Barton M. Biggs
CHAIRMAN OF THE BOARD OF DIRECTORS
Michael F. Klein
PRESIDENT AND DIRECTOR
Peter J. Chase
DIRECTOR
John W. Croghan
DIRECTOR
David B. Gill
DIRECTOR
Graham E. Jones
DIRECTOR
John A. Levin
DIRECTOR
William G. Morton, Jr.
DIRECTOR
James W. Grisham
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Joanna M. Haigney
TREASURER
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
THIRD QUARTER REPORT
SEPTEMBER 30, 1997
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
For the nine months ended September 30, 1997, the Morgan Stanley Global Opportunity Bond Fund, Inc. (the "Fund") had a total return, based on net asset value per share, of 20.93% compared to 14.35% for the Fund's benchmark (described below). For the one year ended September 30, 1997, the Fund had a total return, based on net asset value per share, of 28.54% compared with 20.93% for the benchmark. For the period since the Fund's commencement of operations on May 27, 1994 through September 30, 1997, the Fund's total return, based on net asset value per share, was 79.04% compared with 74.61% for the Index. The Fund uses as its benchmark, for purpose of comparing its performance, a composite comprised of 50% of the J.P. Morgan Emerging Markets Bond Plus Index and 50% of the CS First Boston High Yield Index. However, the Fund's weightings in these asset classes is not restricted and will, under normal circumstances, fluctuate depending on market conditions. At September 30, 1997 the Fund's net assets were comprised of 63.5% of emerging markets debt securities and 32.5% U.S. high yield securities.
On September 30, 1997, the closing price of the Fund's shares on the New York Stock Exchange was $15 5/8, representing a 6.2% discount to the Fund's net asset value per share.
Emerging market debt was propelled higher by the continuation of the rally in U.S. bond prices and subsequent 35 basis point decline in U.S. Treasury yields during the quarter. The decline in U.S. rates was fueled by a lack of inflationary pressures and by a Federal Reserve which kept policy unchanged during the quarter. Spreads on emerging market debt continued to narrow through the summer months as has been typical in rallying U.S. bond market environments. The average spread on a typical emerging market bond moved from 400 over U.S. Treasuries, to 350 over U.S. Treasuries while the yield on the long bond declined form 6.78% to 6.40%.
We have maintained a somewhat cautious view on emerging market debt over the last few months as it has been our belief that the recent strength in emerging markets has been driven more by technical factors than by fundamental improvements in sovereign credit outlooks. Technical factors such as the continuous flow of money into emerging market and high yield mutual funds and Brady bond buybacks by most of the larger Latin countries were the key drivers which caused spreads to narrow for emerging market bonds. This occurred while fundamental credit factors remained steady for most of Latin America and Eastern Europe but deteriorated in Southeast Asia.
During the quarter, Bulgaria, Ecuador and Russia were the performance leaders, while Morocco, Panama and the Philippines lagged the rest of the market. The Fund's overweight positions in Bulgaria and Russia were largely responsible for the portfolio's outperformance of 0.63% during the quarter. The Fund had almost no exposure to any of the countries in Southeast Asia and was able to avoid the price declines suffered by assets in that region.
We begin the fourth quarter with spreads at historically narrow levels and interest rate hikes in the U.S. and Europe seemingly possible before year end. Cautions seems warranted because investor appetite for risk tends to decrease during the fourth quarter and liquidity in all markets declines toward year end. We are also mindful of the near term outlook for the Southeast Asian region and continue to watch for potential contagion effects on emerging market debt. While we are not expecting any large or widespread correction, we do feel that a more conservative portfolio posture will serve us well in the upcoming months.
The high-yield market continued its solid performance in the third quarter of 1997. The absence of Federal Reserve tightening, and favorable inflation statistics resulted in ten year treasury rates declining nearly 40 basis points in the quarter. The stock market also provided a sound backdrop to the high-yield market as the S&P 500 rose about 7 1/2 percent over the quarter.
High-yield bond yield spreads over U.S. Treasuries continued to be at historically narrow levels. These levels are supported by the solid U.S. economy, strong demand among mutual fund investors and others for high-yield bonds, and favorable merger and acquisition activity affecting high-yield companies. The telecommunications sector has been especially active in the merger and acquisition and IPO fronts. The third quarter was capped by the proposed acquisition of both MCI Communications and Brooks Fiber by Worldcom. These transactions follow Worldcom's acquisition of MFS Communications completed earlier in the year. These and similar transactions are being consummated through stock swaps, and thus the combined companies have not increased debt levels. Credit quality of the acquired companies has improved as a result of the mergers, favorably impacting prices on their high-yield bonds. We believe the accelerating demand for telecommunications services will continue to favorably impact companies who have sound business strategies and attractive fiber-optic networks. We have been significantly weighted in the sector, and increased our commitment in the third quarter.
We continued to reduce our exposure to the cable television sector. In the second quarter, Microsoft announced plans to make an investment in Comcast. Telecommunications Inc., the leader in the industry, began to improve credit quality by spinning off non-cable assets and entering into joint ventures to realize efficiencies in parts of their cable system. Cable company stock prices have soared this year indirectly helping bond prices and more directly boosting returns on a TCI convertible bond investment we made earlier in the year.
The high-yield portion of the portfolio continues to stress higher credit ratings when compared to other high-yield managers, with an average credit quality of BB. We believe that through active security selection we can perform favorably without reaching for the higher current yields available in lower quality securities.
Sincerely,
/s/ Michael F. Klein Michael F. Klein PRESIDENT AND DIRECTOR /s/ Robert E. Angevine Robert E. Angevine PORTFOLIO MANAGER /s/ Paul Ghaffari Paul Ghaffari PORTFOLIO MANAGER October 1997 |
HISTORICAL INFORMATION TOTAL RETURN (%) ------------------------------------------------------------------------------------ MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3) ------------------------- --------------------------- ------------------------- AVERAGE AVERAGE AVERAGE CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL ------------------------------------------------------------------------------------ FISCAL YEAR TO DATE 15.24% -- 20.93% -- 14.35% -- ONE YEAR 22.47 22.47% 28.54 28.54% 20.93 20.93% SINCE INCEPTION* 67.92 16.74 79.04 19.00 74.61 18.13 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. ------------------------------------------------------------------------------------------------------------------------------------ |
RETURNS AND PER SHARE INFORMATION:
[CHART]
NINE MONTHS YEARS ENDED DECEMBER 31: ENDED 1994* 1995 1996 SEPTEMBER 30, 1997 ------- ------- ------- ------------------ Net Asset Value Per Share. . . . . . . . . $ 12.25 $ 12.99 $ 14.86 $ 16.66 Market Value Per Share . . . . . . . . . . $ 12.50 $ 12.50 $ 14.63 $ 15.63 Premium/(Discount) . . . . . . . . . . . . 2.0% -3.8% -1.5% -6.2% Income Dividends . . . . . . . . . . . . . $ 0.91 $ 1.59 $ 1.49 $ 1.02 Capital Gains Distributions . . . . . . . -- -- $ 0.50 $ 0.18 Fund Total Return (2). . . . . . . . . . . -6.42% 20.34% 31.45% 20.93% Index Total Return (3) . . . . . . . . . . -0.46% 22.37% 25.36% 14.35% |
(1) Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on net asset value per share reflects the
effects of changes in net asset value on the performance of the Fund during
each period, and assumes dividends and distributions, if any, were
reinvested. These percentages are not an indication of the performance of a
shareholder's investment in the Fund based on market value due to
differences between the market price of the stock and the net asset value
per share of the Fund.
(3) Prior to fiscal year 1997, the Fund used the J.P. Morgan Emerging Markets
Bond Index for performance purposes. Beginning in 1997, the Fund is using
a Global Opportunity Blended Composite comprised of 50% of the J.P. Morgan
Emerging Markets Bond Plus Index and 50% of the CS First Boston High Yield
Index for the purpose of performance comparisons. This composite better
represents the investment strategy of the Fund. However, the Fund's
weighting in these asset classes is not restricted and will, under normal
circumstances, fluctuate depending on market conditions. As of September
30, 1997, the Fund's net assets were comprised of 63.5% emerging markets
debt securities, and 32.5% U.S. high yield securities.
* The Fund commenced operations on May 27, 1994.
[CHART]
[CHART]
1. Federative Republic of Brazil 'C' Bond PIK 8.00%, 4/15/14 6.5% 2. Russia Principal Note, Zero Coupon, 12/31/99 4.2 3. Republic of Venezuela Debt Conversion Bond 9.25%, 9/15/27 3.8 4. Salomon Brothers Federative Republic of Brazil Credit Linked Enhanced Note 9.00%, 1/15/99 3.6 5. Republic of Venezuela Debt Conversion Bond 'DL' 6.75%, 12/18/07 3.5 6. CIA International Telecom 144A 10.375%, 8/1/04 3.0 7. Republic of Argentina 6.688%, 3/31/05 2.9 8. United Mexican States 11.50%, 5/15/26 2.2 9. Turkish Treasury Bill, Zero Coupon, 8/12/98 2.1 10. United Mexican States Discount Bond 'D' 6.813%, 12/13/19 2.1 ---- 33.9% ---- ---- |
* Excludes short-term investments.
INVESTMENTS (UNAUDITED) SEPTEMBER 30, 1997 FACE AMOUNT VALUE (000) (000) -------------------------------------------------------------------------------- DEBT INSTRUMENTS (90.0%) -------------------------------------------------------------------------------- ALGERIA (0.9%) LOAN AGREEMENTS +Algeria Reprofiled Loan Agreement Tranche A 7.125%, 12/31/00 U.S.$ 700 U.S.$ 630 ------------ -------------------------------------------------------------------------------- |
ARGENTINA (6.6%)
BONDS
CIA International Telecom 144A
10.375%, 8/1/04 ARP 2,000 2,041
+Republic of Argentina 6.688%, 3/31/05 U.S.$ 2,112 2,011 Republic of Argentina 144A 11.75%, 2/12/07 ARP 450 509 ------------ 4,561 ------------ -------------------------------------------------------------------------------- BRAZIL (9.6%) BONDS Federative Republic of Brazil 'C' Bond PIK 8.00%, 4/15/14 U.S.$ 5,245 4,466 +Federative Republic of Brazil 'EI-L' Bond 6.875%, 4/15/06 792 743 Federative Republic of Brazil Global Bond 10.125%, 5/15/27 1,360 1,363 Globopar 10.50%, 12/20/06 80 84 ------------ 6,656 ------------ -------------------------------------------------------------------------------- BULGARIA (3.2%) BONDS +Republic of Bulgaria Discount Bond 'A' Euro 6.688%, 7/28/24 500 416 Republic of Bulgaria Front Loaded Interest Reduction Bond 2.50%, 7/28/12 1,050 691 +Republic of Bulgaria Past Due Interest Bond 6.688%, 7/28/11 1,315 1,062 ------------ 2,169 ------------ -------------------------------------------------------------------------------- COLOMBIA (0.6%) BONDS Occidente y Caribe 0.00%, 3/15/04 525 414 ------------ -------------------------------------------------------------------------------- ECUADOR (2.2%) BONDS Conecel 144A 14.00%, 5/1/02 500 540 +Republic of Ecuador Past Due Interest Bond 6.688%, 2/27/15 1,290 939 ------------ 1,479 ------------ -------------------------------------------------------------------------------- IVORY COAST (1.8%) LOAN AGREEMENTS Republic of Ivory Coast Syndicated Loan DEM 1,105 300 Republic of Ivory Coast Syndicated Loan FRF 8,400 752 Republic of Ivory Coast Syndicated Loan U.S.$ 450 216 ------------ 1,268 ------------ -------------------------------------------------------------------------------- |
JAMAICA (2.9%)
BONDS
Government of Jamaica 9.625%,
7/2/02 1,000 1,014 Mechala Group Jamaica, Ltd. 'B' 12.75%, 12/30/99 1,000 1,010 ------------ 2,024 ------------ -------------------------------------------------------------------------------- MAURITIUS (0.6%) FOREIGN GOVERNMENT & AGENCY OBLIGATIONS Pindo Deli Finance Mauritius 144A 10.75%, 10/1/07 400 407 ------------ -------------------------------------------------------------------------------- MEXICO (9.8%) BONDS Bancomext Global Bond 7.25%, 2/2/04 470 448 Empresas ICA Sociedad Controladora 144A 11.875%, 5/30/01 1,000 1,120 National Financiera 17.00%, 2/26/99 ZAR 4,000 863 Petro Mexicanos 144A 9.50%, 9/15/27 U.S.$ 500 512 United Mexican States 11.50%, 5/15/26 1,270 1,546 0.00%, 6/30/03 4,962 --@ +United Mexican States Discount Bond 6.867%, 12/31/19 900 861 +United Mexican States Discount Bond 'D' 6.813%, 12/31/19 1,500 1,435 ------------ 6,785 ------------ -------------------------------------------------------------------------------- MOROCCO (2.0%) LOAN AGREEMENTS +Kingdom of Morocco Restructuring and Consolidation Agreement 'A' (Salomon Brothers, Inc., J.P. Morgan) 6.813%, 1/1/09 1,450 1,361 ------------ -------------------------------------------------------------------------------- NETHERLANDS (1.5%) BONDS Unexim International Finance 144A 9.875%, 8/1/00 1,000 1,013 ------------ -------------------------------------------------------------------------------- |
FACE AMOUNT VALUE (000) (000) -------------------------------------------------------------------------------- PERU (1.2%) BONDS Republic of Peru Front Loaded Interest Reduction Bond 13.25%, 3/7/17 U.S.$ 1,350 U.S.$ 832 ------------- ------------------------------------------------------------------------------- RUSSIA (9.8%) LOAN AGREEMENTS (3.7%) Bank for Foreign Economic Affairs (Participation: Chase Securities, Inc.) 600 622 International Bank for Economic Cooperation Loan Agreement 1,700 1,221 International Bank for Economic Cooperation Loan Agreement DEM 1,750 701 ------------- 2,544 ------------- NOTES (6.1%) Russia Interest Arrears Note U.S.$ 1,625 1,342 Russia Principal Note, Zero Coupon, 12/31/99 3,900 2,908 ------------- 4,250 ------------- 6,794 ------------- ------------------------------------------------------------------------------- |
UNITED STATES (30.1%)
ASSET - BACKED SECURITIES (2.2%)
Aircraft Lease Portfolio Securitization Ltd. 1996-1
P1D 12.75%, 6/15/06 374 404 Securitized Asset Sales, Inc. 1997-5 'A1' 7.72%, 6/15/05 275 275 DR Securitized Lease Trust 1993-K1 A1 6.66%, 8/15/10 160 146 1994-K1 A1 7.60%, 8/15/07 471 458 First Home Mortgage Acceptance Corp., 1996-B, Class C 144A 7.929%, 11/1/18 249 223 ------------- 1,506 ------------- BONDS (27.4%) Advanced Micro Devices, Inc. 11.00%, 8/1/03 760 852 Ameriserve Food Co. 144A 10.125%, 7/15/07 85 88 Anthem Insurance 144A 9.00%, 4/1/27 375 404 Big Flower Press Holdings, Inc. 144A 8.875%, 7/1/07 275 274 Brooks Fiber Properties 0.00%, 3/1/06 700 562 CA FM Lease Trust 144A 8.50%, 7/15/17 246 261 Cablevision Systems Corp. 9.875%, 5/15/06 405 437 Cliffs Drilling Co. 144A 10.25%, 5/15/03 25 27 Comcast Cellular Corp. 144A 9.50%, 5/1/07 565 590 Courtyard By Marriott 'B' 10.75%, 2/1/08 300 325 Dial Call Communications 'B' 0.00%, 12/15/05 U.S.$ 165 U.S.$ 147 EES Coke Battery Co., Inc. 144A 9.382%, 4/15/07 100 105 Fleming Companies, Inc. 144A 10.50%, 12/1/04 110 115 10.625%, 7/31/07 70 74 Fox/Liberty Networks LLC 144A 0.00%, 8/15/07 75 48 8.875%, 8/15/07 80 81 Grand Casinos 10.125%, 12/1/03 400 425 Hermes Europe Railtel BV 144A 11.50%, 8/15/07 40 43 HMC Acquisition Properties 9.00%, 12/15/07 350 360 Horseshoe Gaming L.L.C. 144A 9.375%, 6/15/07 250 258 Host Marriott Travel 9.50%, 5/15/05 450 474 +Huntsman Corp. 144A 9.094%, 7/1/07 250 260 Integrated Health Services 144A 9.50%, 9/15/07 815 839 Intermedia Communications 144A 0.00%, 7/15/07 395 275 Iridium LLC/Capital Corp. 144A 13.00%, 7/15/05 90 94 ISP Holdings, Inc. 'B' 9.00%, 10/15/03 395 413 IXC Communications, Inc. 12.50%, 10/1/05 175 202 Jet Equipment Trust 'C1' 144A 11.79%, 6/15/13 175 229 KMart Corp. 7.75%, 10/1/12 125 117 Midland Cogeneration Ventures 'C-91' 10.33%, 7/23/02 22 24 Midland Funding Corp. I 'C-94' 10.33%, 7/23/02 172 184 Midland Funding Corp. II 'A' 11.75%, 7/23/05 80 94 Navistar Financial Corp. 'B' 9.00%, 6/1/02 65 67 Nextel Communications 0.00%, 8/15/04 810 702 Norcal Waste Systems Inc. 13.00%, 11/15/05 500 575 Nuevo Energy Co. 9.50%, 4/15/06 240 256 Outdoor Systems Inc. 144A 8.875%, 6/15/07 810 826 Paramount Communications 8.25%, 8/1/22 195 193 Qwest Communications International 144A 10.875%, 4/1/07 135 153 Revlon Worldwide 'B' 0.00%, 3/15/01 275 200 |
FACE AMOUNT VALUE (000) (000) -------------------------------------------------------------------------------- UNITED STATES (CONTINUED) Riggs Capital Trust II 144A 8.875%, 3/15/27 U.S.$ 140 U.S.$ 148 RJR Nabisco Inc. 8.75%, 4/15/04 265 280 Rogers Cablesystems 'B' 10.00%, 3/15/05 425 466 Rogers Cantel Inc. 144A 8.30%, 10/1/07 555 556 Rogers Communications, Inc. 9.125%, 1/15/06 90 92 Globalstar LP 144A 11.375%, 2/15/04 230 240 SD Warren Co. 'B' 12.00%, 12/15/04 215 243 Sinclair Broadcast Group 144A 9.00%, 7/15/07 475 473 Snyder Oil Corp. 8.75%, 6/15/07 175 175 Southland Corp. 5.00%, 12/15/03 1,265 1,091 Station Casinos, Inc. 144A 9.75%, 4/15/07 270 269 TCI Satellite Entertainment 144A 0.00%, 2/15/07 615 401 Tele-Communications, Inc. 9.25%, 1/15/23 260 280 Teleport Communications 0.00%, 7/1/07 555 434 Tenet Healthcare Corp. 8.625%, 1/15/07 805 834 Transamerican Energy 144A 0.00%, 6/15/02 100 79 Vencor Inc. 144A 8.625%, 7/15/07 700 710 Viacom, Inc. 8.00%, 7/7/06 390 389 Western Financial Bank 8.875%, 8/1/07 150 150 ------------- 18,963 ------------- COLLATERALIZED MORTGAGE OBLIGATION (0.5%) Long Beach Auto 1997-1, 'B' 144A 14.22%, 10/26/03 350 352 ------------- 20,821 ------------- ------------------------------------------------------------------------------- VENEZUELA (7.2%) BONDS Republic of Venezuela Debt Conversion Bond 9.25%, 9/15/27 2,733 2,606 +Republic of Venezuela Debt Conversion Bond 'DL' 6.75%, 12/18/07 2,500 2,387 ------------- 4,993 ------------- ------------------------------------------------------------------------------- TOTAL DEBT INSTRUMENTS (Cost U.S.$59,367) 62,207 ------------- ------------------------------------------------------------------------------- |
Note 9.00%, 1/15/99 (Cost U.S.$2,500) U.S.$ 2,500 U.S.$ 2,496 ------------- ------------------------------------------------------------------------------- NO. OF WARRANTS ------------------------------------------------------------------------------- WARRANTS (0.1%) ------------------------------------------------------------------------------- COLOMBIA (0.0%) Occidente y Caribe 144A, expiring 3/15/04 2,100 --@ ------------------------------------------------------------------------------- UNITED STATES (0.1%) Globalstar Telecom 144A, expiring 2/15/04 230 28 |
-------------------------------------------------------------------------------- TOTAL WARRANTS (Cost U.S.$0) 41 ------------- ------------------------------------------------------------------------------- SHARES -------------------------------------------------------------------------------- PREFERRED STOCK (2.3%) United States IXC Communications, Inc. 144A PIK 12.50% 125 145 Sinclair Capital 144A 11.625% 2,050 222 TCI Communications, Inc. 5.00% (Convertible) 770 97 Time Warner, Inc. Series 'M' 10.25% 1,000 1,145 -------------------------------------------------------------------------------- TOTAL PREFERRED STOCK (Cost U.S.$1,440) 1,609 ------------- -------------------------------------------------------------------------------- FACE AMOUNT (000) -------------------------------------------------------------------------------- |
Turkey Treasury Bill, Zero Coupon, 8/12/98 TRL 517,811,000 1,446 ------------- -------------------------------------------------------------------------------- UNITED KINGDOM (1.0%) NOTES ING Bank 144A, Zero Coupon, 8/14/98 U.S.$ 700 691 ------------- ------------------------------------------------------------------------------- |
FACE AMOUNT VALUE (000) (000) -------------------------------------------------------------------------------- UNITED STATES (4.3%) REPURCHASE AGREEMENT Chase Securities, Inc., 5.75%, dated 9/30/97, due 10/1/97, to be repurchased at U.S.$3,000, collateralized by United States Treasury Notes, 5.875%, due 11/15/05, valued at U.S. $3,079 U.S.$ 3,000 U.S.$ 3,000 ------------- ------------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (Cost U.S.$5,182) 5,137 ------------- ------------------------------------------------------------------------------- TOTAL INVESTMENTS (103.4%) (Cost U.S.$68,489) 71,490 ------------- -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (-3.4%) Other Assets 21,940 Liabilities (24,305) (2,365) ----------- -------------- NET ASSETS (100%) Applicable to 4,149,339 issued and outstanding U.S.$0.01 par value shares (100,000,000 shares authorized) U.S.$ 69,125 ------------- ------------- -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE U.S.$ 16.66 ------------- ------------- -------------------------------------------------------------------------------- @ - Value is less than U.S.$500. |
+ - Variable/floating rate security - rate disclosed is as of September 30, 1997. PIK- Payment-in-Kind. Income may be paid in additional securities or cash at the discretion of the issuer.