<PAGE>
--------------------------------------------------------
THE
PAKISTAN
INVESTMENT
FUND, INC.
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THIRD QUARTER REPORT
SEPTEMBER 30, 1999
MORGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT INC.
INVESTMENT ADVISER
THE PAKISTAN 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
Mary E. Mullin
SECRETARY
Belinda A. Brady
TREASURER
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U.S. INVESTMENT ADVISER
Morgan Stanley Dean Witter Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
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PAKISTAN INVESTMENT ADVISER
International Asset Management Company Limited
Nacon House
Maulana Din Mohammed Wafar Road
Karachi, Pakistan
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ADMINISTRATOR
The Chase Manhattan Bank
73 Tremont Street
Boston, Massachusetts 02108
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CUSTODIAN
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
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SHAREHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
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LEGAL COUNSEL
Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
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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 or visit our website at www.msdw.com/institutional/
investmentmanagement.
<PAGE>
LETTER TO SHAREHOLDERS
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For the nine months ended September 30, 1999, The Pakistan Investment Fund, Inc.
(the "Fund") had a total return, based on net asset value per share, of 23.36%
compared to 23.05% 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 September 30, 1999, the Fund had a total return, based on net asset
value per share, of -77.38% compared to -65.29% for the Index. On September 30,
1999, the closing price of the Fund's shares on the New York Stock Exchange was
$2 1/16, representing a 29.2% discount to the Fund's net asset value per share.
In 1999, a more active management stance has allowed the Fund to match Index
performance. Up to September 30, 1999, 60% of the Fund's portfolio equity
holdings showed out performance, 10% performed with the market and 25% under
performed. The balance of 5% was in cash. The complexion of the Fund's portfolio
remained generally defensive in view of uncertain market conditions. Thus large
cap blue-chip stocks continued to dominate the Fund's portfolio with liquidity
being another key consideration for inclusion.
Over the past eighteen months, since the nuclear tests, subsequent sanctions and
government policy reversals, the Pakistan market has taken on a decidedly
trading character. Foreign investors have remained largely on the sell side
while local institutions and speculative operators have become a dominant market
force. Most local investors have a very short-term investment horizon and are
generally trading oriented. As a result, the market has become range bound, with
the Karachi Stock Exchange (KSE-100) Index oscillating between 1100-1300. Local
investors tend to take profit at the upper end of the range and re-enter at the
lower end. This has capped any sustained rise in the market. However, the
KSE-100 seems to find a bottom around the 1100 level mainly because below 1100,
the dividend yield of the major investible universe rises to 12-14%. With
interest rates sharply down year-over-year, equities have become attractive for
local investors.
Despite the speculative and trading nature of the market, we do believe that
there are some fundamental value-based investment opportunities within some key
sectors of the economy. We feel that the investible universe of this market is
fairly efficient. As an example, consider the comparative fortunes of two major
sectors - the fertilizer sector and the oil sector. While the fertilizer sector
posted record performance in 1998, it was becoming clear that with domestic
tariff barriers coming down and raw material costs being rapidly deregulated,
the cozy era of protection and pricing power for fertilizer producers was coming
to an end. The market quickly downgraded fertilizer stocks and the sector has
under-performed significantly in the first nine months of 1999, despite high
dividend yields. We have had an underweight position in this sector. On the
other hand, the oil sector, which had performed poorly last year due to the cash
flow problems of public sector utilities, was re-rated as soon as the army took
charge of the utilities and oil prices turned north. So far this year, oil has
been the star performer with Pakistan State Oil up 84% in the first nine months
of 1999. We have maintained an overweight in the oil sector.
Going forward, we feel that while the macro environment will take time to show
improvement and the broader economy is still six to twelve months away from
moving out of recession, leading stocks have already discounted most of the
mediocre earnings growth expected in fiscal year 1999 and fiscal year 2000. With
GDP growth hovering around 3.6 - 3.8% this year, driven mainly by agriculture,
inflation subdued at 7% and government borrowing constrained due to IMF
conditionalities, interest rates are unlikely to rise significantly. The banking
system is liquid and non-performing loans are coming down. In such an
environment, in the absence of alternative investment venues like real estate,
gold and local commodity financing, we believe that domestic equities will
continue to attract a steady stream of local liquidity. Based on this view, we
expect the market to gradually edge upwards over the next three to four months.
POLITICS
On October 12, in a dramatic turn of political events, Nawaz Sharif was ousted
from power following a military takeover led by the army Chief General Musharaf.
The following morning, a proclamation of emergency was made and General Musharaf
took over as the chief executive of the country. Both the assemblies and the
senate were suspended and all ministers and senators ceased to hold office
according to a provisional constitutional order issued by the General. In the
aftermath of this coup, the governor of the state bank held detailed meetings
with senior bankers to assure them that Pakistan had no intention of defaulting
on its obligations and would continue to implement reforms as agreed with the
IMF and World Bank.
A few major steps taken in the last few weeks by the new chief executive have
been well received within Pakistan. A number of technocrats have been appointed
to the federal cabinet and the appointment of Shaukat Aziz, (from Citibank) as
the finance minister has been welcomed. The government has also announced a
major drive to recover bad debts, abolished minimum price mechanisms for cotton
purchases and has singled out resolving the IPP issue as being of the highest
priority. At the outset, these measures instill some confidence on the future
for economic reforms. In terms of response from the external world, while
responses from the IMF and the World Bank are mildly positive so far, the U.S.
is waiting to see what the current regime delivers, and the commonwealth has
given the country two years for restoration of democracy.
2
<PAGE>
On the international front, relations with the United States administration are
gradually on the mend after the U.S. had come out publicly on India's side
during the Kargill crisis. The U.S. continues to remain concerned about links
between the Talibaan in Afghanistan and certain religious parties in Pakistan.
We believe, however, that the local establishment now realizes the danger this
poses to internal security as well as to Pakistan's standing in the
international community. We feel this indicates a major turning point in the
government's view about its relationship with its northern neighbors. Pakistan
has also signaled its willingness to sign the Comprehensive Test Ban Treaty
(CTBT) which was a major thorn in the past in terms of relations with the U.S.
MACRO ECONOMIC ENVIRONMENT
The current macro economic environment is in a flux. Starting last year,
Pakistan entered into the IMF ESAF program that is attempting to change the
nature of government revenue sources on a permanent basis. This exercise is not
proving easy but is critical if the persistent high budget and deficit is to be
narrowed. Some progress is discernable. From a high of 8% in the mid- nineties,
the deficit has been reduced to 3.5% in fiscal year 1999. To be sure, there is
enormous resistance by the business community to the tax reforms, which envisage
shifting the bulk of revenue sources from indirect taxes like customs tariff,
excise duties and surcharges to direct and consumption taxes such as the GST.
The main issue is not the amount of tax involved but rather the documentation of
business activity that this will entail. After decades of hiding the full extent
of their business volume and evading taxes by all means possible, a large number
of businesses are loath to have any documentation of their activities - this is
the crux of the problem. That said, some progress has indeed been made on this
front over the last few years, albeit very gradually. In 1990, indirect taxes
constituted almost 78% of total government revenue. By 1999, this has fallen to
less than 45%. We feel that over the next two years, this would settle down at
around 30-35% and help stabilize the budget deficit.
The external account position is still weak. While most observers expect that
the next IMF ESAF tranche of $280 million is likely to be released by November
1999, the underlying weakness in exports continues to be the fundamental source
of low foreign exchange reserves. Thus, over the next six to eight months it
appears that Pakistan will remain highly dependent on bilateral - government to
government - and multilateral funding of its external financing needs. Private
international flows remain a distant possibility until the foreign exchange
reserve position and international credit ratings improve.
CAPITAL MARKET OUTLOOK
As stated above, we believe that the Pakistan market has bottomed out, although
a sustainable rise is not in the immediate future. The market appears to have
discounted the mediocre earnings growth over the fiscal year ending in June
2000. At fiscal year 2001 price-to-earnings ratio of 7 times and market earnings
growth accelerating to 15% after consensus estimates of negligible growth in
fiscal year 1999, we feel that the market does present attractive value in the
key quality stock universe. However, due to the weak foreign exchange reserve
position, near-default rating and unofficial control on movements of portfolio
funds by the central bank, the country risk factor for foreign investors remains
high. As a result, we do not expect significant foreign liquidity to enter the
Pakistan market in the medium term. We feel that such a development would have
to wait until the Hubco and Independent Power Producers' problems are resolved
and the informal capital controls are removed.
FUND STRATEGY
The Fund is carefully positioned to continue dovetailing changing market
dynamics. The strategic asset allocation is driven mainly by our outlook
regarding the expected changes in the market risk premium. The second plank of
strategic asset allocation is the choice of key sectors and core stock holdings.
Here, we continue to focus on large cap, blue chips with inherently strong
fundamentals and make periodic adjustments based on changes in industry dynamics
and outlook. The tactical asset allocation decisions are of a more short-term
nature and reflect our posture to take advantage of unfolding developments in
capital market conditions such as takeover plays or unanticipated earnings
changes. We believe that this policy should allow the Fund to minimize risk in
this volatile market while at the same time potentially benefit from any upside
move.
Sincerely,
/s/ Michael F. Klein
Michael F. Klein
PRESIDENT AND DIRECTOR
October 1999
THE INFORMATION CONTAINED IN THIS OVERVIEW REGARDING SPECIFIC SECURITIES IS FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL THE SECURITIES MENTIONED.
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DAILY NET ASSET AND MARKET VALUES, AS WELL AS MONTHLY PORTFOLIO INFORMATION FOR
THE FUND, ARE AVAILABLE ON OUR WEBSITE AT
www.msdw.com/institutional/investmentmanagement.
3
<PAGE>
The Pakistan Investment Fund, Inc.
Investment Summary as of September 30, 1999 (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 10.52% -- 23.36% -- 23.05% --
ONE YEAR 15.41 15.41% 8.41 8.41% 12.23 12.23%
FIVE YEAR -79.90 -27.45 -77.11 -25.54 -66.07 -19.44
SINCE INCEPTION* -83.98 -27.23 -77.38 -22.74 -65.29 -16.78
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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RETURNS AND PER SHARE INFORMATION
[GRAPH]
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS
ENDED
1993* 1994 1995 1996 1997 1998 SEPTEMBER 30, 1999
------ ------ ------ ------ ------ ------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value Per Share...... $14.03 $11.42 $ 6.57 $ 4.77 $ 6.01 $ 2.37 $ 2.91
Market Value Per Share......... $15.50 $ 9.00 $ 5.25 $ 5.13 $ 4.88 $ 1.88 $ 2.06
Premium/(Discount)............. 10.5% -21.2% -20.1% 7.5% -18.8% -20.7% -29.2%
Income Dividends............... -- $ 0.03 $ 0.00# -- $ 0.01 $ 0.16 $ 0.01
Capital Gains Distributions.... -- -- $ 0.00# -- -- -- --
Fund Total Return(2)........... -0.50% -18.36% -42.43% -27.40% 26.32% -57.25% 23.36%
Index Total Return(3).......... N/A -8.51% -31.14% -19.46% 26.13% -55.88% 23.05%
</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 IFC Global Pakistan Total Return Index is an unmanaged index of common
stocks, including dividends.
* The Fund commenced operations on December 27, 1993.
# Amount is less than $0.01 per share.
4
<PAGE>
The Pakistan Investment Fund, Inc.
Investment Summary as of September 30, 1999 (Unaudited)
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DIVERSIFICATION OF TOTAL INVESTMENTS
[CHART]
<TABLE>
<S> <C>
Equity Securities (92.5%)
Short-Term Investments (7.5%)
</TABLE>
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INDUSTRIES
[CHART]
<TABLE>
<S> <C>
Automobiles (1.6%)
Banking (5.3%)
Chemicals (10.6%)
Energy Sources (18.2%)
Forest Products & Paper (2.2%)
Health & Personal Care (10.5%)
Telecommunications (18.3%)
Textiles & Apparel (3.9%)
Transportation -- Airlines (2.8%)
Utilities -- Electrical & Gas (20.3%)
Other (6.3%)
</TABLE>
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TEN LARGEST HOLDINGS*
<TABLE>
<CAPTION>
PERCENT OF
NET ASSETS
----------
<S> <C>
1. Pakistan Telecommunications Corp. 18.3%
2. Hub Power Co., Ltd. 17.8
3. Pakistan State Oil Co., Ltd. 10.7
4. Lever Brothers Pakistan Ltd. 10.5
5. Shell Pakistan Ltd. 6.1
6. Fauji Fertilizer Co., Ltd. 4.7
7. Engro Chemicals Ltd. 4.1
8. Muslim Commercial Bank Ltd. 3.6
9. Pakistan International Airlines Corp. `A' 2.8
10. Sui Southern Gas Co. 2.5
----
81.1%
----
----
</TABLE>
* Excludes short-term investments.
5
<PAGE>
FINANCIAL STATEMENTS
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STATEMENT OF NET ASSETS (UNAUDITED)
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SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
SHARES VALUE
(000)
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<S> <C> <C>
PAKISTANI COMMON STOCKS (95.2%)
(Unless otherwise noted)
AUTOMOBILES (1.6%)
Pak Suzuki Motor Co., Ltd. 1,429,000 U.S .$ 528
-------------
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BANKING (5.3%)
Askari Bank 2,172,591 569
Muslim Commercial Bank Ltd. 2,951,070 1,223
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1,792
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CHEMICALS (10.6%)
Engro Chemicals Ltd. 893,064 1,372
Fauji Fertilizer Co., Ltd. 1,837,200 1,574
ICI Pakistan Ltd. 3,726,500 631
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3,577
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ENERGY SOURCES (18.2%)
Pakistan Oilfields Ltd. 471,462 459
Pakistan State Oil Co., Ltd. 1,436,280 3,615
Shell Pakistan Ltd. 559,800 2,062
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6,136
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FINANCIAL SERVICES (0.0%)
Trust Modaraba Ltd. 100 --@
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FOREST PRODUCTS & PAPER (2.2%)
Packages Ltd. 753,671 747
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HEALTH & PERSONAL CARE (10.5%)
Lever Brothers Pakistan Ltd. 225,160 3,535
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INSURANCE (1.5%)
Adamjee Insurance Co., Ltd. 717,701 502
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TELECOMMUNICATIONS (18.3%)
Pakistan Telecommunications
Corp. 'A' 12,596,600 4,974
Pakistan Telecommunication s
Corp. GDR 30,383 1,208
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6,182
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TEXTILES & APPAREL (3.9%)
Ibrahim Fibre Ltd. 5,059,700 739
Nishat Mills Ltd. 3,070,411 577
Saif Textiles Mills Ltd. 110 --@
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1,316
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TRANSPORTATION--AIRLINES (2.8%)
Pakistan International
Airlines Corp. 'A' 3,952, 500 961
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UTILITIES--ELECTRICAL & GAS (20.3%)
Hub Power Co., Ltd. 16,385 ,700 U.S. $ 6,010
Sui Southern Gas Co. 4,527, 811 830
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6,840
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TOTAL COMMON STOCKS
(Cost U.S.$39,378) 32,116
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RIGHTS (0.0%) NO. OF
RIGHTS
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Chemicals
ICI Pakistan Ltd., expiring
1/6/00 (Cost $--@) 7,260 --@
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<CAPTION>
FACE
AMOUNT
(000)
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<S> <C> <C>
SHORT-TERM INVESTMENTS (3.6%)
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REPURCHASE AGREEMENT (3.6%)
Chase Securities, Inc., 5.10%,
dated 9/30/99, due 10/1/99,
to be repurchased at
U.S.$1,219 collateralized by
U.S.$1,140 United States
Treasury Bonds, 7.125%, due
2/15/23, valued at U.S.$1,249
(Cost U.S.$1,219) U.S. $ 1,219 1,219
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FOREIGN CURRENCY ON DEPOSIT WITH CUSTODIAN (4.1%)
Pakistani Rupee
(Cost U.S.$1,396) PKR 74,590 1,396
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TOTAL INVESTMENTS (102.9%)
(Cost U.S.$41,993) 34,731
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OTHER ASSETS AND LIABILITIES (-2.9%)
Other Assets U.S.$ 1,460
Liabilities (2,453) (993)
------------- -------------
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NET ASSETS (100%)
Applicable to 11,604,792 issued
and outstanding U.S.$0.01 par
value shares (100,000,000 shares
authorized) U.S.$ 33,738
-------------
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NET ASSET VALUE PER SHARE U.S .$ 2.91
-------------
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</TABLE>
@ -- Value is less than U.S.$500.
GDR -- Global Depositary Receipt
6
