Yes, that type of Morphing is done in a compositing program. I have Combustion 4, and it has an awesome particle system (most competing packages don't come with a Particle system like Combustion does...you have to buy plugins for that) among many other features. The Morph system you are asking about is a set of third-party plugins from RE:Vision Effects, Inc. that come with Combustion. The specific feature you would use is AE RE:Flex Morph, or Flex Motion Morph. This website will give you some more details on that feature:

http://www.revisionfx.com/rflx.htm 

If you have a recent version of 3ds Max and that is the 3D program you normally use, then the absolute BEST compositing package for you to buy would be Combustion....period! While After Effects is probably the most common, and Apple's Shake is pretty good, none of them outdoes Combustion in any specific category, and there are features for 3ds Max users that it's competitors can't match. It's designed to be tightly integrated with Max. The best example of that is the fact that in Max's material editor you have a section called "Combustion workspace." This allows you to run both programs simultaneously, and use Combustion's Paint tools to paint your 3D objects on the fly...much like Deep Paint 3D or Maxon's Body Paint. You can do the same with displacement maps. When you paint inside Combustion on a displacement map that is open in Max's Material Editior, it instantly changes the shape/displacement in Max.

The one thing that absolutely turns me off about After Effects is the cluttered UI. I have two screens, but I shouldn't have to resort to using both just to get all of that clutter out of the way. Combustion is easy on the eyes and very organized. You don't have to drag a single thing out of your way. When you want to work in a specific operator, you click the tab for it, and it lays out neatly all the applicable controls. I shopped around, and it didn't take alot of looking and researching to decide Combustion is the outright champ for those who use 3ds Max. It can't be beat even if you don't use Max, but those exclusive features that I just mentioned, make it a no brainer.

You are right. If you want to do alot of Visual Effects, there are some things that a 3D package won't do, or won't do very well. Glowing effects is a good example.That's specifically where Compositing packages step in and show their stuff. You will also find yourself using Combustion's Particle System probably half the time just because of the ease and speed at which you can create the same effect.