<PAGE>
LETTER TO SHAREHOLDERS
March 12, 1999
Dear Shareholder,
We are pleased to present this quarterly report which
covers the activities
of The First Australia Fund, Inc. (the 'Fund') for the
quarter ended January 31,
1999. Included in this report is a review of the Australian
economy and
investment markets, together with an overview of the Fund's
investments prepared
by the Investment Manager, EquitiLink International
Management Limited.
Performance - First in its Lipper category over 5 years
The Fund has been awarded the No. 1 ranking in the Lipper
Closed-End Funds
Performance Survey over five years to December 31, 1998 in
the category of
Pacific ex-Japan Funds.
The new portfolio management personnel now have a solid
first year
performance behind them. The latest quarter is the first
since April last year
in which the Australian stock market rose. The Fund's NAV in
U.S. Dollar terms
increased by 11.3% over the quarter, assuming reinvestment
of distributions.
IMPORTANTLY, THE SHARE PRICE HAS RISEN BY 53% SINCE
AUGUST 31, 1998 TO THE
DATE OF THIS REPORT. IN ADDITION, THE FUND HAS PAID A TOTAL
OF 85.3 CENTS IN
DISTRIBUTIONS OVER THE PAST TWELVE MONTHS, EQUATING TO AN
ANNUAL CASH
DISTRIBUTION RATE OF 11.2%, BASED ON THE SHARE PRICE OF
$7.63 AS OF THE DATE OF
THIS REPORT, AND TOTAL RETURN, BASED ON MARKET VALUE, OF
3.8%.
Currency - Australian Dollar appreciates
Over the period, the Australian Dollar strengthened
against the U.S. Dollar,
reaching a high of 64.40 cents in mid-November. The currency
declined following
a monetary policy easing in early December, but recovered
ground following
stronger economic data in January, closing the quarter at
63.02 cents, up 0.9%.
Resilient economic growth is a key positive for the
currency in the
near-term. Looking further out, improving global growth
should lead commodity
prices higher, further supporting the Australian Dollar.
An Important Issue - Addressing the Discount
As you may now be aware, a group known as Deep Discount
Advisors and Ron Olin
Investment Management Company (together 'DDA') have targeted
The First Australia
Fund, Inc. as part of their ongoing attack on the closed-end
fund industry. DDA
claims that both the Investment Manager and the Fund's Board
of Directors have
been unresponsive addressing the discount issue.
This is not the case.
Management has implemented several proposals intended to
reduce the discount
and has constantly monitored the Fund's premium/discount
since its inception:
1. Not long after the Fund began trading at a discount in
mid-1986, at
Management's recommendation, the Board implemented a share
buy-back program.
This had a minimal impact on closing the discount, while
increasing costs.
Consequently, the program was discontinued.
2. In early 1994, Management implemented an investor
awareness campaign which
led to large buying of the Fund by international investors.
The resultant
increase in the stock price not only closed the discount,
but saw the Fund trade
at a premium for a short period.
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3. In an attempt to close the discount that can be
attributed to a
depreciation of the Australian Dollar, Management
recommended, and the Board
approved, a managed distribution policy back in 1997. The
Fund is now being
recognized as a high distribution investment with
substantial capital growth
potential, and the discount has considerably narrowed. The
Fund's current
distribution rate is 9% on NAV and around 11% on its current
share price.
4. Management has continued an effective educational
campaign, including
ongoing discussions with leading U.S. analysts. As a result,
several major U.S.
brokers have announced BUY recommendations for the Fund.
Because the Fund's recent strong performance has not been
fully reflected in
the Fund's stock price, we believe your investment in the
Fund offers value to
the long-term investor. This perception seems to have helped
both the stock
price, which has risen some 53% since August 31, 1998, and
the discount, which
has dropped substantially.
For information on the Fund, please telephone investor
relations at Dewe
Rogerson, toll free on 1-800-323-9995.
Yours sincerely,
Laurence S. Freedman Brian M.
Sherman
Chairman President
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DIVIDEND REINVESTMENT AND CASH PURCHASE
PLAN
Participation in the Fund's Dividend Reinvestment and
Cash Purchase Plan
('the Plan') allows you to automatically reinvest your
distributions in shares
of the Fund's common stock at favorable commission rates.
The Plan also enables
you to make additional cash investments in shares of at
least $100 per month.
Under this arrangement, the Plan Agent will purchase shares
for you on the stock
exchange or otherwise on the open market on or about the
15th of each month.
As a Participant in the Plan, you will have the
convenience of:
Automatic reinvestment - the Plan Agent will
automatically reinvest your
distributions, allowing you to gradually grow your holdings
in the Fund;
Lower costs - shares are purchased on your behalf under
the Plan at reduced
brokerage rates;
Convenience - the Plan Agent will hold your shares in
noncertificated form
and will provide a detailed record of your holdings at the
end of each
distribution period.
To request a brochure containing information of the Plan,
together with an
authorization form, please telephone investor relations at
Dewe Rogerson,
toll-free on 1-800-323-9995.
REPORT BY THE INVESTMENT MANAGER
NAV Performance
The Fund's Net Asset Value (NAV) outperformed its
benchmark returns,
increasing by 11.3% over the quarter, assuming reinvestment
of distributions.
Currency
The Australian Dollar rose by 0.9% against the U.S.
Dollar over the three
months, supporting the Fund's return.
Share Price Performance
The Fund's share price increased 7.9% over the quarter,
assuming reinvestment
of distributions. The Fund's stock closed at $6.88 per share
on January 31,
1999.
Investment Strategy
The Fund substantially lowered its exposure to the
resource sector a year
ago. That sector has underperformed the industrial sector
over the year and in
the latest quarter. The Fund will remain relatively fully
invested, with an
overweight position in the industrial sector.
Quality of the Portfolio
The Fund maintains a high-quality portfolio, with some
90% by value invested
in the top 100 companies on the Australian Stock Exchange.
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Distribution Policy - 9% Per Annum
Commencing from January 1998, the Fund changed its
distribution policy to
quarterly distributions at an annual rate based on a
percentage of the rolling
average of the prior four quarter-end NAV's. The rate for
1999 was reset at 9%
by the Board of Directors. The distributions will be made
initially from net
investment income, then from net realized gains and, to any
extent necessary,
paid-in capital. To date no capital has been repaid, nor is
there any
expectation of doing so in the foreseeable future.
Over the past 12 month period the Fund paid a total of
85.3 cents per share
which equates to an annualized cash distribution rate of
11.2%, based on the
share price of $7.63 as of the date of this report.
At the meeting of the Board of Directors held on March
11, 1999, a
distribution of 20.0 cents per share was declared for the
quarter ending March
31, 1999, payable in April 1999.
Portfolio Composition
The following chart summarizes the composition of the
Fund's portfolio,
expressed as a percentage of net assets.
[CHART TO COME]
SELECTED EQUITY HOLDINGS
The following notes highlight the Fund's top ten holdings
at January 31,
1999.
Telstra Corporation Limited
10.9% of total assets
Telstra Corporation is Australia's dominant
telecommunications carrier
providing a full range of telecommunications services. The
company will continue
to participate in a rapidly growing market. Although
deregulation of the
Australian telecommunications market has increased
competition and may lead to
some erosion of Telstra's market share, profitability is
expected to grow
strongly as costs are reduced.
4
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Australia & New Zealand Banking Group Limited (ANZ)
7.2% of total assets
ANZ Banking Group is Australia's fourth largest banking
group, offering
retail and wholesale banking services to Australia, New
Zealand and Asia. Recent
management changes have focused on cost control and growing
non-interest income.
Domestic asset quality and interest margins are trending
favorably, underpinning
a sound outlook for profitability.
National Australia Bank Limited (NAB)
6.9% of total assets
National Australia Bank is Australia's largest full-
service banking group,
with significant operations in Australia, New Zealand, the
U.K. and U.S. NAB has
grown its international retail banking presence through
acquisitions while
maintaining market leadership in Australia. The recent
interim result showed
strong growth in banking fees and commissions, as well as
continuing emphasis on
expense reduction.
News Corporation Limited
4.6% of total assets
News Corporation is a global, vertically-integrated
entertainment and media
company. The company produces film and television
entertainment through the Fox
brand name and also has significant interests in several
major broadcast
platforms such as B-Sky-B in the U.K. and the Fox TV network
in the U.S. News
Corporation has also entered into joint venture arrangements
with other
media/telecommunications companies in order to reduce
financial risk and expand
its global market presence.
Westpac Banking Corporation Limited (WBC)
4.6% of total assets
Westpac Banking Corporation is the second largest banking
group in Australia,
offering retail and wholesale banking services to Australia
and New Zealand.
Management remains focused on optimizing its domestic
banking business and
integrating recent acquisitions. Sound capital management
should drive earnings
per share growth.
Fosters Brewing Group Limited
4.5% of total assets
Fosters Brewing Group is an international beverage group
focusing on beer,
wine and other alcoholic beverages. Following the recent
disposal of its holding
in Molson Canada, Fosters derives the majority of its
earnings from its
Australian liquor operations.
Brambles Industries Limited
3.9% of total assets
Brambles Industries is a geographically diversified group
operating in
Australia, Europe and North America. Major activities
include equipment rental,
waste management, palette management (CHEP), security,
industrial service,
records management, and other transport-related services.
The trend towards
outsourcing industrial services is underwriting strong
growth for Brambles in
its core operations.
Lend Lease Corporation Limited
3.7% of total assets
Lend Lease Corporation is Australia's largest integrated
property and
financial services group. The company has achieved 23
consecutive years of
profit growth. It continues to leverage off its strong
market presence in
Australia with increasing involvement internationally. Lend
Lease Corporation is
involved in project management, design and construction,
property development
and facilities management. It is also a major provider of
financial services
(funds management and life insurance products) through the
MLC group. The
company is well positioned to maintain growth in
profitability.
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<PAGE>
Lang Corporation Limited
2.5% of total assets
Lang Corporation is the owner of Australia's largest
stevedoring company,
Patrick, and TDG Autocare. Having resolved Patrick's union
problems, the market
will increasingly focus on the attractiveness of the
stevedore business. Given
that the business is a duopoly, with high barriers to entry
and steady long-term
growth, the prospects for Lang Corporation are positive.
Rio Tinto Limited
2.2% of total assets
Rio Tinto is the world's largest mining company, with
assets located in North
America, Europe, Southern Africa, South America, Australia
and New Zealand. The
company pursues world class ore bodies, with particular
emphasis on copper,
gold, diamonds, iron ore and coal. Strong financial
management is a core
competency of the group.
MARKET REVIEW AND OUTLOOK
Economy
The Australian economy grew strongly in the last quarter,
due mainly to the
strength of the service sector and other domestically
focused parts of the
economy. Growth has been underpinned by low interest rates,
lagging real wage
increases, productivity growth, and healthy consumer
sentiment.
The September quarter national accounts recorded GDP
growth of 5% per annum.
Our expectations remain in place that the Australian economy
will moderate
towards an annual growth rate of 2.5-3.0% in 1999.
Inflation remains lower than forecast, well below 2% over
the last year. It
should remain low in 1999, as solid productivity gains have
capped growth in
unit labor costs. We expect only a moderate increase, to
around 2%, due to
higher import prices, resulting from a depreciated currency.
Stock Market
Over recent months, the Australian stock market has risen
strongly. It
reached a new high in early February, about 18% above its
low point at the time
of world financial market disturbance around September last
year. Strong
economic data and a reduction in interest rates in early
December aided
sentiment. Over the three months to January 31, 1999, the
All Ordinaries
Accumulation Index increased by 11.2% in U.S. Dollar terms.
As has been the case for some time in Australia, banks
and large industrial
stocks showed the biggest rises in price, where resource
stocks fell further in
response to lower commodity prices globally.
Currency
Over the quarter, the Australian Dollar strengthened
against the U.S. Dollar.
It rose to a high of 64.40 cents in mid-November but
declined following a
monetary policy easing in early December, only to recover
following stronger
January economic data. The currency appreciated 0.9% against
the U.S. Dollar
over the three months, to close at 63.02 cents on January
31, 1999.
The resilience of domestic growth is a key positive for
the currency in the
near-term. Looking further out, improving global growth
should lead commodity
prices higher, further supporting the Australian Dollar.
EquitiLink
International Management Limited
6
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THE FIRST AUSTRALIA FUND, INC.
Statement of Net Assets
January 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS--99.5%
Common and Preferred Stocks--99.5%
Diversified Industries--29.5%
1,700,000 Australian Infrastructure
Group..................... $ 2,396,185
1,035,000 Cable & Wireless Optus
Limited*.................. 2,455,303
950,000 CSR Limited................. 2,223,172
1,090,000 Fairfax (John) Holdings
Limited................... 2,606,354
610,000 Faulding (F.H.) & Company
Limited................... 3,339,047
2,500,000 Fosters Brewing Group
Limited................... 7,346,496
2,200,000 Futuris Corporation
Limited................... 2,533,361
1,705,000 Lang Corporation Limited.... 4,076,912
900,000 Leighton Holdings Limited... 3,652,797
460,000 Lend Lease Corporation
Limited................... 6,094,766
25,000 LibertyOne Limited*......... 75,085
4,900,000 MacMahon Holdings Limited... 1,464,580
1,800,000 MTM Entertainment Trust*.... 906,120
400,000 Orica Limited............... 2,046,322
900,000 Pioneer International
Limited................... 1,833,195
1,000,000 Ramsay Health Care
Limited................... 1,164,113
411,517 Toll Holdings Limited
Convertible Preferred
Stock..................... 1,009,894
100,000 Woolworths Limited.......... 348,605
------------
45,572,307
------------
Resources And Mining--12.7%
748,064 Acacia Resources Limited.... 1,153,263
297,755 Broken Hill Proprietary
Company Limited........... 2,188,580
489,073 Comalco Limited............. 1,748,016
1,295,600 Lihir Gold Limited*......... 1,304,411
2,876,034 M.I.M. Holdings Limited..... 1,230,627
1,186,600 Newcrest Mining Limited*.... 1,889,071
575,209 North Limited............... 865,061
358,000 Resolute Limited............ 259,062
297,151 Rio Tinto Limited........... 3,682,430
395,588 Santos Limited.............. 1,152,019
768,555 WMC Limited................. 2,364,869
387,081 Woodside Petroleum
Limited................... 1,751,274
------------
19,588,683
------------
- ---------------------------------------------------------
Value
Shares Description (US$)
- ---------------------------------------------------------
Services--57.3%
348,000 Adelaide Bank Limited....... $ 1,368,619
1,797,324 Australia & New Zealand
Banking Group Limited..... 11,837,826
235,000 Brambles Industries
Limited................... 6,395,985
650,298 Colonial Limited............ 2,359,039
450,000D HIH Winterthur Interest
Installment Receipts...... 382,269
1,560,000D HIH Winterthur International
Holdings Limited.......... 2,257,750
1,275,548 Jupiters Limited............ 2,793,183
678,000 National Australia Bank
Limited................... 11,386,372
1,800,000D National Mutual Holdings
Limited................... 3,192,941
1,050,000 News Corporation Limited.... 7,611,410
1,500,000 Pacific Magazines & Printing
Limited................... 2,960,937
850,000 Qantas Airways Limited...... 1,850,625
900,000 QBE Insurance Group
Limited................... 3,597,298
210,000D St. George Bank Limited..... 1,372,565
3,300,000Pound Telstra Corporation Limited
Installment Receipts*..... 17,941,181
2,600,000D Village Roadshow Limited
Voting Preferred Stock.... 3,566,590
1,097,000 Westpac Banking Corporation
Limited................... 7,593,162
------------
88,467,752
------------
Total common and preferred
stocks
(cost US$144,496,797)..... 153,628,742
------------
Principal
Amount
(000) SHORT-TERM INVESTMENTS--1.8%
- -----------
Demand Deposits--1.2%
A$ 2,464 Banque Nationale de Paris,
Demand Deposit, 4.40%..... 1,550,366
530 State Street Bank & Trust
Company, Demand Deposit,
4.05%..................... 333,632
------------
Total demand deposits
(cost US$1,927,253)....... 1,883,998
------------
</TABLE>
8
<PAGE>
<TABLE>
- ---------------------------------------------------------
<CAPTION>
Principal
Amount Value
(000) Description (US$)
<C> <S> <C>
- ---------------------------------------------------------
Repurchase Agreement--0.6%
US$ 908 Repurchase Agreement, State
Street Bank & Trust
Company, 4.60% dated
1/29/99, due 2/1/99 in
the amount of $908,348
(cost $908,000;
collateralized by $635,000
U.S. Treasury bill, due
11/15/10; value including
accrued
interest--US$932,265)..... $ 908,000
------------
Total short-term investments
(cost US$2,835,253)....... 2,791,998
------------
Total Investments--101.3%
(cost US$147,332,050)..... 156,420,740
Liabilities in excess of
other
assets--(1.3%)............ (2,034,120)
------------
Net Assets--100%............ $154,386,620
------------
------------
Net asset value per common
share
($154,386,620 / 17,189,998
shares issued and
outstanding).............. $8.98
------------
------------
</TABLE>
- ------------------
* Non-income producing security.
D Portion of securities on loan.
Pound Fair valued security.
9
<PAGE>
Directors
Anthony E. Aaronson
Sir Roden Cutler
David Lindsay Elsum
Rt. Hon. Malcolm Fraser
Laurence S. Freedman, Chairman
Michael R. Horsburgh
Howard A. Knight
Richard H. McCoy
Neville J. Miles
William J. Potter
John T. Sheehy
Brian M. Sherman
Officers
Brian M. Sherman, President
Laurence S. Freedman, Vice President
Ouma Sananikone-Fletcher, Assistant Vice President
and Chief Investment Officer
David Manor, Treasurer
Roy M. Randall, Secretary
Barry G. Sechos, Assistant Treasurer
Kenneth T. Kozlowski, Assistant Treasurer
Allan S. Mostoff, Assistant Secretary
Margaret A. Bancroft, Assistant Secretary
The accompanying Statement of Net Assets as of January 31,
1999 was not audited
and accordingly, no opinion is expressed on it.
This report, including the financial statements herein, is
transmitted to the
shareholders of The First Australia Fund, Inc. for their
general information
only. It does not have regard to the specific investment
objectives, financial
situation and the particular needs of any specific person.
Notice is hereby given in accordance with Section 23(c) of
the Investment
Company Act of 1940 that the Fund may purchase, from time to
time, shares of its
common stock in the open market.
<PAGE>
- ------------------------------------------------------
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- -------
- ------------------------------------------------------------
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Investment Manager
EquitiLink International Management Limited
P.O. Box 578, 17 Bond Street
St. Helier, Jersey JE4 5XB Channel Islands
Investment Adviser
EquitiLink Australia Limited
190 George Street
Sydney, NSW 2000, Australia
Administrator
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Custodian and Transfer Agent
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
Legal Counsel
Dechert Price & Rhoads
1500 K Street N.W.
Washington, D.C. 20005
Stikeman, Elliott
Level 32, Chifley Tower
2 Chifley Square
Sydney, NSW 2000, Australia
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
for information call toll-free (800) 522-
5465
collect (973) 367-7403
or for information regarding net asset
value
(800) 451-6788
Shares of The First Australia Fund, Inc. are traded
on the
American Stock Exchange and on the Pacific Stock
Exchange under the
symbol 'IAF'. Information about the Fund's net asset
value and
market price is published weekly in Barron's and in
the Monday
edition of The Wall Street Journal.
For a weekly update of the Fund's net asset value
and share price, or to receive more information on the
Fund, call
toll-free:
1-800-323-9995
318652104
(R)
The First Australia
Fund, Inc.
- ------------------------------------------------------------
- -------
Quarterly Report
January 31, 1999
Highlights
-------------------------------------------
- Performance: First in its category over
five years in the Lipper Closed-end Fund
Survey.
- Annual cash distribution rate set at 9% of
NAV.
- Share price up 53% since August 31, 1998.
- Discount to NAV narrows substantially.
- Australian Dollar appreciates.
ALL AMOUNTS ARE U.S. DOLLARS UNLESS OTHERWISE STATED.
Managed by EquitiLink International Management Limited.
