<PAGE>
THE PAKISTAN INVESTMENT FUND, INC.
- ---------------------------------------------
OFFICERS AND DIRECTORS
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE BOARD DIRECTOR
OF DIRECTORS J. Antonio Quila
Frederick B. Whittemore DIRECTOR
VICE-CHAIRMAN OF THE BOARD OF DIRECTORS Altaf M. Saleem
Warren J. Olsen DIRECTOR
PRESIDENT AND DIRECTOR James W. Grisham
Peter J. Chase VICE PRESIDENT
DIRECTOR Michael F. Klein
John W. Croghan VICE PRESIDENT
DIRECTOR Harold J. Schaaff, Jr.
David B. Gill VICE PRESIDENT
DIRECTOR Joseph P. Stadler
Graham E. Jones VICE PRESIDENT
DIRECTOR Valerie Y. Lewis
John A. Levin SECRETARY
DIRECTOR James R. Rooney
TREASURER
Belinda A. Brady
ASSISTANT TREASURER
- ---------------------------------------------
U.S. INVESTMENT ADVISER
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
- -----------------------------------------------------------------
PAKISTANI INVESTMENT ADVISER
International Asset Management Company Limited
Sidco Avenue Centre
6th Floor
Strachen Road
Karachi, Pakistan
- -----------------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
- -----------------------------------------------------------------
CUSTODIANS
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
The Chase Manhattan Bank
770 Broadway
New York, New York 10003
- -----------------------------------------------------------------
SHAREHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
- -----------------------------------------------------------------
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
PAKISTAN
INVESTMENT
FUND, INC.
---------------------
ANNUAL REPORT
DECEMBER 31, 1996
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER
<PAGE>
LETTER TO SHAREHOLDERS
- --------
For the year ended December 31, 1996 The Pakistan Investment Fund, Inc. had a
total return, based on net asset value per share, -27.40% compared to -19.46%
for the IFC Global Pakistan Total Return Index (the "Index"). For the period
from the Fund's commencement of operations on December 27, 1993 through December
31, 1996, the Fund's total return was -66.05% compared with -49.26% for the
Index. On December 31, 1996, the closing price of the Fund's shares on the New
York Stock Exchange was $5 1/8 representing a 7.5% premium to the Fund's net
asset value per share.
While the Fund's relative underperformance verses the IFC benchmark is
disappointing, there are several mitigating factors worth underlining. First,
and foremost, is the increasing concentration of the IFC Pakistan index. The top
five stocks in the Index now equal 74.7%, a natural consequence of the sustained
erosion in share prices over the past three years. The Fund has experienced a
similar portfolio concentration, with its top five holdings comprising 50.6% of
net assets. However, due to IRS diversification restraints, we are barred from
matching the IFC's weighting in such core holdings as Fauji, Hubco, PSO and PTCL
(the top four holdings in the Fund). As all four of these stocks outperformed
the Index last year (including the much-maligned PTCL), our underweight levels
led to our underperformance. A more appropriate benchmark would be the KSE
dollar-based index which was down 24% for the year. It should also be said that
despite the skewed IFC weightings, Pakistan is not a five stock country. As a
country fund with a view towards the long term, we have chosen not to ignore
such important sectors as textiles, banking, insurance, consumer goods,
packaging and automobiles despite their negligible weightings and poor relative
performance to date.
One should not forget as well the cumulative 17% currency devaluation that the
Fund sustained this year. The Fund exists to invest in Pakistan with exposure
there averaging 95% for the year. As a result of currency generation, the
dollar-based performance has suffered.
Over the past year, the portfolio has gone through an aggressive restructuring.
In a sometimes illiquid and very weak market, we were able to sell off 31
companies bringing the size of the portfolio down to a more manageable 22 core
stocks. With the proceeds, we increased our positions in our core top four
holdings (Fauji, PTCL, PSO and Hubco) while also diversifying into some of the
peripheral sectors mentioned above. Our top ten holdings, representing 74% of
the net assets of the Fund (compared to 50% a year ago) now comprise of large,
liquid, index stocks which are largely defensive in nature and cover utilities
(electricity, oil and gas and telecom), fertilizers, basic consumer non-durables
and banking.
On the economic front the twin structural weaknesses of trade and fiscal
deficits finally came to a head by the third quarter of 1996. Fiscal
indiscipline and political expediencies caused complete derailment of the
structural adjustment program launched in 1993 with the agreement of the IMF.
Not only did the government lose credibility with the multinational lending
agency but the damage caused to the domestic economy and investor confidence was
substantial.
While the government continued to report progress in GDP growth, inflation and
the budget deficit, this was achieved partially through a fortuitous upturn in
the agricultural sector and partly by statistical sleight of hand. The
industrial sector which drives the stock market took the full brunt of the
government's poor economic policies. By the end of the third quarter the
imbalances in the economy (a current account deficit of 6% of GDP and a budget
deficit of 5%) could no longer by camoflouaged and a sharp decline in foreign
exchange resources triggered a major crisis of confidence. It became clear that
the increasing reliance on short-term, high cost debt, both domestic and
external, could plunge the country towards potential default on debt servicing.
The President was forced to dismiss the government of Benazir Bhutto and put in
a technocratic caretaker administration to shore up the economy. But the damage
had already been done. Moody's downgraded Pakistan's rating and the stock
market, already buffeted by June's tax-heavy budget, swooned once again.
The ensuing turmoil has now exposed the schism in Pakistan's socio-political
structure. On the eve of the fiftieth year of its independence, Pakistan stands
at a major cross-roads in its history. The power shift from the elitist feudal
establishment to the populist urban-industrial class is now clearly apparent.
Despite its reluctance, the military is now set to play a more active role in
stabilizing the fragmented body-politic. With its policy
2
<PAGE>
role now institutionalized, it should be well placed to reign in the corruptive
tendencies of Pakistani politicians before they get out of hand. With a slight
nod to Indonesia and Singapore, President Farooq Leghari and the military
establishment seem to be moving in the direction of guided democracy as the
appropriate means for Pakistan to reach its full potential. Elections are set to
be held this February, and with the IMF now in full support of the government's
restructuring efforts together with the increased and formalized powers of the
military and the President, the incoming prime minister will be forced to carry
through with the still nascent reform process.
It is this supposition that lies at the core of our optimism for 1997. The
policy initiatives launched by the present caretaker administration could very
well lead to a significant improvement in economic performance over the next
12-18 months. The immediate challenge facing the government is to manage its
external account weakness by boosting export earnings so that the unblemished
debt servicing record of the country is maintained. Second and equally
important, is the need to reduce fiscal imbalances by significantly curtailing
government expenditure so that a basic stability is achieved in the
macro-economic environment whereby private enterprise can again begin playing a
meaningful role in building up the long term capital-base of the country.
Already, the positive impact of the devaluations is becoming visible with
exports for the first six months of the year having risen 16% on a yearly basis,
while import growth has been more or less flat. Such progress on the external
account is extremely good news for the reform process because it goes to the
heart of what precipitated the recent foreign exchange crisis. Export growth
(which was negligible last year) leads to an improved current account, reserve
expansion and inevitably increased confidence.
If the government is able to show progress in achieving critical targets agreed
with the IMF by June 1997, Pakistan would become eligible for the Enhanced
Structural Adjustment Facility (ESAF). This is a large, low cost, medium term
loan which will provide the necessary breathing space to the government for
pushing through key programs as related to privatization, taxation and tariff
reforms, reduction in bureaucracy and financial sector restructuring. One key
leading indicator in this regard is government bank borrowing. Over the next few
months, reduction in this indicator will be the clearest signal of progress. It
would also allow the central bank to reduce interest rates from their present
high level of 17% and ease credit to the private sector in order to gradually
reflate the economy.
At the current levels of the low 1300s the market is near its technical low,
significantly discounting both political and economic uncertainty. As noted in
our third quarter report, notwithstanding the magnitude of the economic
problems, the KSE 100 Index managed to remain above the 1300 level throughout
1996. The fact that Standard & Poor's Pakistan rating, released after the
initiation of new economic policies, has not been down-graded supports our view
of an improving outlook ahead. The market should react positively to a new
administration and move up by the end of the first quarter. If the government
policies now being put in place manifest themselves in consistent improvement in
key economic indicators during the second quarter of 1997, this will help
underpin a more sustainable rise.
It is certainly not valuation which is holding the market back. At 7.5 times
expected 1997 earnings, underpinned by improving earnings growth, the Pakistan
market is by far the cheapest in Asia. Earnings growth is being driven by strong
sales and operating profit growth in benchmark sectors such as fertilizers, oil
and gas and telecommunications. Any improvement in the political and economic
scenario should allow investors to focus on solid corporate earnings prospects.
We will continue to position the Fund towards blue-chip stocks with above
average earnings growth. Compared to the market's 1997 earnings growth estimate
of 12%, the average earnings growth forecast for our top ten holdings is over
20% in US dollar terms, providing significant upside as the market improves. We
continue to focus on our top four holdings of Fauji Fertilizer, Pakistan State
Oil, Hubco and PTCL. Despite the overall underperformance of the fund, our top
four holdings all outperformed the Index. As we will be limited from
significantly increasing our exposure in these stocks, we have recently focused
attention on developing a portfolio of smaller, second tier stocks. To name a
few: Lever Brothers, the consumer products manufacturer; PakSuzuki, automobiles;
Faysal Bank, a leading commercial bank; and Gaddoon textile, a manufacturer of
cotton and
3
<PAGE>
synthetic yarns. While we should expect the large cap/ blue chip stocks to be
leading the market's rally, we also believe that there is now considerable value
in some of the smaller, less visible companies. Increasingly, the focus of the
Fund will be on these companies.
Sincerely,
[SIGNATURE]
Warren J. Olsen
PRESIDENT AND DIRECTOR
[SIGNATURE]
Marianne L. Hay
SENIOR PORTFOLIO MANAGER
[SIGNATURE]
Landon Thomas
PORTFOLIO MANAGER
January 1997
- --------------------------------------------------------------------------------
MORGAN STANLEY GROUP INC., THE DIRECT PARENT COMPANY OF THE FUND'S INVESTMENT
ADVISER, MORGAN STANLEY ASSET MANAGEMENT INC., RECENTLY ANNOUNCED ITS INTENTION
TO MERGE WITH DEAN WITTER, DISCOVER & CO. TO FORM MORGAN STANLEY, DEAN WITTER,
DISCOVER & CO. IT CURRENTLY IS ANTICIPATED THAT THE TRANSACTION WILL CLOSE IN
MID-1997. THEREAFTER, MORGAN STANLEY ASSET MANAGEMENT INC. WILL BE A SUBSIDIARY
OF MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
4
<PAGE>
The Pakistan Investment Fund, Inc.
Investment Summary as of December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HISTORICAL
INFORMATION
TOTAL RETURN (%)
----------------------------------------------------------------------------
MARKET VALUE (1) NET ASSET VALUE (2) INDEX (1)(3)
------------------------ ------------------------ ------------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
ONE YEAR -2.38% -2.38% -27.40% -27.40% -19.46% -19.46%
SINCE INCEPTION* -63.52% -28.44% -66.05 -30.12% -49.26 -20.22%
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
- --------------------------------------------------------------------------------
RETURNS AND PER SHARE INFORMATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
1993* 1994 1995 1996
<S> <C> <C> <C> <C>
Net Asset Value Per Share $ 14.03 $ 11.42 $ 6.57 $ 4.77
Market Value Per Share $15.50 $9.00 $5.25 $ 5.13
Premium/(Discount) 10.5% -21.2% -20.1% 7.5%
Income Dividends - $0.03 $0.00# -
Cap Gains Distributions - - $0.00# -
Fund Total Return (2) -0.50% -18.36% -42.43% -27.40%
Index Total Return (1)(3) N/A -8.51% -31.14% -19.46%
</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 of
the Fund.
(3) The IFC Global Pakistan Total Return Index is an unmanaged index of common
stocks.
* The Fund commenced operations on December 27, 1993.
# Amount is less than $0.01 per share.
5
<PAGE>
The Pakistan Investment Fund, Inc.
Investment Summary as of December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PORTFOLIO INVESTMENTS DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Equity Securities 96.2%
Short-Term Investments 3.8%
</TABLE>
- --------------------------------------------------------------------------------
SECTORS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Automobiles 2.2%
Banking 6.9%
Chemicals 24.0%
Energy Sources 14.1%
Health & Personal Care 2.5%
Forest Products & Paper 2.6%
Insurance 1.5%
Telecommunications 11.9%
Textiles & Apparel 6.4%
Utilities - Electrical &
Gas 21.5%
Other 6.4%
</TABLE>
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
-------------
<C> <S> <C>
1. Fauji Fertilizer Co. Ltd. 14.0%
2. Pakistan State Oil Co. Ltd. 12.8
3. Hub Power Co. 12.0
4. Pakistan Telecommunications 11.8
5. Engro Chemicals Ltd. 5.0
<CAPTION>
PERCENT OF
NET ASSETS
-------------
<C> <S> <C>
6. Sui Southern Gas 4.4%
7. Sui Northern Gas 4.1
8. Fauji Jordan Fertilizer Co. Ltd. 3.7
9. Muslim Commercial Bank Ltd. 3.2
10. Nishat Mills Ltd. 3.0
-------------
74.0%
-------------
-------------
</TABLE>
6
<PAGE>
FINANCIAL STATEMENTS
- ---------
STATEMENT OF NET ASSETS
- ---------
DECEMBER 31, 1996
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- -----------------------------------------------------------------
- -------------
PAKISTANI COMMON STOCKS (95.8%)
(Unless otherwise noted)
- --------------------------------------------------
- ----------
APPLIANCES & HOUSEHOLD DURABLES (0.9%)
+Pel Appliances Ltd. 814,010 U.S.$ 518
--------------
- -----------------------------------------------------------------
- -------------
AUTOMOBILES (2.2%)
Indus Motor Co. Ltd. 2,500 1
Pak Suzuki Motor Co. Ltd. 1,236,000 1,218
--------------
1,219
--------------
- -----------------------------------------------------------------
- -------------
BANKING (6.9%)
+Askari Commercial Bank Ltd. 890,120 533
Faysal Bank Ltd. 2,883,150 1,521
+Muslim Commercial Bank Ltd. 2,321,270 1,752
--------------
3,806
--------------
- -----------------------------------------------------------------
- -------------
BUILDING MATERIALS & COMPONENTS (0.1%)
+Dandot Cement Co. (Rights) 284,562 36
--------------
- -----------------------------------------------------------------
- -------------
CHEMICALS (24.0%)
Engro Chemicals Ltd. 827,795 2,778
Fauji Fertilizer Co. Ltd. 4,619,000 7,779
+Fauji Jordan Fertilizer Co. Ltd. 6,000,000 2,051
+ICI Pakistan Ltd. (Rights) 385,125 67
Sitara Chemicals Industries Ltd. 639,630 598
--------------
13,273
--------------
- -----------------------------------------------------------------
- -------------
ENERGY SOURCES (14.1%)
Pakistan Oilfields Ltd. 471,463 765
Pakistan State Oil Co. Ltd. 1,094,600 7,073
--------------
7,838
--------------
- -----------------------------------------------------------------
- -------------
FINANCIAL SERVICES (1.1%)
Orix Leasing 520,590 610
PIL Corp. Ltd. 50,600 20
Trust Modaraba Ltd. 3,200 --
--------------
630
--------------
- -----------------------------------------------------------------
- -------------
FOREST PRODUCTS & PAPER (2.6%)
Century Paper & Board 2,071,465 1,240
+Packages Ltd. 150,200 185
--------------
1,425
--------------
- -----------------------------------------------------------------
- -------------
HEALTH & PERSONAL CARE (2.5%)
Lever Brothers 85,680 1,392
--------------
- -----------------------------------------------------------------
- -------------
INDUSTRIAL COMPONENTS (0.1%)
+General Tyres & Rubber Co. 134,900 51
--------------
- -----------------------------------------------------------------
- -------------
INSURANCE (1.5%)
Adamjee Insurance Co. Ltd. 378,532 824
--------------
- -----------------------------------------------------------------
- -------------
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
TELECOMMUNICATIONS (11.9%)
+Pakistan Telecommunications Corp 'A' 7,629,000 U.S.$ 4,778
+Pakistan Telecommunications Corp. GDR 27,950 1,733
*T.F. Payphones Ltd. 350,000 110
--------------
6,621
--------------
- -----------------------------------------------------------------
- -------------
TEXTILES & APPAREL (6.4%)
*+Artistic Denim (IPO) 1,250,000 530
+Crescent Textile Mills Ltd. 1,147,440 372
Gadoon Textile Mills 670,000 535
+Ibrahim Fibre Limited 2,000,000 429
+Nishat Mills Ltd. 4,190,911 1,673
*Saif Textiles 100 --
--------------
3,539
--------------
- -----------------------------------------------------------------
- -------------
UTILITIES -- ELECTRICAL & GAS (21.5%)
+Hub Power Co. 8,480,000 6,622
+Karachi Electric Supply Corp. 1,155,000 540
Nishat Tek Ltd. 555 --
+Nishat Tek Ltd. (Rights) 17 --
+Sui Northern Gas 3,019,298 2,298
Sui Southern Gas 4,072,863 2,439
--------------
11,899
--------------
- -----------------------------------------------------------------
- -------------
TOTAL PAKISTANI COMMON STOCKS
(Cost U.S. $92,145) 53,071
--------------
- -----------------------------------------------------------------
- -------------
<CAPTION>
AMOUNT
(000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
FOREIGN CURRENCY ON DEPOSIT
WITH CUSTODIAN (2.7%)
Pakistani Rupee
(Cost U.S. $1,512) PKR 60,599 1,512
--------------
- -----------------------------------------------------------------
- -------------
SHORT-TERM INVESTMENT (1.1%)
REPURCHASE AGREEMENT (1.1%)
Chase Securities, Inc. 5.95%, date
12/31/96, due 1/2/97,to be
repurchased at U.S. $580,
collateralized by U.S. $555 United
States Treasury Bonds 7.25%, due
5/15/96, valued at U.S. $592 (Cost
U.S. $580) U.S. $580 580
--------------
- -----------------------------------------------------------------
- -------------
TOTAL INVESTMENTS (99.6%)
(Cost U.S. $94,237) 55,163
--------------
- -----------------------------------------------------------------
- -------------
OTHER ASSETS (1.6%)
Dividends Receivable U.S.$422
Receivable for Investments Sold 406
Deferred Organization Costs 35
Other Assets 11 874
--------------
- -----------------------------------------------------------------
- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AMOUNT
(000) (000)
<S> <C> <C>
- ---------------------------------------------------------
- ------------
LIABILITIES (-1.2%)
Payable for:
Investments Purchased U.S.$ (277)
Bank Overdraft (98)
Custodian Fees (67)
U.S. Investment Advisory Fees (50)
Professional Fees (48)
Shareholder Reporting Expenses (46)
Directors' Fees and Expenses (20)
Pakistani Investment Advisory Fees (19)
Administrative Fees (13) U.S.$ (638)
--------------------------------
- -----------------------------------------------------------------
- -------------
NET ASSETS (100%)
Applicable to 11,604,792, issued and
outstanding U.S. $0.01 par value
shares (100,000,000 shares
authorized) U.S.$ 55,399
--------------
--------------
- -----------------------------------------------------------------
- -------------
NET ASSET VALUE PER SHARE U.S.$ 4.77
--------------
--------------
- -----------------------------------------------------------------
- -------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------
Common Stock U.S.$ 116
Capital Surplus 163,055
Accumulated Net Investment Loss (36)
Accumulated Net Realized Loss (68,609)
Unrealized Depreciation on Investments
and Foreign Currency Translations (39,127)
- --------------------------------------------------------------------------
TOTAL NET ASSETS U.S.$ 55,399
--------------
--------------
- -----------------------------------------------------------------
- -------------
</TABLE>
+ -- Non-income producing.
* -- Security valued at fair value--see note A-1 to financial statements.
GDR -- Global Depositary Receipt.
December 31, 1996 exchange rate-Pakistani Rupee (PKR) 40.0799 = U.S. $1.00
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
STATEMENT OF OPERATIONS (000)
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends............................................................................... U.S.$ 1,369
Interest................................................................................ 57
Less: Foreign Taxes Withheld............................................................ (186)
- ---------------------------------------------------------------------------------------------------------------
Total Income.......................................................................... 1,240
- ---------------------------------------------------------------------------------------------------------------
EXPENSES
U.S. Investment Advisory Fees........................................................... 743
Custodian Fees.......................................................................... 295
Pakistani Investment Advisory Fees...................................................... 222
Administrative Fees..................................................................... 155
Professional Fees....................................................................... 91
Shareholder Reporting Expenses.......................................................... 63
Directors' Fees and Expenses............................................................ 40
Amortization of Organization Costs...................................................... 18
Transfer Agent Fees..................................................................... 13
Other Expenses.......................................................................... 65
- ---------------------------------------------------------------------------------------------------------------
Total Expenses........................................................................ 1,705
- ---------------------------------------------------------------------------------------------------------------
Net Investment Loss............................................................... (465)
- ---------------------------------------------------------------------------------------------------------------
NET REALIZED LOSS
Investment Securities Sold.............................................................. (46,658)
Foreign Currency Transactions........................................................... (614)
- ---------------------------------------------------------------------------------------------------------------
Net Realized Loss................................................................. (47,272)
- ---------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Appreciation on Investments............................................................. 26,941
Depreciation on Foreign Currency Translations........................................... (24)
- ---------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation/Depreciation.................................... 26,917
- ---------------------------------------------------------------------------------------------------------------
Total Net Realized Loss and Change in Unrealized Appreciation/Depreciation (20,355)
- ---------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................... U.S.$(20,820)
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Loss................................................. U.S.$ (465) U.S.$ (356)
Net Realized Loss................................................... (47,272) (22,179)
Change in Unrealized Appreciation/Depreciation...................... 26,917 (33,673)
- ---------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Operations................ (20,820) (56,208)
- ---------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income............................................... -- (22)
In Excess of Net Investment Income.................................. -- (6)
Net Realized Gain................................................... -- (28)
- ---------------------------------------------------------------------------------------------------------------
Total Distributions................................................. -- (56)
- ---------------------------------------------------------------------------------------------------------------
Total Decrease...................................................... (20,820) (56,264)
Net Assets:
Beginning of Year................................................... 76,219 132,483
- ---------------------------------------------------------------------------------------------------------------
End of Year (including accumulated net investment loss of U.S. $36
and $27, respectively)............................................. U.S.$ 55,399 U.S.$ 76,219
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 27,
YEAR ENDED DECEMBER 31, 1993* TO
--------------------------------------------------- DECEMBER 31,
SELECTED PER SHARE DATA AND RATIOS: 1996 1995 1994 1993
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.... U.S.$ 6.57 U.S.$ 11.42 U.S.$ 14.03 U.S.$ 14.10
- ---------------------------------------------------------------------------------------------------------------
Offering Costs.......................... -- -- (0.01) (0.07)
- ---------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss)............ (0.04) (0.02) 0.02 --#
Net Realized and Unrealized Loss on
Investments............................ (1.76) (4.83) (2.78) --
- ---------------------------------------------------------------------------------------------------------------
Total From Investment Operations.... (1.80) (4.85) (2.76) --
- ---------------------------------------------------------------------------------------------------------------
Distributions:
Net Investment Income............... -- (0.00)# (0.02) --
In Excess of Net Investment
Income............................ -- (0.00)# (0.01) --
Net Realized Gain................... -- (0.00)# -- --
- ---------------------------------------------------------------------------------------------------------------
Total Distributions................. -- (0.00)# (0.03) --
- ---------------------------------------------------------------------------------------------------------------
Increase in Net Asset Value due to
Repurchase of Shares................... -- -- 0.19 --
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.......... U.S.$ 4.77 U.S.$ 6.57 U.S.$ 11.42 U.S.$ 14.03
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD... U.S.$ 5.13 U.S.$ 5.25 U.S.$ 9.00 U.S.$ 15.50
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Market Value........................ (2.38)% (41.63)% (41.76)% 9.93%
Net Asset Value (1)................. (27.40)% (42.43)% (18.36)% (0.50)%
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
RATIOS, SUPPLEMENTAL DATA:
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS)... U.S.$55,399 U.S.$76,219 U.S.$132,483 U.S.$177,410
- ---------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net
Assets................................. 2.30% 2.20% 1.93% 2.51%**
Ratio of Net Investment Income (Loss) to
Average Net Assets..................... (0.63)% (0.36)% 0.15% 0.41%**
Portfolio Turnover Rate................. 28% 15% 2% 0%
Average Commission Rate (2)............. U.S.$0.0077 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
* Commencement of operations.
** Annualized.
# Amount is less than U.S.$0.01 per share.
(1) 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 of the Fund.
(2) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose the average
commission rate per share it paid for portfolio trades on which commissions were charged. For the year
ended December 31, 1996, the average commission rate paid on trades where commissions were charged was
1.02% of the trade amount.
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- ------------
The Pakistan Investment Fund, Inc. (the "Fund") was incorporated on January
14, 1992, and is registered as a non-diversified, closed-end management
investment company under the Investment Company Act of 1940, as amended. The
Fund's investment objective is long-term capital appreciation through
investments primarily in equity securities.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in the preparation of its financial
statements. Generally accepted accounting principles may require management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results may differ from those estimates.
1. SECURITY VALUATION: In valuing the Fund's assets, all listed securities for
which market quotations are readily available are valued at the last sales
price on the valuation date, or if there was no sale on such date, at the
mean between the current bid and asked prices. Securities which are traded
over-the-counter are valued at the average of the mean of current bid and
asked prices obtained from reputable brokers. Short-term securities which
mature in 60 days or less are valued at amortized cost. All other securities
and assets for which market values are not readily available (including
investments which are subject to limitations as to their sale) are valued at
fair value as determined in good faith by the Board of Directors (the
"Board"), although the actual calculations may be done by others.
2. TAXES: It is the Fund's intention to continue to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial
statements.
The Fund has been granted an exemption from taxation on gains realized on
sales of equity securities quoted on any Pakistani exchange. While this
exemption is applicable for an indefinite period, there is no assurance that
it will not be revoked in the future.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the
underlying securities, with a market value at least equal to the amount of
the repurchase transaction, including principal and accrued interest. To the
extent that any repurchase transaction exceeds one business day, the value
of the collateral is marked-to-market on a daily basis to determine the
adequacy of the collateral. In the event of default on the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. In the event of default or
bankruptcy by the counterparty to the agreement, realization and/or
retention of the collateral or proceeds may be subject to legal proceedings.
4. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Amounts denominated in Pakistani rupees are
translated into U.S. dollars at the mean of the bid and asked prices of such
currency against U.S. dollars last quoted by a major bank as follows:
- investments, other assets and liabilities at the prevailing rate of
exchange on the valuation date;
- investment transactions and investment income at the prevailing rate of
exchange on the dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rate and market values at the close of the period, the Fund does not isolate
that portion of the results of operations arising as a result of changes in
the foreign exchange rate from the fluctuations arising from changes in the
market prices of the securities held at period end. Similarly, the Fund does
not isolate the effect of changes in the foreign exchange rate from the
fluctuations arising from changes in the market prices of securities sold
during the period. Accordingly, realized and unrealized foreign currency
gains (losses) are included in the reported net realized and unrealized
gains (losses) on investment transactions and balances.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of forward foreign
currency exchange contracts, disposition of foreign currency, currency gains
or losses realized between the trade and settlement dates on securities
transactions, and the difference between the amount of investment income and
foreign withholding taxes recorded on the Fund's books and the U.S. dollar
equivalent amounts actually received or paid. Net unrealized currency gains
(losses) from valuing foreign currency denominated assets and liabilities at
period end exchange rates are reflected as a component of unrealized
appreciation (depreciation) in the Statement of Net Assets. The change in
net unrealized currency gains (losses) for the period is reflected in the
Statement of Operations.
5. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into
forward foreign currency exchange contracts to attempt to protect securities
and related receivables and payables against changes in future foreign
exchange rates. A forward foreign currency exchange contract is an agreement
between two parties to buy or sell currency at a set price on a future date.
The market value
11
<PAGE>
of the contract will fluctuate with changes in currency exchange rates. The
contract is marked-to-market daily and the change in market value is
recorded by the Fund as unrealized gain or loss. The Fund records realized
gains or losses when the contract is closed 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. Risk may arise upon entering into these contracts from
the potential inability of counterparties to meet the terms of their
contracts and is generally limited to the amount of unrealized gains on the
contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to the
U.S. dollar.
6. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Interest
income is recognized on the accrual basis. Dividend income is recorded on
the ex-date (except certain dividends which may be recorded as soon as the
Fund is informed of such dividend) net of applicable withholding taxes where
recovery of such taxes is not reasonably assured. Distributions to
shareholders are recorded on the ex-date.
The amount and character of income and capital gain distributions to be paid
are determined in accordance with Federal income tax regulations which may
differ from generally accepted accounting principles. These differences are
primarily due to differing book and tax treatments for foreign currency
transactions, net operating losses and the timing of the recognition of
losses on securities.
Permanent book and tax basis differences relating to shareholder
distributions may result in reclassifications to undistributed net
investment income (loss), accumulated net realized gain (loss) and capital
surplus.
Adjustments for permanent book-tax differences, if any, are not reflected in
ending undistributed net investment income (loss) for the purpose of
calculating net investment income (loss) per share in the financial
highlights.
B. Morgan Stanley Asset Management Inc. (the "U.S. Adviser") provides
investment advisory services to the Fund under the terms of an Investment
Advisory and Management Agreement (the "Agreement"). Under the Agreement, the
U.S. Adviser is paid a fee computed weekly and payable monthly at an annual rate
of 1.00% of the Fund's average weekly net assets.
C. International Asset Management Company Limited (the "Pakistani Adviser")
provides investment advice, research and assistance on behalf of the Fund to
Morgan Stanley Asset Management Inc. under terms of a contract. Under the
contract, the Pakistani Adviser is paid a fee computed weekly and paid monthly
at an annual rate of .30% of the Fund's average weekly net assets.
D. The Chase Manhattan Bank, through its affiliate Chase Global Funds Services
Company (the "Administrator"), provides administrative services to the Fund
under an Administration Agreement. Under the Administration Agreement, the
Administrator is paid a fee computed weekly and payable monthly at an annual
rate of .06% of the Fund's average weekly net assets, plus $100,000 per annum.
In addition, the Fund is charged certain out-of-pocket expenses by the
Administrator. The Chase Manhattan Bank, acts as custodian for the Fund's assets
held in the United States.
E. Morgan Stanley Trust Company (the "International Custodian"), an affiliate
of the Adviser, acts as custodian for the Fund's assets held outside the United
States in accordance with a Custody Agreement. International Custodian fees are
payable monthly based on Fund assets under custody plus an amount for each
transaction effected. For the year ended December 31, 1996, international
custodian fees totaled $291,000, of which $66,000 was payable to the
International Custodian at December 31, 1996. In addition, for the year ended
December 31, 1996, the Fund has incurred interest expense of $13,000 on balances
with the International Custodian.
F. During the year ended December 31, 1996, the Fund made purchases and sales
totaling $20,043,000 and $20,262,000, respectively, of investment securities
other than long-term U.S. Government securities and short-term investments.
There were no purchases or sales of long-term U.S. Government securities. At
December 31, 1996, the U.S. Federal income tax cost basis of securities was
$92,728,000 and accordingly, net unrealized depreciation for U.S. Federal income
tax purposes was $39,077,000, of which $181,000 related to appreciated
securities and $39,258,000 related to depreciated securities. At December 31,
1996, the Fund had a capital loss carryforward for U.S. Federal income tax
purposes of approximately $68,246,000 available to offset future capital gains
of which $11,037,000 will expire on December 31, 2003, and $57,209,000 will
expire on December 31, 2004. To the extent that capital gains are offset, such
gains will not be distributed to the shareholders. For the year ended December
31, 1996, the Fund expects to defer to January 1, 1997 for U.S. Federal income
tax purposes, post-October currency losses of $42,000 and post-October capital
losses of $360,000.
G. In connection with its organization and initial public offering of shares,
the Fund incurred $89,000 of organization costs. The organization costs are
being amortized on a straight line basis over a five-year period beginning
December 27, 1993, the date the Fund commenced operations.
12
<PAGE>
H. A significant portion of the Fund's net assets consist of equity securities
and currency denominated in Pakistani rupees. Changes in currency exchange rates
will affect the value of and investment income from such investments. Pakistani
securities are subject to greater price volatility, limited capitalization and
liquidity, and higher rates of inflation than securities of companies based in
the United States. In addition, Pakistani securities may be subject to
substantial governmental involvement in the economy and greater social, economic
and political uncertainty. Accordingly, the price which the Fund may realize
upon Sale of Securities in such markets may not be equal to its value as
presented in the financial statements.
I. Each Director of the Fund who is not an officer of the Fund or an affiliated
person as defined under the Investment Company Act of 1940, as amended, may
elect to participate in the Directors' Deferred Compensation Plan (the "Plan").
Under the Plan, such Directors may elect to defer payment of a percentage of
their total fees earned as a Director of the Fund. These deferred portions are
treated, based on an election by the Director, as if they were either invested
in the Fund's shares or invested in U.S. Treasury Bills, as defined under the
Plan. The deferred fees payable, under the Plan, at December 31, 1996 totaled
$13,000 and are included in Payable for Directors' Fees and Expenses on the
Statement of Net Assets.
13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------
To the Shareholders and Board of Directors of
The Pakistan Investment Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
The Pakistan Investment Fund, Inc. (the "Fund") at December 31, 1996, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended and the financial highlights
for each of the three years in the period then ended and for the period December
27, 1993 (commencement of operations) through December 31, 1993, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1996 by
correspondence with the custodians and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 10, 1997
14
<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
each shareholder will be deemed to have elected, unless American Stock Transfer
& Trust Company (the "Plan Agent") is otherwise instructed by the shareholder in
writing, to have all distributions automatically reinvested in Fund shares.
Participants in the Plan have the option of making additional voluntary cash
payments to the Plan Agent, annually, in any amount from $100 to $3,000, for
investment in Fund shares.
Dividend and capital gain distributions will be reinvested on the
reinvestment date in full and fractional shares. If the market price per share
equals or exceeds net asset value per share on the reinvestment date, the Fund
will issue shares to participants at net asset value. If net asset value is less
than 95% of the market price on the reinvestment date, shares will be issued at
95% of the market price. If net asset value exceeds the market price on the
reinvestment date, participants will receive shares valued at market price. The
Fund may purchase shares of its Common Stock in the open market in connection
with dividend reinvestment requirements at the discretion of the Board of
Directors. Should the Fund declare a dividend or capital gain distribution
payable only in cash, the Plan Agent will purchase Fund shares for participants
in the open market as agent for the participants.
The Plan Agent's fees for the reinvestment of dividends and distributions
will be paid by the Fund. However, each participant's account will be charged a
pro rata share of brokerage commissions incurred on any open market purchases
effected on such participant's behalf. A participant will also pay brokerage
commissions incurred on purchases made by voluntary cash payments. Although
shareholders in the Plan may receive no cash distributions, participation in the
Plan will not relieve participants of any income tax which may be payable on
such dividends and distributions.
In the case of shareholders, such as banks, brokers or nominees, which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
shareholder as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who are participating in the
Plan.
Participants who wish to withdraw from the Plan should notify the Plan Agent
in writing. There is no penalty for non-participation or withdrawal from the
Plan, and shareholders who have previously withdrawn from the Plan may rejoin at
any time. Requests for additional information or any correspondence concerning
the Plan should be directed to the Plan Agent at:
The Pakistan Investment Fund, Inc.
American Stock Transfer & Trust Company
Dividend Reinvestment and Cash Purchase Plan
40 Wall Street
New York, NY 10005
1-800-278-4353
15
