049) (37,811) (682,607) -------- ----------- ---------- ------------ CLASS I SHARES@@ Sold............................................ 69 1,280 3,186 57,829 Reinvestment of dividends....................... 60 1,071 559 10,194 Redeemed........................................ (25,489) (489,624) (231,659) (4,224,251) -------- ----------- ---------- ------------ Net decrease - Class I.......................... (25,360) (487,273) (227,914) (4,156,228) -------- ----------- ---------- ------------ Net decrease in Fund............................ (718,359) (13,240,244) (1,741,491) $(31,803,608) ======== =========== ========== ============
---------- @@ Formerly Class D shares. Renamed Class I shares effective March 31, 2008. 7. Federal Income Tax Status The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To 22 Morgan Stanley Convertible Securities Trust NOTES TO FINANCIAL STATEMENTS - MARCH 31, 2008 (UNAUDITED) continued the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital. As of September 30, 2007, the Fund had temporary book/tax differences primarily attributable to book amortization of premiums on debt securities and tax adjustments on convertible preferred stock. 8. Accounting Pronouncements On March 19, 2008, Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("FAS 161"). FAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The applications of FAS 161 is required for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. At this time, management is evaluating the implications of FAS 161 and its impact on the financial statements has not yet been determined. In September 2006, Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Management is currently evaluating the impact the adoption of SFAS 157 will have on the Trust's financial statement disclosures. 23 Morgan Stanley Convertible Securities Trust FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE SIX FOR THE YEAR ENDED SEPTEMBER 30, MONTHS ENDED -------------------------------------------------------- MARCH 31, 2008 2007 2006 2005 2004 2003 -------------- -------- -------- -------- ------ ------ (unaudited) Class A Shares Selected Per Share Data: Net asset value, beginning of period......... $19.01 $17.29 $16.46 $15.78 $14.76 $12.76 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income++................... 0.16 0.39 0.43 0.47 0.48 0.52 Net realized and unrealized gain (loss)... (1.50) 1.84 0.82 0.69 1.06 1.97 ------ ----- ----- ----- ----- ---- Total income (loss) from investment operations.................................. (1.34) 2.23 1.25 1.16 1.54 2.49 ------ ----- ----- ----- ----- ----- Less dividends from net investment income.... (0.23) (0.51) (0.42) (0.48) (0.52) (0.49) ------ ------ ------ ------ ------ ------ Net asset value, end of period............... $17.44 $19.01 $17.29 $16.46 $15.78 $14.76 ====== ====== ====== ====== ====== ====== Total Return++++............................. (7.01)%(1) 13.03% 7.64% 7.47% 10.49% 19.76% Ratios to Average Net Assets(3): Total expenses (before expense offset)....... 1.11 %(2)(4) 1.10%(4) 1.12% 1.11% 1.04% 1.08% Net investment income........................ 1.72 %(2)(4) 2.16%(4) 2.55% 2.84% 2.98% 3.59% Supplemental Data: Net assets, end of period, in thousands...... $94,629 $108,594 $111,137 $118,298 $8,314 $5,284 Portfolio turnover rate...................... 53 %(1) 97% 58% 47% 62% 93%
---------- ++ The per share amounts were computed using an average number of shares outstanding during the period. ++++ Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (1) Not annualized. (2) Annualized. (3) Reflects overall Fund ratios for investment income and non-class specific expenses. (4) Reflects rebate of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio - Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets had an effect of 0.01% for the period ended March 31, 2008 and an effect of less than 0.005% for the period ended September 30, 2007.
See Notes to Financial Statements 24 Morgan Stanley Convertible Securities Trust FINANCIAL HIGHLIGHTS continued
FOR THE SIX FOR THE YEAR ENDED SEPTEMBER 30, MONTHS ENDED --------------------------------------------------------- MARCH 31, 2008 2007 2006 2005 2004 2003 -------------- ------- ------- ------- -------- -------- (unaudited) Class B Shares Selected Per Share Data: Net asset value, beginning of period......... $19.03 $17.31 $16.48 $15.78 $14.76 $12.76 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income++................... 0.09 0.26 0.30 0.33 0.35 0.39 Net realized and unrealized gain (loss)... (1.49) 1.83 0.82 0.71 1.07 2.00 ------ ----- ----- ----- ----- ----- Total income (loss) from investment operations.................................. (1.40) 2.09 1.12 1.04 1.42 2.39 ------ ----- ----- ----- ----- ----- Less dividends from net investment income.... (0.16) (0.37) (0.29) (0.34) (0.40) (0.39) ------ ------ ------ ------ ------ ------ Net asset value, end of period............... $17.47 $19.03 $17.31 $16.48 $15.78 $14.76 ====== ====== ====== ====== ====== ====== Total Return++++............................. (7.38)%(1) 12.14% 6.85% 6.65% 9.63% 18.88% Ratios to Average Net Assets(3): Total expenses (before expense offset)....... 1.87 %(2)(4) 1.86%(4) 1.88% 1.86% 1.81% 1.83% Net investment income........................ 0.96 %(2)(4) 1.40%(4) 1.79% 2.09% 2.21% 2.84% Supplemental Data: Net assets, end of period, in thousands...... $32,159 $42,383 $51,695 $74,529 $244,246 $258,799 Portfolio turnover rate...................... 53 %(1) 97% 58% 47% 62% 83%
---------- ++ The per share amounts were computed using an average number of shares outstanding during the period. ++++ Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (1) Not annualized. (2) Annualized. (3) Reflects overall Fund ratios for investment income and non-class specific expenses. (4) Reflects rebate of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio - Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets had an effect of 0.01% for the period ended March 31, 2008 and an effect of less than 0.005% for the period ended September 30, 2007.
See Notes to Financial Statements 25 Morgan Stanley Convertible Securities Trust FINANCIAL HIGHLIGHTS continued
FOR THE SIX FOR THE YEAR ENDED SEPTEMBER 30, MONTHS ENDED ------------------------------------------------------- MARCH 31, 2008 2007 2006 2005 2004 2003 -------------- ------- ------- ------- ------- ------- (unaudited) Class C Shares Selected Per Share Data: Net asset value, beginning of period......... $ 18.91 $ 17.20 $ 16.38 $ 15.71 $ 14.70 $ 12.71 ------- ------- ------- ------- ------- ------- Income (loss) from investment operations: Net investment income++................... 0.09 0.25 0.32 0.34 0.35 0.42 Net realized and unrealized gain (loss)... (1.48) 1.83 0.82 0.69 1.07 1.96 ------ ----- ----- ----- ----- ----- Total income (loss) from investment operations.................................. (1.39) 2.08 1.14 1.03 1.42 2.38 ------ ----- ----- ----- ----- ----- Less dividends from net investment income.... (0.16) (0.37) (0.32) (0.36) (0.41) (0.39) ------ ------ ------ ------ ------ ------ Net asset value, end of period............... $ 17.36 $ 18.91 $ 17.20 $ 16.38 $ 15.71 $ 14.70 ======= ======= ======= ======= ======= ======= Total Return++++............................. (7.36)%(1) 12.18% 7.00% 6.61% 9.65% 18.92% Ratios to Average Net Assets(3): Total expenses (before expense offset)....... 1.87 %(2)(4) 1.86%(4) 1.73% 1.85% 1.81% 1.83% Net investment income........................ 0.96 %(2)(4) 1.40%(4) 1.94% 2.10% 2.21% 2.84% Supplemental Data: Net assets, end of period, in thousands...... $7,433 $8,453 $8,339 $10,374 $12,390 $9,447 Portfolio turnover rate...................... 53 %(1) 97% 58% 47% 62% 93%
---------- ++ The per share amounts were computed using an average number of shares outstanding during the period. ++++ Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (1) Not annualized. (2) Annualized. (3) Reflects overall Fund ratios for investment income and non-class specific expenses. (4) Reflects rebate of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio - Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets had an effect of 0.01% for the period ended March 31, 2008 and an effect of less than 0.005% for the period ended September 30, 2007.
See Notes to Financial Statements 26 Morgan Stanley Convertible Securities Trust FINANCIAL HIGHLIGHTS continued
FOR THE SIX FOR THE YEAR ENDED SEPTEMBER 30, MONTHS ENDED -------------------------------------------------- MARCH 31, 2008 2007 2006 2005 2004 2003 -------------- ------ ------ ------ ------ ------ (unaudited) Class I Shares@@ Selected Per Share Data: Net asset value, beginning of period......... $19.02 $17.28 $16.46 $15.78 $14.76 $12.76 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income++................... 0.18 0.45 0.47 0.50 0.51 0.61 Net realized and unrealized gain (loss)... (1.48) 1.84 0.81 0.70 1.07 1.91 ------ ----- ----- ----- ----- ----- Total income (loss) from investment operations.................................. (1.30) 2.29 1.28 1.20 1.58 2.52 ------ ----- ----- ----- ----- ----- Less dividends from net investment income.... (0.26) (0.55) (0.46) (0.52) (0.56) (0.52) ------ ------ ------ ------ ------ ------ Net asset value, end of period............... $17.46 $19.02 $17.28 $16.46 $15.78 $14.76 ====== ====== ====== ====== ====== ====== Total Return++++............................. (6.89)%(1) 13.42% 7.90% 7.72% 10.75% 20.04% Ratios to Average Net Assets(3): Total expenses (before expense offset)....... 0.87 %(2)(4) 0.86%(4) 0.88% 0.86% 0.81% 0.83% Net investment income........................ 1.96 %(2)(4) 2.40%(4) 2.79% 3.09% 3.21% 3.84% Supplemental Data: Net assets, end of period, in thousands...... $98 $589 $4,474 $3,698 $5,120 $7,996 Portfolio turnover rate...................... 53 %(1) 97% 58% 47% 62% 93%
---------- @@ Formerly Class D shares. Renamed Class I shares effective March 31, 2008. ++ The per share amounts were computed using an average number of shares outstanding during the period. ++++ Calculated based on the net asset value as of the last business day of the period. (1) Not annualized. (2) Annualized. (3) Reflects overall Fund ratios for investment income and non-class specific expenses. (4) Reflects rebate of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio - Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets had an effect of 0.01% for the period ended March 31, 2008 and an effect of less than 0.005% for the period ended September 30, 2007.
See Notes to Financial Statements 27 TRUSTEES Frank L. Bowman Michael Bozic Kathleen A. Dennis James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael F. Klein Michael E. Nugent W. Allen Reed Fergus Reid OFFICERS Michael E. Nugent Chairperson of the Board Ronald E. Robison President and Principal Executive Officer Dennis F. Shea Vice President Amy R. Doberman Vice President Carsten Otto Chief Compliance Officer Stefanie V. Chang Yu Vice President Francis J. Smith Treasurer and Chief Financial Officer Mary E. Mullin Secretary TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Two World Financial Center New York, New York 10281 LEGAL COUNSEL Clifford Chance US LLP 31 West 52nd Street New York, New York 10019 COUNSEL TO THE INDEPENDENT TRUSTEES Kramer Levin Naftalis & Frankel LLP 1177 Avenue of the Americas New York, New York 10036 INVESTMENT ADVISER Morgan Stanley Investment Advisors Inc. 522 Fifth Avenue New York, New York 10036 The financial statements included herein have been taken from the records of the Fund without examination by the independent auditors and accordingly they do not express an opinion thereon. This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read Prospectus carefully before investing. Morgan Stanley Distributors Inc., member FINRA. (c) 2008 Morgan Stanley [MORGAN STANLEY LOGO] MORGAN STANLEY FUNDS Morgan Stanley Convertible Securities Trust Semiannual Report March 31, 2008 CNSSAN IU08-02835P-Y03/08 Item 2. Code of Ethics. Not applicable for semiannual reports. Item 3. Audit Committee Financial Expert. Not applicable for semiannual reports. Item 4. Principal Accountant Fees and Services Not applicable for semiannual reports. Item 5. Audit Committee of Listed Registrants. Not applicable for semiannual reports. Item 6. Refer to Item 1. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable for semiannual reports. Item 8. Portfolio Managers of Closed-End Management Investment Companies Applicable only to reports filed by closed-end funds. Item 9. Closed-End Fund Repurchases Applicable to reports filed by closed-end funds. Item 10. Submission of Matters to a Vote of Security Holders Not applicable. Item 11. Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the 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. 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Morgan Stanley Convertible Securities Trust /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer March 20, 2008 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison Ronald E. Robison Principal Executive Officer May 20, 2008 /s/ Francis Smith Francis Smith Principal Financial Officer May 20, 2008 3