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: 811-07111
Morgan Stanley Insured California Municipal Securities
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: October 31, 2005
Date of reporting period: April 30, 2005
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley Insured
California Municipal Securities 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 Trust's financial statements and a list of Trust investments.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT THE TRUST WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE TRUST
IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF
SECURITIES OWNED BY THE TRUST WILL DECLINE AND, THEREFORE, THE VALUE OF THE
TRUST"S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN
LOSE MONEY INVESTING IN THIS TRUST.
FUND REPORT
For the six-month period ending April 30, 2005
MARKET CONDITIONS
Consumer spending and business investment helped the U.S. economy expand at a
solid pace. This, in turn, translated into generally higher interest rates
during the six-month fiscal period ended April 30, 2005. The markets also
continued to focus on global commodity supply pressures, specifically the rapid
climb in oil prices and the large federal budget and trade deficits. However,
employment growth remained uneven and bonds often rallied on weaker than
anticipated monthly reports.
The Federal Open Market Committee (the "Fed") reaffirmed its pledge to raise the
federal funds target rate at a "measured" pace and did so in its meetings
throughout the period. The Fed's policy shift began in June 2004 with the first
of seven consecutive 25-basis point rate hikes which took the federal funds
target rate to 2.75 percent by the end of April 2005. These increases
represented a reversal of the Fed's rate reductions between January 2001 and
June 2003. At the end of the period, the forward yield curve reflected a
widespread view that the Fed would continue its current pace of rate increases.
Against this setting, long-term municipal bond yields remained in a trading
range which moved rates higher at the beginning of the period, lower through the
winter and higher at the end of the first quarter. By the end of April, yields
declined again and ended the fiscal period at or near their lows. In contrast,
yields on shorter maturity bonds which were more directly impacted by the Fed's
actions rose. As a result, the municipal yield curve continued to flatten and
the yield spread (or differential between one-year rates and 30-year rates)
narrowed.
In the first four months of 2005, total municipal underwriting volume increased
by nine percent over the same period in 2004. Refunding issues accounted for the
incremental growth. Bonds backed by insurance increased their market penetration
from 50 to 60 percent over the same period. California issuers represented 12
percent of the total municipal underwriting volume.
On the demand side, the municipal to Treasury yield ratio, which gauges relative
performance between the two markets, remained attractive for tax-exempts. As a
result, fixed income investors that normally focus on taxable sectors (such as
insurance companies and hedge funds) supported municipals by "crossing over" to
purchase bonds. However, retail investors continued to experience rate shock
from the absolute level of rates and largely remained on the sidelines.
California's economy has demonstrated sustained improvement. Residential real
estate markets showed continued strength and unemployment edged downward. On the
fiscal front, strong personal and corporate income tax growth have helped
stabilize the credit outlook.
PERFORMANCE ANALYSIS
For the six-month period ended April 30, 2005, the net asset value (NAV) of the
Morgan Stanley Insured California Municipal Securities (ICS) increased from
$15.35 to $15.36 per share. Based on this increase plus reinvestment of tax-free
dividends totaling $0.33
2
per share and a long-term capital gain of $0.128 per share, the Trust's total
NAV return was 3.41 percent. ICS's value on the New York Stock Exchange (NYSE)
moved from $13.96 to $14.00 per share during the same period. Based on this
change plus reinvestment of distributions, ICS's total market return was 3.64
percent. On April 30, 2005, ICS's NYSE market price was at an 8.85 percent
discount to its NAV. Past performance is no guarantee of future results.
Monthly dividends for the second quarter of 2005, declared in March, were
unchanged at $0.055 per share. The dividend reflects the current level of the
Trust's net investment income. ICS's level of undistributed net investment
income was $0.118 per share on April 30, 2005, versus $0.132 per share six
months earlier.(1)
During the period, ICS maintained a conservative strategy in anticipation of
continued Fed tightening and higher interest rates. The Trust's duration* (a
measure of interest rates sensitivity) was 6.7 years. This positioning helped
performance early in the period when rates rose, but had the net effect of
hampering total returns when rates declined later in the period. The Trust's net
assets, of $56.2 million were diversified across 40 credits in 12 long-term
sectors.
The Trust's procedure for reinvesting all dividends and distributions on common
shares is through purchases in the open market. This method helps support the
market value of the Trust's shares. In addition, we would like to remind
investors that the Trustees have approved a procedure whereby the Trust may,
when appropriate, purchase shares in the open market or in privately negotiated
transactions at a price not above market value or NAV, whichever is lower at the
time of purchase. During the six-month period ended April 30, 2005, the Trust
purchased and retired 48,755 shares of common shares at a weighted average
market discount of 8.86 percent.
----------------------------------------------------
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. INVESTMENT RETURN, NET ASSET VALUE AND COMMON SHARE MARKET PRICE WILL
FLUCTUATE AND TRUST SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
There is no guarantee that any sectors mentioned will continue to perform well
or be held by the Trust in the future.
(1) Income earned by certain securities in the portfolio may be subject to the
federal alternative tax (AMT).
* A measure of the sensitivity of a bond's price to changes in interest rates,
expressed in years. Each year of duration represents an expected 1 percent
change in the price of a bond for every 1 percent change in interest rates. The
longer a bond's duration, the greater the effect of interest-rate movements on
its price. Typically, trusts with shorter durations perform better in
rising-interest-rate environments, while trusts with longer durations perform
better when rates decline.
3
LARGEST SECTORS
Water and Sewer 25.8%
General Obligation 11.8%
Transportation 11.3%
Tax Allocation 9.1%
Electric 8.6%
CREDIT ENHANCEMENTS
Ambac 35.2%
FGIC 21.0%
FSA 24.8%
MBIA 17.0%
U.S. Government Backed 2.0%
Data as of April 30, 2005. Subject to change daily. All percentages for largest
sectors are as a percentage of net assets and all percentages for credit
enhancements are as a percentage of total long-term investments. 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.
FOR MORE INFORMATION
ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY TRUST PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE TRUST'S
SECOND AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO
DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO TRUST SHAREHOLDERS AND MAKES THESE
REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN
STANLEY TRUST ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC
FOR THE TRUST'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.
4
DISTRIBUTION BY MATURITY
(% of Long-Term Portfolio) As of April 30, 2005
WEIGHTED AVERAGE MATURITY: 19 YEARS(A)
1-5 0.00
6-10 7.00
11-15 23.00
16-20 25.00
21-25 33.00
26-30 12.00
31+ 0.00
(a) Where applicable maturities reflect mandatory tenders, puts and call dates.
Portfolio structure is subject to change.
5
CALL AND COST (BOOK) YIELD STRUCTURE
(Based on Long-Term Portfolio) As of April 30, 2005
YEARS BONDS CALLABLE -- WEIGHTED AVERAGE CALL PROTECTION: 7 YEARS
2005(a) 10
2006 0
2007 0
2008 0
2009 4
2010 6
2011 22
2012 13
2013 22
2014 16
2015+ 7
COST (BOOK) YIELD(B) -- WEIGHTED AVERAGE BOOK YIELD: 5.1%
2005(a) 6.3
2006 0
2007 0
2008 0
2009 5.9
2010 5.2
2011 5.2
2012 4.9
2013 4.9
2014 4.9
2015+ 4.6
(a) May include issues initially callable in previous years.
(b) Cost or "book" yield is the annual income earned on a portfolio investment
based on its original purchase price before the Trust's operating expenses.
For example, the Trust is earning a book yield of 10% on 6.3% of the
long-term portfolio that is callable in 2005.
Portfolio structure is subject to change.
6
INVESTMENT ADVISORY AGREEMENT APPROVAL
NATURE, EXTENT AND QUALITY OF SERVICES
The Board reviewed and considered the nature and extent of the investment
advisory services provided by the Investment Adviser under the Advisory
Agreement, including portfolio management, investment research and fixed income
securities trading. The Board also reviewed and considered the nature and extent
of the non-advisory, administrative services provided by the Trust's
Administrator under the Administration Agreement, including accounting,
clerical, bookkeeping, compliance, business management and planning, and the
provision of supplies, office space and utilities at the Adviser's expense. (The
Investment Adviser and the Administrator together are referred to as the
"Adviser" and the Advisory and Administration Agreements together are referred
to as the "Management Agreement.") The Board also compared the nature of the
services provided by the Adviser with similar services provided by
non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").
The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Trust. The
Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Trust. The Board also concluded that the overall quality of
the advisory and administrative services was satisfactory.
PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the Trust's performance for one-, three- and five-year
periods ended November 30, 2004, as shown in reports provided by Lipper (the
"Lipper Reports"). The Board noted that the Lipper Report for the Trust did not
include a chart showing comparative performance of the Trust with a group of
comparable funds because this Trust is one of only three California insured
municipal debt funds that do not use leverage as part of their investment
strategy and a comparison with only two other trusts would not be meaningful.
The Board concluded that the Trust's performance was acceptable compared to
other California municipal funds managed by the Adviser which the Board had
previously reviewed.
FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES
The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Trust under the Management Agreement. The Board
noted that the rate was comparable to the management fee
7
rates charged by the Adviser to any other funds it manages with investment
strategies comparable to those of the Trust.
FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS
The Board reviewed the management fee rate and total expense ratio of the Trust.
The Board noted that: (i) the Trust's management fee rate was lower than the
average management fee rate for the two other funds, selected by Lipper (the
"expense peer group"), managed by other advisers, with investment strategies
comparable to those of the Trust, as shown in the Lipper Report for this Trust;
and (ii) the Trust's total expense ratio was also lower than the average total
expense ratio of the funds included in the Trust's expense peer group. The Board
concluded that the Trust's management fee and total expenses were competitive
with those of the Trust's expense peer group.
BREAKPOINTS AND ECONOMIES OF SCALE
The Board reviewed the structure of the Trust's management fee schedule under
the Management Agreement and noted that it does not include any breakpoints. The
Board considered that the Trust is closed-end and is not a growth trust and,
therefore, that the Trust's assets are not likely to grow with new sales or grow
significantly as a result of capital appreciation. The Board concluded that
economies of scale for this Trust were not a factor that needed to be
considered.
PROFITABILITY OF ADVISER AND AFFILIATES
The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Trust and the Morgan Stanley Fund Complex and
reviewed with the Controller of the Adviser the cost allocation methodology used
to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Trust.
FALL-OUT BENEFITS
The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Trust and the Fund Complex, such
as "float" benefits derived from handling of checks for purchases and sales of
Trust shares through a broker-dealer affiliate of the Adviser. The Board
considered the float benefits and concluded that they were relatively small.
8
SOFT DOLLAR BENEFITS
The Board considered whether the Adviser realizes any benefits from commissions
paid to brokers who execute securities transactions for the Trust ("soft
dollars"). The Board noted that the Trust invests only in fixed income
securities, which do not generate soft dollars.
ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE TRUST'S NEEDS
The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.
HISTORICAL RELATIONSHIP BETWEEN THE TRUST AND THE ADVISER
The Board also reviewed and considered the historical relationship between the
Trust and the Adviser, including the organizational structure of the Adviser,
the policies and procedures formulated and adopted by the Adviser for managing
the Trust's operations and the Board's confidence in the competence and
integrity of the senior managers and key personnel of the Adviser. The Board
concluded that it is beneficial for the Trust to continue its relationship with
the Adviser.
OTHER FACTORS AND CURRENT TRENDS
The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Trust's Chief Compliance Officer and concluded that
the conduct of business by the Adviser indicates a good faith effort on its part
to adhere to high ethical standards in the conduct of the Trust's business.
GENERAL CONCLUSION
After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Trust and its shareholders to approve
renewal of the Management Agreement for another year.
9
Morgan Stanley Insured California Municipal Securities
PORTFOLIO OF INVESTMENTS - APRIL 30, 2005 (UNAUDITED)
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------------------------------------------------------------------------------------------------------------
California Tax-Exempt Municipal Bonds (96.4%)
General Obligation (11.8%)
$ 505 California, Various Purposes Dtd 03/01/94.................. 5.50 % 03/01/20 $ 514,312
1,280 Huntington Beach Union High School District, Ser 2004
(FSA).................................................... 5.00 08/01/26 1,356,262
1,030 Los Angeles, Ser 2004 A (MBIA)............................. 5.00 09/01/24 1,099,206
1,000 San Diego Unified School District, 2003 Ser E (FSA)........ 5.00 07/01/28 1,097,940
1,000 Upland School District, Election 2000 Ser 2001 B (FSA)..... 5.125 08/01/25 1,079,690
1,375 Washington Unified School District, Election 2004 Ser A
(FGIC)................................................... 5.00 08/01/22 1,477,685
-----------
-------
6,625,095
6,190
-----------
-------
Educational Facilities Revenue (4.2%)
1,000 California State University, Ser 2005 A (Ambac)............ 5.00 11/01/35 1,056,020
1,250 University of California, Multi Purpose Ser Q (FSA)........ 5.00 09/01/31 1,307,925
-----------
-------
2,363,945
2,250
-----------
-------
Electric Revenue (8.6%)
1,000 Anaheim Public Financing Authority, Generation Refg Ser
2002-B (FSA)............................................. 5.25 10/01/18 1,102,160
1,400 California Department of Water Resources, Power Supply Ser
2002 A (Ambac)........................................... 5.375 05/01/18 1,555,750
1,000 Los Angeles Department of Water & Power, 2001 Ser A
(FSA).................................................... 5.25 07/01/21 1,077,910
1,000 Southern California Public Power Authority, Transmission
Refg Ser 2002 A (FSA).................................... 5.25 07/01/18 1,099,120
-----------
-------
4,834,940
4,400
-----------
-------
Mortgage Revenue - Multi-Family (4.1%)
2,265 Los Angeles Community Redevelopment Agency, 1994 Ser A
------- (Ambac).................................................. 6.45 07/01/17 2,316,144
-----------
Mortgage Revenue - Single Family (4.1%)
2,000 California Department of Veterans Affairs, Home Purchase
2002 Ser A (Ambac)....................................... 5.35 12/01/27 2,102,080
195 California Housing Financing Agency, 1995 Ser B (AMT)
(Ambac).................................................. 6.25 08/01/14 197,186
-----------
-------
2,299,266
2,195
-----------
-------
Public Facilities Revenue (1.9%)
1,000 Simi Valley Public Financing Authority, Ser 2004 COPs
------- (Ambac).................................................. 5.00 09/01/30 1,048,220
-----------
Resource Recovery Revenue (4.0%)
2,000 Sacramento Financing Authority, 1999 Solid Waste &
------- Redevelopment (Ambac).................................... 5.75 12/01/22 2,237,780
-----------
See Notes to Financial Statements
10
Morgan Stanley Insured California Municipal Securities
PORTFOLIO OF INVESTMENTS - APRIL 30, 2005 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------------------------------------------------------------------------------------------------------------
Tax Allocation Revenue (9.1%)
$ 560 Bay Area Government Association, Pool 1994 Ser A (FSA)..... 6.00 % 12/15/24 $ 573,434
1,145 Capistrano Unified School District, Community Facilities
District #98-2, Ladera Special Tax Ser 2005 (FGIC)....... 5.00 09/01/29 1,213,723
1,100 La Quinta Financing Authority, Local Agency 2004 Ser A
(Ambac).................................................. 5.25 09/01/24 1,198,604
1,000 Long Beach Bond Finance Authority, Downtown, North Long
Beach, Poly High and West Beach Areas 2002 Ser A
(Ambac).................................................. 5.375 08/01/21 1,089,070
1,000 San Jose Redevelopment Agency, Tax Allocation Merged Area
Project Ser 2002 (MBIA).................................. 5.00 08/01/32 1,033,480
-----------
-------
5,108,311
4,805
-----------
-------
Transportation Facilities Revenue (11.3%)
2,000 California Infrastructure & Economic Development Bank, Bay
Area Toll Bridges Seismic Retrofit First Lien Ser 2003 A
(FGIC)................................................... 5.00 07/01/29 2,099,020
1,000 Los Angeles County Metropolitan Transportation Authority,
Sales Tax Ser 2000 A (FGIC).............................. 5.25 07/01/30 1,070,380
2,000 Orange County Transportation Authority, Toll Road Express
Lanes Refg 2003 Ser A (Ambac)............................ 5.00 08/15/20 2,164,680
1,000 San Jose, Airport Ser 2001 A (FGIC)........................ 5.00 03/01/25 1,039,680
-----------
-------
6,373,760
6,000
-----------
-------
Water & Sewer Revenue (25.8%)
1,500 California Department of Water Resources, Central Valley
Ser Y (FGIC)............................................. 5.25 12/01/19 1,659,000
2,000 East Bay Municipal Utility District, Water Ser 2001
(MBIA)................................................... 5.00 06/01/26 2,083,460
1,000 Los Angeles, Wastewater Refg Ser 2003 B (FSA).............. 5.00 06/01/22 1,074,210
1,000 Metropolitan Water District of Southern California, 2003
Ser B-2 (FGIC)........................................... 5.00 10/01/27 1,052,960
565 Orange County Water District, Ser 2005 B COPs (MBIA)....... 5.00 08/15/24 599,787
1,700 Oxnard Financing Authority, Redwood Trunk Sewer & Headworks
Ser 2004 A (FGIC)........................................ 5.00 06/01/29 1,789,335
2,000 Sacramento Financing Authority, Water & Capital Improvement
2001 Ser A (Ambac)....................................... 5.00 12/01/26 2,083,460
1,000 San Diego County Water Authority, Ser 2004 A COPs (FSA).... 5.00 05/01/29 1,056,020
2,000 San Francisco Public Utilities Commission, Water Refg Ser A
2001
(FSA).................................................... 5.00 11/01/31 2,079,280
1,000 Yucaipa Valley Water District, Ser 2004 A COPs (MBIA)...... 5.25 09/01/24 1,086,410
-----------
-------
14,563,922
13,765
-----------
-------
Other Revenue (2.0%)
1,000 California, Economic Recovery Ser 2004 A (MBIA)............ 5.00 07/01/15 1,101,510
-----------
-------
See Notes to Financial Statements
11
Morgan Stanley Insured California Municipal Securities
PORTFOLIO OF INVESTMENTS - APRIL 30, 2005 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------------------------------------------------------------------------------------------------------------
Refunded (9.5%)
$ 2,000 Anaheim, Anaheim Memorial Hospital Association COPs (Ambac)
(ETM).................................................... 5.125% 05/15/20 $ 2,031,520
2,000 Los Angeles Community College District, Election 2001 Ser A
(MBIA)#.................................................. 5.00 08/01/11+ 2,206,700
1,000 Puerto Rico Infrastructure Financing Authority, 2000 Ser A
(ETM).................................................... 5.50 10/01/32 1,096,640
-----------
-------
5,334,860
5,000
-----------
-------
50,870 Total California Tax-Exempt Municipal Bonds (Cost $50,858,548)....................... 54,207,753
-----------
-------
California Short-Term Tax-Exempt Municipal Obligation (2.1%)
1,200 Orange County Sanitation District, Ser 2000 A COPs (Demand
------- 06/01/05) (Cost $1,200,000).............................. 3.01* 08/01/30 1,200,000
-----------
$52,070 Total Investments (Cost $52,058,548) (a) (b)............................. 98.5% 55,407,753
=======
Other Assets in Excess of Liabilities.................................... 1.5 835,564
----- -----------
Net Assets Applicable to Common Shareholders............................. 100.0% $56,243,317
===== ===========
---------------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
ETM Escrowed to maturity.
* Current coupon of variable rate demand obligation.
# A portion of this security has been physically segregated in
connection with open futures contracts in the amount of
$44,250.
+ Prerefunded to call date shown.
(a) Securities have been designated as collateral in an amount
equal to $8,103,094 in connection with open futures
contracts.
(b) The aggregate cost for federal income tax purposes
approximates is $52,006,213. The aggregate gross and net
unrealized appreciation is $3,401,540.
Bond Insurance:
---------------
Ambac Assurance Corporation.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.
Futures Contracts Open at April 30, 2005:
NUMBER OF DESCRIPTION/DELIVERY UNDERLYING FACE UNREALIZED
CONTRACTS LONG/SHORT MONTH AND YEAR AMOUNT AT VALUE DEPRECIATION
--------- ---------- ---------------------- ------------------------ --------------
60 Short U.S. Treasury Notes 5 $ (6,507,188) $(15,634)
Year June 2005
15 Short U.S. Treasury Notes 10 (1,671,328) (15,745)
Year June 2005
--------
Total unrealized depreciation................... $(31,379)
========
12
See Notes to Financial Statements
Morgan Stanley Insured California Municipal Securities
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
April 30, 2005 (unaudited)
Assets:
Investments in securities, at value
(cost $52,058,548)................. $55,407,753
Cash................................. 48,316
Receivable for:
Interest......................... 813,751
Variation margin................. 18,750
Prepaid expenses and other assets.... 11,236
-----------
Total Assets..................... 56,299,806
-----------
Liabilities:
Payable for:
Investment advisory fee.......... 15,308
Common shares of beneficial
interest repurchased........... 11,248
Administration fee............... 4,536
Accrued expenses and other
payables........................... 25,397
-----------
Total Liabilities................ 56,489
-----------
Preferred shares of beneficial
interest (1,000,000 shares
non-participating $.01 par value,
none issued)....................... --
-----------
Net Assets Applicable to Common
Shareholders................... $56,243,317
===========
Composition of Net Assets Applicable
to Common Shareholders:
Common shares of beneficial interest
(unlimited shares authorized of
$.01 par value, 3,661,358 shares
outstanding)....................... $51,986,046
Net unrealized appreciation.......... 3,317,826
Accumulated undistributed net
investment income.................. 432,876
Accumulated undistributed net
realized gain...................... 506,569
-----------
Net Assets Applicable to Common
Shareholders................... $56,243,317
===========
Net Asset Value Per Common Share,
($56,243,317 divided by 3,661,358
common shares outstanding)........... $15.36
===========
Statement of Operations
For the six months ended April 30, 2005 (unaudited)
Net Investment Income:
Interest Income....................... $1,324,966
----------
Expenses
Investment advisory fee............... 75,452
Professional fees..................... 26,622
Administration fee.................... 22,356
Shareholder reports and notices....... 9,477
Registration fees..................... 7,977
Transfer agent fees and expenses...... 7,600
Custodian fees........................ 2,950
Trustees' fees and expenses........... 378
Other................................. 4,453
----------
Total Expenses.................... 157,265
Less: expense offset.................. (2,863)
----------
Net Expenses...................... 154,402
----------
Net Investment Income............. 1,170,564
----------
Net Realized and Unrealized Gain:
Net Realized Gain on:
Investments........................... 458,390
Futures contracts..................... 4,349
----------
Net Realized Gain................. 462,739
----------
Net Change in Unrealized
Appreciation/Depreciation on:
Investments........................... 10,701
Futures contracts..................... 12,453
----------
Net Appreciation.................. 23,154
----------
Net Gain.......................... 485,893
----------
Net Increase.......................... $1,656,457
==========
See Notes to Financial Statements
13
Morgan Stanley Insured California Municipal Securities
FINANCIAL STATEMENTS continued
Statement of Changes in Net Assets
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
APRIL 30, 2005 OCTOBER 31, 2004
-------------- ----------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 1,170,564 $ 2,481,552
Net realized gain........................................... 462,739 482,387
Net change in unrealized appreciation/depreciation.......... 23,154 446,846
----------- -----------
Net Increase............................................ 1,656,457 3,410,785
----------- -----------
Dividends and Distributions to Common Shareholders From:
Net investment income....................................... (1,227,497) (2,390,725)
Net realized gain........................................... (463,024) (754,732)
----------- -----------
Total Dividends and Distributions....................... (1,690,521) (3,145,457)
----------- -----------
Decrease from transactions in common shares of beneficial
interest.................................................. (677,151) (1,233,332)
----------- -----------
Net Decrease............................................ (711,215) (968,004)
Net Assets Applicable to Common Shareholders:
Beginning of period......................................... 56,954,532 57,922,536
----------- -----------
End of Period
(Including accumulated undistributed net investment income
of $432,876 and $489,809, respectively)..................... $56,243,317 $56,954,532
=========== ===========
See Notes to Financial Statements
14
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2005 (UNAUDITED)
1. Organization and Accounting Policies
Morgan Stanley Insured California Municipal Securities (the "Trust") is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company. The Trust's investment
objective is to provide current income which is exempt from both federal and
California income taxes. The Trust was organized as a Massachusetts business
trust on October 14, 1993 and commenced operations on February 28, 1994.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) portfolio securities are valued by an outside
independent pricing service approved by the Trustees. The pricing service uses
both a computerized grid matrix of tax-exempt securities and evaluations by its
staff, in each case based on information concerning market transactions and
quotations from dealers which reflect the mean between the last reported bid and
asked price. The portfolio securities are thus valued by reference to a
combination of transactions and quotations for the same or other securities
believed to be comparable in quality, coupon, maturity, type of issue, call
provisions, trading characteristics and other features deemed to be relevant.
The Trustees believe that timely and reliable market quotations are generally
not readily available for purposes of valuing tax-exempt securities and that the
valuations supplied by the pricing service are more likely to approximate the
fair value of such securities; (2) futures are valued at the latest sale price
on the commodities exchange on which they trade unless it is determined that
such price does not reflect their market value, in which case they will be
valued at their fair value as determined in good faith under procedures
established by and under the supervision of the Trustees; and (3) 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.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
C. Futures Contracts -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Trust is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Trust agrees to
receive from or pay to the
15
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2005 (UNAUDITED) continued
broker an amount of cash equal to the daily fluctuation in the value of the
contract. Such receipts or payments known as variation margin are recorded by
the Trust as unrealized gains and losses. Upon closing of the contract, the
Trust realizes a gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
D. Federal Income Tax Policy -- It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable and nontaxable
income to its shareholders. Accordingly, no federal income tax provision is
required.
E. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
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 Morgan Stanley Investment
Advisors Inc. (the "Investment Adviser"), the Trust pays an advisory fee,
calculated weekly and payable monthly, by applying the annual rate of 0.27% to
the Trust's weekly net assets.
Pursuant to an Administration Agreement with Morgan Stanley Services Company
Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Trust
pays an administration fee, calculated weekly and payable monthly, by applying
the annual rate of 0.08% to the Trust's weekly net assets.
3. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended April 30, 2005 aggregated
$5,117,428 and $7,035,289, respectively.
Morgan Stanley Trust, an affiliate of the Investment Adviser and Administrator,
is the Trust's transfer agent. At April 30, 2005, the Trust had transfer agent
fees and expenses payable of approximately $3,600.
The Trust 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 receives for serving on the Board of Trustees. Each eligible Trustee
generally may elect to have the deferred amounts credited
16
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2005 (UNAUDITED) continued
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 Trust.
4. Preferred Shares of Beneficial Interest
The Trust is authorized to issue up to 1,000,000 non-participating preferred
shares of beneficial interest having a par value of $.01 per share, in one or
more series, with rights as determined by the Trustees, without approval of the
common shareholders. The preferred shares have a liquidation value of $50,000
per share plus the redemption premium, if any, plus accumulated but unpaid
dividends, whether or not declared, thereon to the date of distribution. The
Trust may redeem such shares, in whole or in part, at the original purchase
price of $50,000 per share plus accumulated but unpaid dividends, whether or not
declared, thereon to the date of redemption.
Upon issuance, the Trust will be subject to certain restrictions relating to the
preferred shares. Failure to comply with these restrictions could preclude the
Trust from declaring any distributions to common shareholders or purchasing
common shares and/or could trigger the mandatory redemption of preferred shares
at liquidation value.
The preferred shares, entitled to one vote per share, generally vote with the
common shares but vote separately as a class to elect two Trustees and on any
matters affecting the rights of the preferred shares.
As of April 30, 2005, there were no preferred shares outstanding.
5. Common Shares of Beneficial Interest
Transactions in common shares of beneficial interest were as follows:
CAPITAL
PAID IN
EXCESS OF
SHARES PAR VALUE PAR VALUE
--------- --------- -----------
Balance, October 31, 2003................................... 3,799,913 $37,999 $53,858,530
Treasury shares purchased and retired (weighted average
discount 9.05%)*.......................................... (89,800) (898) (1,232,434)
--------- ------- -----------
Balance, October 31, 2004................................... 3,710,113 37,101 52,626,096
Treasury shares purchased and retired (weighted average
discount 8.86%)*.......................................... (48,755) (488) (676,663)
--------- ------- -----------
Balance, April 30, 2005..................................... 3,661,358 $36,613 $51,949,433
========= ======= ===========
---------------------
* The Trustees have voted to retire the shares purchased.
17
Morgan Stanley Insured California Municipal Securities
NOTES TO FINANCIAL STATEMENTS - APRIL 30, 2005 (UNAUDITED) continued
6. Dividends to Common Shareholders
On March 29,2005, the Trust declared the following dividends from net investment
income:
AMOUNT RECORD PAYABLE
PER SHARE DATE DATE
--------- ------------- -------------
$0.055 May 6, 2005 May 20, 2005
$0.055 June 3, 2005 June 17, 2005
7. Expense Offset
The expense offset represents a reduction of the custodian fees for earnings on
cash balances maintained by the Trust.
8. Risks Relating to Certain Financial Instruments
The Trust may invest a portion of its assets in residual interest bonds, which
are inverse floating rate municipal obligations. The prices of these securities
are subject to greater market fluctuations during periods of changing prevailing
interest rates than are comparable fixed rate obligations.
To hedge against adverse interest rate changes, the Trust may invest in
financial futures contracts or municipal bond index futures contracts ("futures
contracts").
These futures contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Trust bears the risk
of an unfavorable change in the value of the underlying securities. Risks may
also arise upon entering into these contracts from the potential inability of
the counterparties to meet the terms of their contracts.
9. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
As of October 31, 2004, Trust had temporary book/tax differences primarily
attributable to book amortization of discounts on debt securities and mark-to
market of open futures contracts.
18
Morgan Stanley Insured California Municipal Securities
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a common share of beneficial interest
outstanding throughout each period:
FOR THE SIX FOR THE YEAR ENDED OCTOBER 31,
MONTHS ENDED -------------------------------------------------------
APRIL 30, 2005 2004 2003 2002 2001 2000
-------------- ------- ------- ------- ------- -------
(unaudited)
Selected Per Share Data:
Net asset value, beginning of period............ $15.35 $15.24 $15.56 $16.00 $15.24 $ 14.42
------ ------ ------ ------ ------ -------
Income (loss) from investment operations:
Net investment income*...................... 0.31 0.66 0.67 0.69 0.78 0.76
Net realized and unrealized gain (loss)..... 0.14 0.25 (0.07) (0.01) 0.71 0.77
------ ------ ------ ------ ------ -------
Total income from investment operations......... 0.45 0.91 0.60 0.68 1.49 1.53
------ ------ ------ ------ ------ -------
Less dividends and distributions from:
Net investment income....................... (0.33) (0.63) (0.71) (0.72) (0.75) (0.75)
Net realized gain........................... (0.13) (0.20) (0.25) (0.41) -- --
------ ------ ------ ------ ------ -------
Total dividends and distributions............... (0.46) (0.83) (0.96) (1.13) (0.75) (0.75)
------ ------ ------ ------ ------ -------
Anti-dilutive effect of acquiring treasury
shares*........................................ 0.02 0.03 0.04 0.01 0.02 0.04
------ ------ ------ ------ ------ -------
Net asset value, end of period.................. $15.36 $15.35 $15.24 $15.56 $16.00 $ 15.24
====== ====== ====== ====== ====== =======
Market value, end of period..................... $14.00 $13.96 $13.83 $14.15 $15.29 $13.375
====== ====== ====== ====== ====== =======
Total Return+................................... 3.64%(1) 7.19% 4.57% (0.14)% 20.34% 9.34%
Ratios to Average Net Assets:
Total expenses (before expense offset).......... 0.56%(2)(3) 0.58%(3) 0.55%(3) 0.55%(3) 0.57%(3) 0.56%(3)
Net investment income........................... 4.19%(2) 4.37% 4.50% 4.68% 5.01% 5.18%
Supplemental Data:
Net assets, end of period, in thousands......... $56,243 $56,955 $57,923 $60,862 $63,150 $61,360
Portfolio turnover rate......................... 9%(1) 31% 31% 19% 22% 14%
---------------------
* The per share amounts were computed using an average number
of shares outstanding during the period.
+ Total return is based upon the current market value on the
last day of each period reported. Dividends and
distributions are assumed to be reinvested at the prices
obtained under the Trust's dividend reinvestment plan. Total
return does not reflect brokerage commissions.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.01%.
19
See Notes to Financial Statements
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
Chairman of the Board
Mitchell M. Merin
President
Ronald E. Robison
Executive Vice President and Principal Executive Officer
Joseph J. McAlinden
Vice President
Barry Fink
Vice President
Amy R. Doberman
Vice President
Carsten Otto
Chief Compliance Officer
Stefanie V. Chang
Vice President
Francis J. Smith
Treasurer and Chief Financial Officer
Thomas F. Caloia
Vice President
Mary E. Mullin
Secretary
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
The financial statements included herein have been taken from the records of the
Trust without examination by the independent auditors and accordingly they do
not express an opinion thereon.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
(c) 2005 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Insured California Municipal Securities
Semiannual Report
April 30, 2005
[MORGAN STANLEY LOGO]
38622RPT-RA05-00455P-Y04/05
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 covering periods ending on or after December 31,
2005.
Item 9. Closed-End Fund Repurchases
REGISTRANT PURCHASE OF EQUITY SECURITIES
Period (a) Total (b) Average (c) Total (d) Maximum
Number of Price Paid Number of Number (or
Shares per Share (or Shares (or Approximate
(or Unit) Units) Dollar
Units) Purchased as Value) of
Purchased Part of Shares (or
Publicly Units) that
Announced May Yet Be
Plans or Purchased
Programs Under the
Plans or
Programs
-------------------- --------- ------------- ------------- -----------
November 1, 2004 --
November 30, 2004 7,900 $13.8210 N/A N/A
December 1, 2004 --
December 31, 2004 8,200 $13.6657 N/A N/A
January 1, 2005 --
January 31, 2005 8,400 $13.8900 N/A N/A
February 1, 2005 --
February 28, 2005 7,000 $13.9198 N/A N/A
March 1, 2005 --
March 31, 2005 11,755 $13.9912 N/A N/A
April 1, 2005 --
April 30, 2005 5,500 $13.9897 N/A N/A
Total 48,755 $13.8796 N/A N/A
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
(a) The Trust's principal executive officer and principal financial officer have
concluded that the Trust's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Trust 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.
2
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 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.
3
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 Insured California Municipal Securities
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
June 16, 2005
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
June 16, 2005
/s/ Francis Smith
Francis Smith
Principal Financial Officer
June 16, 2005
4