<PAGE>
THE LATIN AMERICAN DISCOVERY FUND, INC.
---------------------------------------------
OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS Frederick B. Whittemore
Warren J. Olsen DIRECTOR
PRESIDENT AND DIRECTOR James W. Grisham
Peter J. Chase VICE PRESIDENT
DIRECTOR Harold J. Schaaff, Jr.
John W. Croghan VICE PRESIDENT
DIRECTOR Joseph P. Stadler
David B. Gill VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
Graham E. Jones SECRETARY
DIRECTOR James R. Rooney
John A. Levin TREASURER
DIRECTOR Joanna M. Haigney
ASSISTANT TREASURER
</TABLE>
--------------------------------------------------------
U.S. INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
--------------------------------------------------------
U.S. ADMINISTRATOR
The Chase Manhattan Bank, N.A.
73 Tremont Street
Boston, Massachusetts 02108
--------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company (International)
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank, N.A. (Domestic)
770 Broadway
New York, New York 10003
--------------------------------------------------------
SHAREHOLDER SERVICING AGENT
The First National Bank of Boston
Investor Relations Department
P.O. Box 644, Mail Stop 46-02-09
Boston, Massachusetts 02102-0644
(617) 575-2900
--------------------------------------------------------
LEGAL COUNSEL
Rogers & Wells
200 Park Avenue
New York, New York 10166
--------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
--------------------------------------------------------
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.
----------
THE
LATIN AMERICAN
DISCOVERY
FUND, INC.
----------
THIRD QUARTER REPORT
SEPTEMBER 30, 1995
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- -------
For the third quarter of 1995 the Fund's total return based on net asset value
per share was 10.28% versus 3.77% for the MSCI Emerging Markets Global (EMG)
Latin America Index (the MSCI Index) and 2.83% for the IFC Latin America Total
Return Composite Index (the IFC Index). On a year-to-date basis, the Fund's
total return was -22.56% versus -10.22% for the MSCI Index and -11.29% for the
IFC Index. Since inception the Fund's total return is 38.12% versus 28.71% for
the MSCI Index and 26.11% for the IFC Index.
The Latin American markets rallied during the month of July and August but
corrected slightly in September. The individual markets moved disparately,
reacting to local events and reflecting shifts in sentiment. The Fund's
outperformance was due to its overweight position in Brazil, which saw much
larger gains than the MSCI Index, and its small presence in Chile, which was hit
hard during the quarter.
The Brazilian market was the best performer during the period, rising 14.7% on
the back of lower than expected inflation numbers and a modest easing of bank
reserve requirements by the Central Bank. Brazil's gains for the past two
quarters now aggregate to 33.7%, bringing the net decline for the year to -9.3%.
Economic activity in Brazil picked up slightly during August and September after
two slow summer months. The Central Bank's credit tightening measures appeared
to have been successful in slowing the economy and reducing inflationary
pressures, clearing the way for easing credit towards the end of the quarter.
Inflation reached a low of 0.7% in August and should come in modestly higher for
the month of September. Furthermore, past due loans in the banking sector,
rising throughout the year, peaked and stabilized during August.
The reform process continues to move slowly through Congress and other
regulatory bodies, addressing tax, administration, social security, industry
deregulation and privatization issues. We expect progress in these areas to come
gradually over the next six to twelve months. Tariffs on regulated industries
are being cautiously raised to avoid inflationary shocks. The petroleum industry
was granted a 13% raise in tariffs during the quarter and similar action is
expected for the telecommunications and electric utility sectors before the end
of the year.
The government's control of the economy through the foreign exchange rate,
domestic interest rates and select import tariffs has been prudent and has
allowed for the reduction of inflationary pressures without tipping the economy
into a recession. Said differently, the government appears to be on the road to
successfully engineering a "soft landing."
We are cautiously optimistic about the market for the remainder of the year. We
believe there are opportunities for handsome gains through judicious stock
selection, though we do not expect the continuation of the strong rallies
experienced in the second and third quarters. The Fund is therefore positioned
to benefit from a) a marginal reduction of interest rates, b) improving trends
in consumer spending and credit, and c) reform, privatization and cost-cutting
in the attractively valued state-owned companies.
Mexico also posted a strong performance for the quarter, as the MSCI Mexico
Index gained 7.4%. The Mexican market rallied during July and August, but saw a
reversal of sentiment amidst renewed concern over fundamentals and the depth of
the recession in September.
A lower-than-expected -10.5% year-over-year GDP contraction for the second
quarter raised new questions about the state of the economy and the timing of
the much-anticipated recovery. Market sentiment soured, stabilized towards the
end of the month, and turned negative again at the end of the quarter shrinking
a 19% gain to 7.4% by the end of September.
The currency saw periods of volatility in August and late September, closing the
quarter 2% lower than at the end of June. Interest rates were also under
pressure at the end of the quarter, with rates on government paper experiencing
modest rises. Inflation for July and August was moderate to low, falling in the
below 2% range, but spiked in September to 2.1% due to seasonal factors.
1
<PAGE>
While we believe there are selected stocks that represent good value and have
attractive upside, we are cautious about the Mexican market as a whole in the
near term, as sentiment turned less pessimistic too quickly and an economic
turnaround is slow in coming.
The Argentine market was flat for the quarter, as concern over the tenure of
Economic Minister Cavallo erased a strong early quarter rally. A series of debt
buy-back programs were announced during the quarter, the first few of which were
implemented with moderate success.
Disagreements over economic policy between Cavallo and other administration
insiders in addition to controversy over the Finance Minister's energetic attack
on corruption, created an air of uncertainty about the stability of the Menem
team and rumors of Cavallo's imminent departure. By the end of the quarter
speculation subsided, but it seems clear that Cavallo's tenure in the government
is increasingly precarious. We continue to have a defensive presence in
Argentina, but remain optimistic on the ability of the country to make economic
headway in the medium to long term.
Chile experienced a steep decline during the third quarter, as the MSCI EMG
Chile Index fell 14.6%, reacting to a potential decline in electricity rates and
a weakening currency. The Fund remains underweight in Chile, allowing for
valuations to contract further and come in line with fundamentals.
The Colombian market was severely damaged by allegations that President Samper's
election campaign received contributions from the Cali cartel. As the case
against the President gained momentum, the stock market fell, amassing a 16.1%
loss for the quarter, and the currency weakened. Hearings on the case will be
held by the Colombian Congress during the month of October. This situation may
provide an opportunity for the Fund to revisit its exposure to the country,
increasing holdings in stocks whose valuations have been strongly affected but
whose fundamentals remain sound.
The Peruvian market continued its strong performance for the year, rising 6.9%.
The Fund's position in the country remains relatively neutral with emphasis on
more liquid blue-chips with superior growth potential.
Venezuela edged up 1.1% on the back of positive though sporadic moves by the
Caldera administration, which backtracked on one of its campaign promises and
doubled the price of gasoline. In addition, as foreign reserves fall to
alarmingly low levels, there is speculation about an IMF package that would
modify the current fixed exchange rate scheme and liberalize other controls on
the economy in exchange for a US$1.5 billion loan needed to meet interest
payments due in the fourth quarter. In the event that these measures are adopted
and represent a turning point in Venezuelan economic policy, we will revisit our
current negative stance on the market.
Sincerely,
[SIG]
Barton M. Biggs
CHAIRMAN
[SIG]
Robert L. Meyer
SENIOR PORTFOLIO MANAGER
[SIG]
James Colmenares
PORTFOLIO MANAGER
October 18, 1995
2
<PAGE>
The Latin American Discovery Fund, Inc.
Investment Summary as of September 30, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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>
CURRENT QUARTER -8.47% -- 10.28% -- 3.77% --
FISCAL YEAR TO DATE -41.07 -- -22.56 -- -10.22 --
ONE YEAR -48.08 -48.08% -39.14 -39.14% -30.55 -30.55%
SINCE INCEPTION* 11.79 3.47 38.12 10.38 28.71 7.98
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION(2)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C> <C>
Periods ended September 30
1992* 1993 1994 9 Months Ended 9/30/95 (Unaudited)
Net Asset Value 15.23 23.31 17.16 12.51
Capital Gains and Other Distributions - - 5.74 0.45
Total Return (1) 8.01% 65.36% (0.14%) (22.56%)
Index Total Return (3) (2.26%) 52.29% (3.69%) (10.22%)
</TABLE>
(1)Assumes dividends and distributions, if any, were reinvested.
(2) Total investment return based on per share net asset value 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 of
the Fund.
(3) Morgan Stanley Capital International Emerging Markets Global Latin America
Index
* The Fund commenced operations on June 23, 1992.
3
<PAGE>
The Latin American Discovery Fund, Inc.
Portfolio Summary as of September 30, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Equity Securities 93.3%
Debt Securities 3.8%
Short-Term Investments 2.9%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Banking 21.2%
Utilities 14.5%
Telecommunications 12.6%
Beverage & Tobacco 10.6%
Building Materials & Components 8.3%
Energy Sources 4.7%
Appliances & Household Durables 3.6%
Metals - Non-Ferrous 2.4%
Multi-Industry 2.2%
Other 19.9%
</TABLE>
- --------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Argentina 5.8%
Brazil 55.1%
Chile 1.0%
Colombia 3.2%
Mexico 20.0%
Peru 3.2%
Venezuela 2.3%
Other 9.4%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<C> <S>
1. Eletrobras
2. Telebras (Preferred)
3. Banco Bradesco (Preferred)
4. Brahma (Preferred)
5. G. Bancomer ADR
6. FEMSA 'B'
7. Petrobras (Preferred)
8. Banco Itau (Preferred)
9. CVRD (Preferred)
10. G. Banacci 'B'
</TABLE>
4
<PAGE>
INVESTMENTS (UNAUDITED)
- ---------
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
COMMON STOCKS (87.0%)
(Unless otherwise noted)
- -----------------------------------------------------------------
- -------------
ARGENTINA (5.8%)
BANKING
Banco Del Suquia 589,329 U.S.$ 778
-------------
BEVERAGES & TOBACCO
Quilmes 80,465 1,489
-------------
ENERGY SOURCES
Capex ADR 145,710 2,004
-------------
TELECOMMUNICATIONS
Compania Austral de Inversiones 227,000 1,441
Compania Austral de Inversiones (Rights) 227,000 987
-------------
2,428
-------------
6,699
-------------
- -----------------------------------------------------------------
- -------------
BRAZIL (55.1%)
APPLIANCES & HOUSEHOLD DURABLES
Continental 2001 (Preferred) 21,577,000 436
Multibras (Preferred) 420,000 440
Refripar 33,919,000 75
Refripar (Preferred) 819,407,277 2,141
WEG (Preferred) 1,974,000 1,015
-------------
4,107
-------------
BANKING
Banco Bradesco (Preferred) 584,240,524 5,609
Banco do Brasil (Preferred) 162,106,000 2,602
Banco Itau (Preferred) 9,758,100 3,072
Banco Nacional (Preferred) 61,460,000 1,219
-------------
12,502
-------------
BEVERAGES & TOBACCO
Brahma (Preferred) 12,762,946 5,203
-------------
CHEMICALS
Rhodia-Ster ADS 83,770 1,120
-------------
ENERGY SOURCES
Petrobras (Preferred) 32,432,000 3,420
-------------
FOOD & HOUSEHOLD PRODUCTS
Dixie Toga (Preferred) 1,135,000 977
-------------
MERCHANDISING
Cia Brasileira ADR 57,275 623
Lojas Americanas (Bonus Preferred Rights) 159,383 23
Lojas Renner (Preferred) 32,730,000 738
-------------
1,384
-------------
METALS -- NON-FERROUS
CVRD (Preferred) 16,435,000 2,759
-------------
METALS -- STEEL
Acesita (Preferred) 161,200,000 1,150
CSN 22,075,000 591
Usiminas (Preferred) 537,500,000 592
-------------
2,333
-------------
- -----------------------------------------------------------------
- -------------
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
MULTI-INDUSTRY
Itausa Investimentos Itau (Preferred) 1,904,000 U.S.$ 1,199
-------------
TELECOMMUNICATIONS
Telebras 28,497,000 1,151
Telebras (Preferred) 136,205,740 6,501
Telebras ADR 35,735 1,697
Telesp 5,234,000 876
Telesp (Preferred) 4,685,800 769
-------------
10,994
-------------
TEXTILES & APPAREL
Coteminas (Preferred) 3,427,000 1,122
-------------
UTILITIES -- ELECTRICAL & GAS
CELESC 'B' (Preferred) 1,161,000 901
Cemig 21,153,000 422
Cemig ADR 77,675 1,728
CESP 23,204,370 755
CPFL (Preferred) 51,486,000 2,058
Eletrobras 23,735,000 7,322
Eletrobras 'B' (Preferred) 7,143,000 2,204
Light 3,079,000 1,147
-------------
16,537
-------------
63,657
-------------
- -----------------------------------------------------------------
- -------------
CHILE (1.0%)
BEVERAGES & TOBACCO
Andina 91,822 490
-------------
BUILDING MATERIALS & COMPONENTS
Masisa 923,290 600
-------------
RECREATION, OTHER CONSUMER GOODS
Video Chile 539,859 41
-------------
1,131
-------------
- -----------------------------------------------------------------
- -------------
COLOMBIA (1.7%)
BANKING
Banco de Colombia 5,916,396 1,931
-------------
MULTI-INDUSTRY
Corfivalle 2 -
-------------
1,931
-------------
- -----------------------------------------------------------------
- -------------
MEXICO (20.0%)
BANKING
G. Banacci 'B' 1,407,880 2,657
G. Banacci 'L' 221,066 392
G. Bancomer 'B' 398,700 119
G. Bancomer 'L' 78,703 22
G. Bancomer ADR 658,335 3,868
-------------
7,058
-------------
BEVERAGES & TOBACCO
FEMSA 'B' 1,482,100 3,759
Panamco 'A' 46,955 1,262
-------------
5,021
-------------
- -----------------------------------------------------------------
- -------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ---------------------------------------------------------
- ------------
<S> <C> <C>
MEXICO (CONTINUED)
BUILDING MATERIALS & COMPONENTS
Apasco 495,180 U.S.$ 1,956
Cemex 302,500 1,157
Cemex ADR 144,732 1,223
Tolmex 'B2' 525,150 2,650
-------------
6,986
-------------
CONSTRUCTION & HOUSING
Empresas ADR 142,505 1,639
-------------
FOREST PRODUCTS & PAPER
Kimberly Clark de Mexico 'A' 78,000 1,044
-------------
MULTI-INDUSTRY
Alfa S.A. 64,800 843
G. Carso ADR 38,300 481
-------------
1,324
-------------
RECREATION, OTHER CONSUMER GOODS
G. Mexicano de Videos 'B' ADR 40,000 80
-------------
23,152
-------------
- -----------------------------------------------------------------
- -------------
PERU (3.2%)
BANKING
Banco de Credito del Peru 270,001 506
-------------
BUILDING MATERIALS & COMPONENTS
Cementos Lima 96 -
Cementos Yura 320,000 2,002
-------------
2,002
-------------
METALS -- NON-FERROUS
Minas Buenaventura 'C' 3 -
Southern Peru Copper 1 -
-------------
-
-------------
MULTI-INDUSTRY
La Fabril 36,627 44
-------------
TELECOMMUNICATIONS
CPT 'B' 619,945 1,189
-------------
3,741
-------------
- -----------------------------------------------------------------
- -------------
VENEZUELA (0.2%)
UTILITIES -- ELECTRICAL & GAS
Electricidad de Caracas 251,047 223
-------------
- -----------------------------------------------------------------
- -------------
TOTAL COMMON STOCKS
(Cost U.S. $95,937) 100,534
-------------
- -----------------------------------------------------------------
- -------------
PURCHASED OPTIONS (0.0%)
- ---------------------------------------------------------
- ------------
BRAZIL (0.0%)
UTILITIES -- ELECTRICAL & GAS
CPFL Call, expiring 10/16/95 strike price
BRL 70.0 (Cost U.S.$0) 37,400,000 -
-------------
- -----------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
DEBT INSTRUMENTS (3.6%)
- ---------------------------------------------------------
- ------------
COLOMBIA (1.5%)
BANKING
Banco de Colombia (Convertible)
5.20%, 2/1/99 U.S.$ 2,310 1,709
-------------
- -----------------------------------------------------------------
- -------------
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
VENEZUELA (2.1%)
BONDS
Republic of Venezuela Debt Conversion Bond
'DL' 6.8125%, 12/18/07 U.S.$ 4,750 U.S.$ 2,402
-------------
- -----------------------------------------------------------------
- -------------
TOTAL DEBT INSTRUMENTS
(Cost U.S. $4,768) 4,111
-------------
- -----------------------------------------------------------------
- -------------
SHORT TERM INVESTMENTS (0.9%)
- ---------------------------------------------------------
- ------------
<CAPTION>
SHARES
<S> <C> <C>
CHILE (0.9%)
INVESTMENT COMPANIES
Desarrollo Mutual Fund 327 6
Financiero Mutual Fund 20,025 327
-------------
333
-------------
<CAPTION>
FACE
AMOUNT
(000)
<S> <C> <C>
BANKING
Banco Bice PRBC 4.40%, 10/9/95 CLP 292,100 733
-------------
- -----------------------------------------------------------------
- -------------
TOTAL SHORT TERM INVESTMENTS
(Cost U.S. $1,066) 1,066
-------------
- -----------------------------------------------------------------
- -------------
FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (1.7%)
</TABLE>
<TABLE>
<S> <C> <C>
Argentine Peso ARS 3 3
Chilean Peso CLP 778,240 1,952
Colombian Peso COP 14,789 15
Mexican New Peso MXN 219 34
Venezuelan Bolivar VLB 1,855 11
-------------
(Cost U.S. $2,032) 2,015
-------------
</TABLE>
<TABLE>
<S> <C> <C>
- ---------------------------------------------
- ---------
TOTAL INVESTMENTS (93.2%)
(Cost U.S. $103,803) 107,726
-------------
- -----------------------------------------------------------------
- -------------
OTHER ASSETS AND LIABILITIES (6.8%)
Other Assets U.S.$ 11,719
Liabilities (3,892) 7,827
-------------- -------------
- -----------------------------------------------------------------
- -------------
NET ASSETS (100%)
Applicable to 9,236,596 issued and outstanding U.S. $.01
par value shares (100,000,000 shares authorized) U.S.$ 115,553
-------------
- -----------------------------------------------------------------
- -------------
NET ASSET VALUE PER SHARE U.S.$ 12.51
-------------
- -----------------------------------------------------------------
- -------------
ADR--American Depositary Receipt
ADS --American Depositary Shares
BRL --Brazilian Real
</TABLE>
6
