<PAGE>
------------------------------------------------
THE
TURKISH
INVESTMENT
FUND, INC.
------------------------------------------------
THIRD QUARTER REPORT
JULY 31, 1998
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
THE TURKISH INVESTMENT FUND, INC.
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DIRECTORS AND OFFICERS
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
Stefanie V. Chang
VICE PRESIDENT
Harold J. Schaaff, Jr.
VICE PRESIDENT
Joseph P. Stadler
VICE PRESIDENT
Valerie Y. Lewis
SECRETARY
Joanna M. Haigney
TREASURER
Belinda A. Brady
ASSISTANT TREASURER
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INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Morgan Stanley Asset Management Limited
25 Cabot Square
Canary Wharf
London EI4 4QA
England
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ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
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CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
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SHAREHOLDER SERVICING AGENT
Investors Bank and Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
(800) 342-8756
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LEGAL COUNSEL
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
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INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
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For additional Fund information, including the Fund's net asset value
per share and information regarding the investments comprising the
Fund's portfolio, please call 1-800-221-6726.
<PAGE>
LETTER TO SHAREHOLDERS
- ---------
For the nine month period ended July 31, 1998, The Turkish Investment Fund,
Inc. (the "Fund") had a total return, based on net asset value per share, of
10.76% compared to 1.38% for the U.S. dollar adjusted Morgan Stanley Capital
International (MSCI) Turkey Index (the "Index"). For the one year period
ended July 31, 1998 and for the period since the Fund's commencement of
operations on December 5, 1989 through July 31, 1998, the Fund's total
return, based on net asset value per share, was 39.15% and -2.01%,
respectively, compared to 28.29% and 57.78%, respectively, for the Index. On
July 31, 1998, the closing price of the Fund's shares on the New York Stock
Exchange was $7 15/16, representing an 18% discount to the Fund's net asset
value per share.
The Fund's significant outperformance compared to the Index for the third
quarter and the nine months ended July 31 was driven by an overweight
position in the beverages, insurance, retail and consumer sectors which
performed strongly and, by maintaining an underweight position in banks and
utilities. Going forward, the Fund has positioned itself to take advantage of
the 30% real yields in domestic T-bills by reducing its holdings in certain
equity investments which had become fully valued in the near term.
Turmoil in international financial markets continues to depress the Turkish
equity market. Negative sentiment towards emerging markets--particularly the
meltdown of the Russian market--limited Turkey's performance thus far this
year. There is limited economic exposure to Russia, which purchases
approximately 8% of Turkey's exports. But sentiment outweighs the
fundamentals and concerns over a weaker yen, a Chinese devaluation and the
collapse of emerging markets' debt has eroded Turkey's resistance to
contagion.
On the domestic front, the market's performance was shaped by politics, a new
anti-inflation program and relations with the International Monetary Fund
(IMF). Prime Minister Yilmaz of the conservative Motherland party continued
to face obstacles both within his ruling coalition and from the parliamentary
opposition. The ruling coalition--a three-party minority group--nearly
collapsed over disagreement on pay increases for public sector employees. A
smaller coalition partner objected to a proposed 20% pay increase. But after
three weeks of intense negotiations, coalition leaders agreed on a formula
for a 30% wage increase. Although higher than the IMF had prescribed, the
wage increase has not strained relations. More importantly, the ruling
coalition remained intact. Yilmaz also struck a deal with Deniz Baykal, the
leader of the center-left opposition CHP party whose support in the
Parliament has been necessary to pass any legislation. The terms of the
agreement call for the Prime Minister to hand over power to a caretaker
administration at the end of the year and call elections for April 1999. In
exchange, the CHP party will not block the government's reform bills. The
agreement confirms that the support of the opposition is absolutely necessary
if Turkey is to have any hope of passing structural reforms.
The Turkish parliament did pass a long-awaited tax reform bill in July that
will have a significant impact on both the debt and equity markets. The goal
of the new legislation is to increase tax collection by broadening the tax
base. From the perspective of the financial markets, the most important new
element is a capital gains tax on transactions in the stock and bond markets.
Under the new law, unrealized income from government bonds will be taxable on
a quarterly basis as opposed to when realized. Turkish banks unsuccessfully
lobbied against these measures which would increase the banks' taxable base
and lead to lower earnings prospects. The measures may increase the market's
stability given that securities held for more than one year would be exempt
from the new tax.
Turkey's relations with the IMF took a significant step forward with the
signing of a Staff Monitored Program aimed at reducing Turkey's stubborn
inflation. The new economic program includes macro economic policy targets
agreed to between the IMF and Turkey, but does not include any loan
commitments. The IMF will monitor Turkey's compliance with these targets and
will be issuing status reports on a quarterly basis. Turkey's ability to meet
these targets should lead to a much more stable economic environment
domestically and higher credibility abroad. Some of the key features of the
program include an increase in the primary surplus to 4.1% of GNP in 1998 and
4.75% in 1999, reducing government debt via accelerated privatization
proceeds of at least $5 billion over the next two years, and capping
non-interest expenditures at 17.5% of GNP by reducing agricultural subsidies.
If successful, the new program could dramatically change the country's
economic environment by reducing inflation which has been a permanent feature
of the economy for decades. In June, annual inflation dropped to a seasonally
adjusted 76.6% from 79.9% in
2
<PAGE>
May. Although these rates are far from the government's 20% inflation target,
the trend is positive. The government's main challenge in the medium-term
will be to balance the fight against inflation with economic growth.
Another challenge faced by Turkey is the heightened tensions with Greece over
the status of Cyprus which have aggravated Turkish relations with the
European Union (EU). In December 1997, Brussels turned down Turkey's
membership application and instead offered closer relations through the 1996
customs union agreement. Improved relations were, however, conditional on
movement towards a resolution to the Cyprus problem. Turkey responded by
backing away from EU negotiations and taking steps toward integrating the
Turkish populated Northern portion of Cyprus. The Greek Cypriot president
responded in turn by announcing a plan to buy Russian anti-aircraft missiles
which would be used to defend the Greek-controlled half of Cyprus. The U.S.
and other NATO powers attempted to intervene to ease tensions, but Turkey has
stated that it will retaliate if the missiles are deployed. A return to the
longer-term process of closer Turko-EU relations will be delayed until this
issue is resolved.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
August 1998
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EFFECTIVE AUGUST 1, 1998, JAIDEEP KHANNA ASSUMED PRIMARY RESPONSIBILITY FOR THE
DAY-TO-DAY MANAGEMENT OF THE FUND'S ASSETS. MR. KHANNA JOINED MORGAN STANLEY
ASSET MANAGEMENT ("MSAM") IN 1994. HE IS A VICE PRESIDENT AND A MEMBER OF MSAM's
EMERGING MARKETS GROUP FOCUSING PRIMARILY ON EMERGING EUROPE, THE MIDDLE EAST
AND THE AFRICAN MARKETS. PRIOR TO JOINING MSAM, HE WORKED IN EQUITY RESEARCH
AND INVESTMENT BANKING AT SMITH BARNEY. HE ALSO WORKED AS AN AUDITOR WITH PRICE
WATERHOUSE, WHERE HE QUALIFIED AS A CERTIFIED PUBLIC ACCOUNTANT.
3
<PAGE>
The Turkish Investment Fund, Inc.
Investment Summary as of July 31, 1998 (Unaudited)
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<TABLE>
<CAPTION>
HISTORICAL
INFORMATION
TOTAL RETURN (%)
-------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (3)
--------------------- --------------------- ---------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year to Date 6.10% -- 10.76% -- 1.38% --
One Year 19.85 19.85% 39.15 39.15% 28.29 28.29%
Five Year -3.86 -0.78 35.66 6.29 79.10 12.36
Since Inception* -19.65 -2.50 -2.01 -0.23 57.78 5.41
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31:
NINE MONTHS
ENDED
1990* 1991 1992 1993 1994 1995 1996 1997 JULY 31, 1998
-------- ------- ------- ------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share . . . $ 12.78 $ 5.16 $ 4.69 $ 9.41 $ 4.89 $ 5.93 $ 5.57 $ 8.74 $ 9.68
Market Value Per Share. . . . . $ 9.38 $ 7.00 $ 6.00 $ 10.38 $ 6.88 $ 5.88 $ 5.38 $ 7.63 $ 7.94
Premium/(Discount). . . . . . . -26.6% 35.7% 27.9% 10.3% 40.7% -0.8% -3.5% -12.7% -18.0%
Income Dividends. . . . . . . . $ 0.03 -- $ 0.07 $ 0.04 $ 0.12 -- $ 0.12 $ 0.14 $ 0.14
Capital Gains Distributions . . -- $ 0.07 $ 0.17 -- -- -- -- -- --
Fund Total Return (2) . . . . . 14.80% -59.27% -6.36% 102.39% -47.61% 21.27% -4.09% 60.76% 10.76%
Index Total Return (3). . . . . 93.17% -64.65% -21.03% 156.26% -45.26% 26.48% -4.24% 87.70% 1.38%
</TABLE>
(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) The Morgan Stanley Capital International (MSCI) Turkey Index is an
unmanaged index of common stocks.
* The Fund commenced operations on December 5, 1989.
4
<PAGE>
The Turkish Investment Fund, Inc.
Portfolio Summary as of July 31, 1998 (Unaudited)
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DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
Equity Securities (90.7%)
Short-Term Investments (9.3%)
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SECTORS
[CHART]
Appliances & Household Durables (4.2%)
Automobiles (3.2%)
Banking (25.3%)
Beverages & Tobacco (8.8%)
Building Materials &
Components (6.0%)
Electrical & Electronics (6.0%)
Other (18.5%)
Utilities -- Electrical & Gas (4.2%)
Metals -- Steel (7.1%)
Merchandising (12.1%)
Insurance (4.6%)
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TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. Yapi Ve Kredi Bankasi 10.3%
2. Turkiye Is Bankasi 10.2
3. Carsi Buyuk Magazacilik 7.3
4. Eregli Demir Ve Celik Fabrikalari TAS 7.1
5. Vestel Elektronik Sanayi Ve Ticaret AS 6.0
6. Migros Turk TAS 4.8
7. Arcelik 4.2
8. Turcas Petroculuk AS 4.2
9. Turkiye Garanti Bankasi 4.0
10. Aksigorta AS 4.0
----
62.1%
----
----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
INVESTMENTS (UNAUDITED)
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JULY 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
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<S> <C> <C>
TURKISH COMMON STOCKS (91.7%)
(Unless otherwise noted)
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APPLIANCES & HOUSEHOLD DURABLES (4.2%)
Arcelik 67,662,200 U.S. $ 2,868
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AUTOMOBILES (3.2%)
Tofas Turk Otomobil Fabrikasi AS 27,785,000 1,127
Uzel Makina Sanayii AS 5,515,000 1,077
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2,204
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BANKING (25.3%)
Akbank T.A.S. 18,288,000 553
Turkiye Garanti Bankasi 59,448,000 2,574
Turkiye Garanti Bankasi
GDS 38,801 172
Turkiye Is Bankasi 168,250,000 6,977
Yapi Ve Kredi Bankasi 226,153,075 7,002
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17,278
-------------
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BEVERAGES & TOBACCO (8.8%)
Ege Biracilik Ve Malt Sanayii 17,755,000 2,454
Erciyas Biracilik 7,012,000 1,073
Guney Biracilik Ve Malt Sanayii 21,542,000 2,461
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5,988
-------------
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BUILDING MATERIALS & COMPONENTS (6.0%)
Adana Cimento 17,200,000 666
Goltas Cimento 72,510,000 2,191
Turk Sise Ve Cam Fabrikalari 38,841,000 1,260
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4,117
-------------
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ELECTRICAL & ELECTRONICS (6.0%)
Vestel Elektronik Sanayi Ve
Ticaret AS 25,629,700 4,110
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FINANCIAL SERVICES (0.9%)
Global Menkul Degerler S.A. 27,793,705 522
Global Securities Services,
Inc. Ltd. 4,242,500 80
Global Securities Services,
Inc. Ltd. - New 1,360 --@
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602
-------------
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FOOD & HOUSEHOLD PRODUCTS (3.0%)
Pinar Sut 29,352,500 2,029
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FOREST PRODUCTS & PAPER (2.7%)
Kartonsan 23,905,000 1,806
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INSURANCE (4.6%)
Aksigorta AS 39,748,000 2,711
Gunes Sigorta 4,738,000 435
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3,146
-------------
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MERCHANDISING (12.1%)
Carsi Buyuk Magazacilik 42,735,000 U.S. $ 4,962
Migros Turk TAS 3,084,000 3,296
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8,258
-------------
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METALS -- NON-FERROUS (0.0%)
Rabak Elektrolitik Bakir Ve
Mamulleri 3,272,280 --
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METALS -- STEEL (7.1%)
Eregli Demir Ve Celik
Fabrikalari TAS 32,457,200 4,845
-------------
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TELECOMMUNICATIONS (1.4%)
Netas Telekomunik 3,292,000 197
Netas Telekomunik (Rights) 3,292,000 765
-------------
962
-------------
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TEXTILES & APPAREL (0.0%)
Mensucat Santral 3,606,400 --
-------------
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TRANSPORTATION -- AIRLINES (2.2%)
Usas Ucak Servisi 660,000 1,484
-------------
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UTILITIES -- ELECTRICAL & GAS (4.2%)
Turcas Petroculuk AS 70,022,000 2,839
-------------
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TOTAL TURKISH COMMON STOCKS
(Cost U.S.$47,642) 62,536
-------------
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FACE
AMOUNT
(000)
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SHORT-TERM INVESTMENT (9.2%)
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REPURCHASE AGREEMENT (9.2%)
Chase Securities, Inc., 5.39%,
dated 7/31/98, due
8/3/98, to be repurchased
at U.S.$6,280, collateralized
by U.S.$4,915 U.S. Treasury
Bond 8.125%, due 5/15/21,
valued at U.S.$6,423
(Cost U.S.$6,277) U.S. $ 6,277 6,277
-------------
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FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (0.2%)
Turkish Lira
(Cost U.S.$124) TRL 33,391,119 123
-------------
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</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AMOUNT
(000) (000)
- -----------------------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENTS (101.1%)
(Cost U.S.$54,043) U.S. $ 68,936
-------------
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OTHER ASSETS AND LIABILITIES (-1.1%)
Other Assets U.S. $ 6,592
Liabilities (7,315) (723)
---------------- -------------
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NET ASSETS (100%)
Applicable to 7,046,430 issued and
outstanding U.S.$0.01 par value shares
(30,000,000 shares authorized) U.S. $ 68,213
-------------
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NET ASSET VALUE PER SHARE U.S. $ 9.68
-------------
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</TABLE>
@ -- Value is less than U.S.$500.
GDS -- Global Depositary Shares
July 31, 1998 exchange rate -- Turkish Lira (TRL)
271,300 = U.S.$1.00
7
