ANNUAL REPORT
The Malaysia Fund, Inc. December 31, 2002
DIRECTORS AND OFFICERS
Barton M. Biggs William G. Morton, Jr.
CHAIRMAN OF THE DIRECTOR
BOARD OF DIRECTORS
Michael Nugent
Ronald E. Robison DIRECTOR
PRESIDENT AND DIRECTOR
Fergus Reid
John D. Barrett II DIRECTOR
DIRECTOR
Stefanie V. Chang
Thomas P. Gerrity VICE PRESIDENT
DIRECTOR
Lorraine Truten
Gerard E. Jones VICE PRESIDENT
DIRECTOR
James W. Garrett [MORGAN STANLEY LOGO]
Joseph J. Kearns TREASURER
DIRECTOR The Malaysia Fund, Inc.
Mary E. Mullin
Vincent R. McLean SECRETARY
DIRECTOR
Belinda A. Brady
C. Oscar Morong, Jr. ASSISTANT TREASURER
DIRECTOR
U.S. INVESTMENT ADVISER
Morgan Stanley Investment Management Inc.
1221 Avenue of the Americas
New York, New York 10020
MALAYSIAN INVESTMENT ADVISER
Arab-Malaysian Consultant Sdn Bhd
21st-29th Floors, Bangurian Arab-Malaysian
Jalan Raja Chulan, 5200
Kuala Lumpur, Malaysia
ADMINISTRATOR
JPMorgan Chase Bank
73 Tremont Street
Boston, Massachusetts 02108
CUSTODIAN
JPMorgan Chase Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
STOCKHOLDER SERVICING AGENT
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10030
(800) 278-4353
LEGAL COUNSEL
Clifford Chance US LLP
200 Park Avenue
New York, New York 10166
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
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.morganstanley.com/im.
Morgan Stanley
Investment Management Inc.
Investment Adviser
(C) 2003 Morgan Stanley
THE MALAYSIA FUND, INC.
Letter to Stockholders Overview
For the year ended December 31, 2002, The Malaysia Fund, Inc. (the "Fund") had a
total return, based on net asset value per share of -3.89% compared to -7.15%
for the Kuala Lumpur Stock Exchange Composite Index (the "Index") expressed in
U.S. dollars. On December 31, 2002, the closing price of the Fund's shares on
the New York Stock Exchange was $3.85, representing a 16.8% discount to the
Fund's net asset value per share.
MARKET REVIEW
The Malaysian market started the year on a positive note with the Index reaching
a high of 816.94 in April 2002, on the back of strong private consumption growth
amidst a low interest rate environment. However, the rally fizzled out as the
slowdown in the external environment dampened domestic sentiment. The launch of
two relatively large primary offerings added to the weakness and Prime Minister
Mahathiar's shocking retirement announcement led to further selling. The Index
ended the year weaker by 7.2%.
The Malaysian economy performed well in 2002 with preliminary estimates showing
the GDP increasing 4-5% in real terms. As mentioned earlier, Malaysia failed to
escape from the slowdown in the external economy. The latest available
industrial production data up to November 2002, showed a growth of only 3.9%
over the same period last year. Sales of cars also slowed down, partly
reflecting a reversal in domestic sentiment and also in anticipation of cheaper
prices in 2005, when the Asian Free Trade Agreement takes place.
The negative consumer sentiment took its toll on corporate earnings as the year
progressed. As a result, corporates in sectors such as real estate and banking
reported disappointing earnings, leading to several rounds of earnings downgrade
by analysts. The plantation sector was one of the few sectors that performed
within expectations as palm oil prices rose amidst stronger external demand and
higher global prices. The construction companies also did well as their order
books remained intact.
MARKET OUTLOOK
The outlook for this year remains positive despite an expected decline in palm
oil prices. The government has room for further pump-priming measures as the
deficit over the last two years came in lower than expected. The monetary policy
will also be accommodative with the Central Bank announcing that it will not
hesitate to kick start growth in the economy. We continue to be overweight in
the construction sector and the interest rate sensitive sectors such as banking
and real estate.
OTHER DEVELOPMENTS
In our ongoing efforts to reduce Fund expenses, the Fund will discontinue the
distribution of first and third quarter stockholder reports. The Fund will
continue to produce and distribute semi-annual and annual stockholder reports.
Additionally, the Fund's portfolio holdings information that was contained in
the first and third quarter reports will be available on our web site, which is
www.morganstanley.com/im, beginning in May of 2003. If you have difficulty
accessing or navigating the site, or if you would like us to send you a copy of
the portfolio holdings, please call us at 1-800-221-6726 and we will be happy to
assist you.
On February 13, 2003, Barton M. Biggs resigned as Director and Chairman of the
Board of Directors of the Fund. On that same day, Mitch Merin, President and
Chief Operating Officer of the Adviser, was elected by the Fund's Board of
Directors to serve as a Director and Chairman of the Board of Directors of the
Fund.
Sincerely,
/s/ Ronald E. Robison
Ronald E. Robison
President and Director
January 2003
2
THE MALAYSIA FUND, INC.
INVESTMENT SUMMARY (UNAUDITED) December 31,2002
Historical Information
TOTAL RETURN (%)
----------------------------------------------------------------------
MARKET VALUE(1) NET ASSET VALUE(2) INDEX(3)
----------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
CUMULATIVE ANNUAL CUMULATIVE ANNUAL CUMULATIVE ANNUAL
------------------------------------------------------------------------------------------------------------------------
One Year 1.86% 1.86% (3.89)% (3.89)% (7.15)% (7.15)%
Five Year (36.54) (8.69) 0.06 0.01 11.37 2.18
Ten Year (54.82) (7.64) (45.72) (5.93) (30.95) (3.64)
Since Inception* (29.52) (2.21) (5.17) (0.34) 7.54 0.47
Past performance is not predictive of future performance.
[CHART]
Returns and Per Share Information
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value Per Share $ 27.32 $ 18.57 $ 18.58 $ 19.29 $ 5.04 $ 3.02 $ 5.62 $ 4.73 $ 5.00 $ 4.63
------------------------------------------------------------------------------------------------------------------------------------
Market Value Per Share $ 28.00 $ 17.38 $ 17.00 $ 17.50 $ 6.56 $ 4.00 $ 7.06 $ 3.75 $ 3.92 $ 3.85
------------------------------------------------------------------------------------------------------------------------------------
Premium/(Discount) 2.5% (6.4)% (8.5)% (9.3)% 30.2% 32.5% 25.6% (20.7)% (21.6)% (16.8)%
------------------------------------------------------------------------------------------------------------------------------------
Income Dividends $ 0.16 $ 0.02 -- -- -- $ 0.03 -- $ 0.11 $ 0.04 $ 0.15
------------------------------------------------------------------------------------------------------------------------------------
Capital Gains Distributions $ 1.13 $ 3.59 $ 0.84 $ 2.82 $ 0.51 -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Fund Total Return(2) 98.28%+ (18.87)% 4.33% 19.93% (72.89)% (39.70)% 86.09% (14.04)% 6.83% (3.89)%
------------------------------------------------------------------------------------------------------------------------------------
Index Total Return(3) 92.60% (19.66)% 3.05% 25.12% (68.71)% (29.61)% 98.04% (16.33)% 2.40% (7.15)%
------------------------------------------------------------------------------------------------------------------------------------
(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.Total returns do not reflect the deduction of taxes that a
stockholder would pay on Fund distributions or the redemption of fund
shares. These percentages are not an indication of the performance of a
stockholder'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 Kuala Lumpur Stock Exchange (KLSE) Composite Index (the "Index") is a
broad based capitalization weighted index of 100 stocks listed on the
exchange. The Fund's return based on net asset value per share and the
Index's return, expressed in U.S. dollars, for 1998 were adjusted in
reaction to the imposition of capital controls by the Malaysian government
during September 1998. During February 1999, the adjustment was removed to
reflect the relaxation of these capital controls.
* The Fund commenced operations on May 4, 1987.
+ This return does not include the effect of the rights issued in connection
with the rights offering.
FOREIGN INVESTING INVOLVES CERTAIN RISKS, INCLUDING CURRENCY FLUCTUATIONS
AND CONTROLS, RESTRICTIONS ON FOREIGN INVESTMENTS, LESS GOVERNMENTAL
SUPERVISION AND REGULATION, LESS LIQUIDITY AND THE POTENTIAL FOR MARKET
VOLATILITY AND POLITICAL INSTABILITY. IN ADDITION, INVESTING IN EMERGING
MARKETS MAY INVOLVE A RELATIVELY HIGHER DEGREE OF VOLATILITY.
3
THE MALAYSIA FUND, INC.
PORTFOLIO SUMMARY (UNAUDITED) December 31,2002
[CHART]
Allocation of Total Investments
Short-Term Investments 2.9%
Equity Securities 97.1%
[CHART]
Industries
Banks 19.5%
Diversified Telecommunication Services 12.4%
Diversified Financials 12.1%
Semiconductor Equipment & Products 10.0%
Hotels, Restaurants & Leisure 9.6%
Other 36.4%
Ten Largest Holdings*
PERCENT OF
NET ASSETS
----------------------------------------------------
1. Malayan Banking Bhd 9.2%
2. Public Finance Bhd 8.0
3. Telekom Malaysia Bhd 6.7
4. Celcom Malaysia Bhd 5.8
5. Public Bank Bhd 5.7
6. Malaysian Pacific Industries Bhd 5.7%
7. Gamuda Bhd 5.3
8. Commerce Asset Holdings Bhd 4.6
9. Genting Bhd 4.5
10. Unisem (Malaysian) Bhd 4.3
----
59.8%
====
* Excludes Short-Term Investments
4
THE MALAYSIA FUND, INC.
STATEMENT OF NET ASSETS STATEMENT OF NET ASSETS
December 31,2002
VALUE
SHARES (000)
--------------------------------------------------------------------------------------
MALAYSIAN COMMON STOCKS (99.2%)
(UNLESS OTHERWISE NOTED)
======================================================================================
AUTOMOBILES (4.1%)
Perusahaan Otomobil Nasional Bhd 562,000 $ 1,301
Tan Chong Motor Holdings Bhd 1,896,000 529
--------------------------------------------------------------------------------------
1,830
======================================================================================
BANKS (19.5%)
Commerce Asset Holdings Bhd 2,446,000 2,085
Malayan Banking Bhd 2,125,500 4,139
Public Bank Bhd 4,291,625 2,564
--------------------------------------------------------------------------------------
8,788
======================================================================================
CONSTRUCTION & ENGINEERING (8.7%)
Gamuda Bhd 1,637,000 2,370
Road Builder (Malaysia) Holdings Bhd 1,779,000 1,526
--------------------------------------------------------------------------------------
3,896
======================================================================================
DIVERSIFIED FINANCIALS (12.1%)
AMMB Holdings Bhd 1,799,000 1,799
Palmco Holdings Bhd 39,041 42
Public Finance Bhd 84,000 166
Public Finance Bhd (Foreign) 1,751,000 3,456
--------------------------------------------------------------------------------------
5,463
======================================================================================
DIVERSIFIED TELECOMMUNICATION SERVICES (12.4%)
Celcom Malaysia Bhd 4,037,000(a) 2,592
Telekom Malaysia Bhd 1,444,000 3,002
--------------------------------------------------------------------------------------
5,594
======================================================================================
ELECTRIC UTILITIES (1.2%)
YTL Power International Bhd 741,684 546
======================================================================================
FOOD PRODUCTS (3.1%)
IOI Corp. Bhd 937,000 1,369
======================================================================================
HOTELS, RESTAURANTS & LEISURE (9.6%)
Genting Bhd 574,200 2,025
Magnum Corp. Bhd 2,188,000 1,319
Tanjong plc 435,000 984
--------------------------------------------------------------------------------------
4,328
======================================================================================
INDUSTRIAL CONGLOMERATES (2.5%)
Malaysian Resources Corp. Bhd 693,000(a) 141
Sime Darby Bhd 760,000 992
--------------------------------------------------------------------------------------
1,133
======================================================================================
INSURANCE (1.2%)
MAA Holdings Bhd 483,000 529
======================================================================================
IT CONSULTING & SERVICES (1.2%)
Computer Systems Advisers Bhd 718,600 548
======================================================================================
MARINE (1.2%)
Malaysian International Shipping Bhd 296,000 $ 534
======================================================================================
MEDIA (2.3%)
Star Publications (Malaysia) Bhd 657,000 1,037
======================================================================================
REAL ESTATE (6.1%)
IOI Properties Bhd 415,000 590
Selangor Properties Bhd 1,105,000 491
SP Setia Bhd 2,565,499 1,654
--------------------------------------------------------------------------------------
2,735
======================================================================================
SEMICONDUCTOR EQUIPMENT & PRODUCTS (10.0%)
Malaysian Pacific Industries Bhd 699,000 2,557
Unisem (Malaysia) Bhd 1,116,000 1,953
--------------------------------------------------------------------------------------
4,510
======================================================================================
SPECIALTY RETAIL (2.0%)
Courts Mammoth Bhd 1,169,000 908
======================================================================================
TOBACCO (2.0%)
British American Tobacco
(Malaysia) Bhd 96,000 897
======================================================================================
TOTAL COMMON STOCKS
(Cost $41,671) 44,645
======================================================================================
FACE
AMOUNT
(000)
--------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (2.4%)
======================================================================================
REPURCHASE AGREEMENT (2.4%)
J.P. Morgan Securities, Inc.,
1.05%, dated 12/31/02, due
1/02/03 (Cost $1,090) $ 1,090(b) 1,090
======================================================================================
FOREIGN CURRENCY ON DEPOSIT WITH
CUSTODIAN (0.5%)
======================================================================================
Malaysian Ringgit
(Cost $244) MYR 928 244
======================================================================================
The accompanying notes are an integral part of the financial statements.
5
THE MALAYSIA FUND, INC.
Statement of Net Assets (cont'd) STATEMENT OF NET ASSETS
December 31,2002
VALUE
(000)
--------------------------------------------------------------------------------------
TOTAL INVESTMENTS (102.1%)
(Cost $43,005) $ 45,979
======================================================================================
AMOUNT
(000)
--------------------------------------------------------------------------------------
OTHER ASSETS (0.4%)
Cash $ 1
Dividends Receivable 183
Other 11 195
======================================================================================
LIABILITIES (-2.5%)
Payable For:
Dividends Declared (1,004)
U.S. Investment Advisory Fees (34)
Stockholder Reporting Expenses (33)
Malaysian Investment Advisory Fees (30)
Directors' Fees and Expenses (26)
Professional Fees (21)
Custodian Fees (9)
Administrative Fees (5) (1,162)
======================================================================================
NET ASSETS (100.0%)
Applicable to 9,713,850 issued and
outstanding $0.01 par value shares
(20,000,000 shares authorized) $ 45,012
======================================================================================
NET ASSET VALUE PER SHARE $ 4.63
======================================================================================
AT DECEMBER 31, 2002, NET ASSETS CONSISTED OF:
Common Stock $ 97
Paid-in Capital 120,681
Undistributed (Distributions in Excess of) Net
Investment Income (1,435)
Accumulated Net Realized Gain (Loss) (77,305)
Unrealized Appreciation (Depreciation) on
Investments and Foreign Currency
Translations 2,974
======================================================================================
TOTAL NET ASSETS $ 45,012
======================================================================================
(a) -- Non-income producing.
(b) -- The repurchase agreement is fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of this
statement of net assets. The investment in the repurchase agreement is
through participation in a joint account with affiliated funds.
PLC -- Public Limited Company
The accompanying notes are an integral part of the financial statements.
6
THE MALAYSIA FUND, INC.
Financial Statements
YEAR ENDED
STATEMENT OF OPERATIONS DECEMBER 31, 2002
(000)
-----------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 1,183
Interest 2
=================================================================================================================
TOTAL INCOME 1,185
=================================================================================================================
EXPENSES
Investment Advisory Fees 454
Malaysian Investment Advisory Fees 125
Administrative Fees 91
Stockholder Reporting Expenses 78
Professional Fees 67
Stockholder Servicing Fees 13
Directors' Fees and Expenses 1
Other Expenses 23
=================================================================================================================
TOTAL EXPENSES 852
=================================================================================================================
NET INVESTMENT INCOME (LOSS) 333
=================================================================================================================
NET REALIZED GAIN (LOSS) ON:
Investments 2,435
Foreign Currency Transactions (139)
=================================================================================================================
NET REALIZED GAIN (LOSS) 2,296
=================================================================================================================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON:
Investments (4,720)
=================================================================================================================
NET REALIZED GAIN (LOSS) AND CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (2,424)
=================================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (2,091)
=================================================================================================================
YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
STATEMENT OF CHANGES IN NET ASSETS (000) (000)
-----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income (Loss) $ 333 $ 416
Net Realized Gain (Loss) 2,296 (1,948)
Change in Unrealized Appreciation (Depreciation) (4,720) 4,647
=================================================================================================================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (2,091) 3,115
=================================================================================================================
Distributions from and/or in excess of:
Net Investment Income (1,492) (432)
=================================================================================================================
Capital Share Transactions:
Repurchase of Shares (24,167 shares in 2002) (108) --
=================================================================================================================
TOTAL INCREASE (DECREASE) (3,691) 2,683
=================================================================================================================
Net Assets:
Beginning of Period 48,703 46,020
=================================================================================================================
END OF PERIOD (INCLUDING UNDISTRIBUTED (DISTRIBUTIONS IN EXCESS OF)
NET INVESTMENT INCOME OF $(1,435) AND $(137), RESPECTIVELY) $ 45,012 $ 48,703
=================================================================================================================
The accompanying notes are an integral part of the financial statements.
7
THE MALAYSIA FUND, INC.
Selected Per Share Data and Ratios Financial Highlights
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2002++ 2001 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 5.00 $ 4.73 $ 5.62 $ 3.02 $ 5.04
----------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.03 0.04 0.03 0.01 0.01
Net Realized and Unrealized Gain (Loss) on
Investments (0.25) 0.27 (0.81) 2.59 (2.00)
----------------------------------------------------------------------------------------------------------------------
Total from Investment Operations (0.22) 0.31 (0.78) 2.60 (1.99)
----------------------------------------------------------------------------------------------------------------------
Distributions from and/or in excess of:
Net Investment Income (0.15) (0.04) (0.11) -- (0.03)
----------------------------------------------------------------------------------------------------------------------
Anti-Dilutive Effect of Share Repurchase Program 0.00# -- -- -- --
----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 4.63 $ 5.00 $ 4.73 $ 5.62 $ 3.02
======================================================================================================================
PER SHARE MARKET VALUE, END OF PERIOD $ 3.85 $ 3.92 $ 3.75 $ 7.06 $ 4.00
======================================================================================================================
TOTAL INVESTMENT RETURN:
Market Value 1.86% 5.64% (45.77)% 76.56% (38.66)%
Net Asset Value(1) (3.89)% 6.83% (14.04)% 86.09%+ (39.70)%+
======================================================================================================================
RATIOS, SUPPLEMENTAL DATA:
----------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (THOUSANDS) $ 45,012 $ 48,703 $ 46,020 $ 54,740 $ 29,400
----------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 1.67% 2.03% 1.78% 2.24% 2.32%
Ratio of Net Investment Income (Loss) to Average
Net Assets 0.65% 0.93% 0.44% 0.27% 0.31%
Portfolio Turnover Rate 35% 21% 21% 37% 124%
----------------------------------------------------------------------------------------------------------------------
(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. This percentage is not an indication of the performance of a
stockholder'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.
+ During the period from September 1998 to February 1999, the Fund adjusted
its net asset value in reaction to the imposition of capital controls by the
Malaysian government. During February 1999, the Fund's net asset value was
again modified to reflect the relaxation of these capital controls. The
result of such adjustments was a decrease to the total return in 1998 and an
increase to the total return in 1999.
++ Per share amounts for the year ended December 31, 2002 are based on average
shares outstanding.
# Amount is less than $0.005.
The accompanying notes are an integral part of the financial statements.
8
THE MALAYSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS December 31, 2002
The Malaysia Fund, Inc. (the "Fund") was incorporated on March 12, 1987 and
is registered as a 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 investment primarily in equity
securities.
A. ACCOUNTING POLICIES: The following significant accounting policies are
in conformity with accounting principles generally accepted in the United
States of America. Such policies are consistently followed by the Fund in the
preparation of its financial statements. Accounting principles generally
accepted in the United States of America 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 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. For all other securities and
investments for which market values are not readily available, including
restricted securities, and where prices determined in accordance with the
aforementioned procedures are not reflective of fair market value, values
are determined in good faith, under fair valuation procedures adopted by
the Board of Directors, although actual calculations may be done by others.
2. REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements under
which the Fund lends excess cash and takes possession of securities with an
agreement that the counterparty will repurchase such securities. In
connection with transactions in repurchase agreements, a bank as custodian
for the Fund takes possession of the underlying securities (collateral),
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.
The Fund, along with other affiliated investment companies, may utilize a
joint trading account for the purpose of entering into one or more
repurchase agreements.
3. FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are
maintained in U.S. dollars. Amounts denominated in foreign currency are
translated into U.S. dollars at the mean of the bid and asked prices of
such currencies against U.S. dollars last quoted by a major bank as
follows:
- investments, other assets and liabilities at the prevailing rates 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
rates 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 rates 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 foreign
exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) due to securities transactions
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 foreign
currency exchange contracts, disposition of foreign currencies, 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
9
THE MALAYSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D) December 31, 2002
appreciation (depreciation) on investments and foreign currency
translations in the Statement of Net Assets. The change in net unrealized
currency gains (losses) on foreign currency translations for the period is
reflected in the Statement of Operations.
A significant portion of the Fund's net assets consist of Malaysian equity
securities and foreign currency. Future economic and political developments
in Malaysia could adversely affect the liquidity or value, or both, of
securities in which the Fund is invested. Changes in currency exchange
rates will affect the value of and investment income from such investments.
Foreign securities may be subject to greater price volatility, lower
liquidity and less diversity than equity securities of companies based in
the United States. In addition, foreign securities may be subject to
substantial governmental involvement in the economy and greater social,
economic and political uncertainty.
The Fund may use derivatives to achieve its investment objectives. The Fund may
engage in transactions in futures contracts on foreign currencies, stock
indices, as well as in options, swaps and structured notes. Consistent with the
Fund's investment objectives and policies, the Fund may use derivatives for
non-hedging as well as hedging purposes.
Following is a description of derivative instruments that the Fund has utilized
and their associated risks:
4. FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into foreign
currency exchange contracts generally to attempt to protect securities and
related receivables and payables against changes in future foreign exchange
rates and, in certain situations, to gain exposure to a foreign currency. A
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 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 gain 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.
5. 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-dividend date (except certain dividends which may be recorded as
soon as the Fund is informed of such dividends) net of applicable
withholding taxes. Distributions to shareholders are recorded on the
ex-dividend date.
B. ADVISERS: Morgan Stanley Investment Management Inc. (the "U.S. Adviser")
provides investment advisory services to the Fund under the terms of an
Investment Advisory Agreement (the "Agreement"). Under the Agreement, the U.S.
Adviser is paid a fee computed weekly and payable monthly at an annual rate of
0.90% of the Fund's first $50 million of average weekly net assets, 0.70% of the
Fund's next $50 million of average weekly net assets and 0.50% of the Fund's
average weekly net assets in excess of $100 million.
Arab-Malaysian Consultant Sdn Bhd (the "Malaysian Adviser") provides investment
advice, research and assistance on behalf of the Fund to Morgan Stanley
Investment Management Inc. under terms of a contract. Under the contract, the
Malaysian Adviser is paid a fee computed weekly and payable monthly at an annual
rate of 0.25% of the Fund's first $50 million of average weekly net assets,
0.15% of the Fund's next $50 million of average weekly net assets and 0.10% of
the Fund's average weekly net assets in excess of $100 million.
C. ADMINISTRATOR: JPMorgan Chase Bank, through its corporate affiliate
J.P. Morgan Investor Services Company (the "Administrator"), provides
administrative services to the Fund under an Administration Agreement. Under the
old Administration Agreement, effective through September 30, 2002, the
Administrator was paid a fee computed weekly and payable monthly at an annual
rate of 0.20% of the Fund's first $50 million of average weekly net assets,
0.15% of the Fund's next $50 million of average weekly net assets and 0.10% of
the Fund's average weekly net assets in excess of $100 million. Effective
October 1, 2002, under the new Administration Agreement, the Administrator is
paid a fee computed weekly and payable monthly at an annual rate of 0.02435% of
the Fund's average weekly net assets, plus $24,000 per annum. In
10
THE MALAYSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D) December 31, 2002
addition, the Fund is charged certain out of pocket expenses incurred by the
Administrator on its behalf.
D. CUSTODIAN: JPMorgan Chase Bank serves as custodian for the Fund. Custody
fees are payable monthly based on assets held in custody, investment purchase
and sales activity and account maintenance fees, plus reimbursement for certain
out-of-pocket expenses.
E. FEDERAL INCOME 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 Federal income taxes is required in the financial
statements. Dividend income and distributions to stockholders are recorded on
the ex-dividend date.
The tax character of distributions paid may differ from the character of
distributions shown on the Statements of Changes in Net Assets due to short-term
capital gains being treated as ordinary income for tax purposes. The tax
character of distributions paid during 2002 and 2001 was as follows:
2002 DISTRIBUTIONS 2001 DISTRIBUTIONS
PAID FROM: PAID FROM:
(000) (000)
--------------------------------- ----------------------------
LONG-TERM LONG-TERM
ORDINARY CAPITAL ORDINARY CAPITAL
INCOME GAIN INCOME GAIN
----------------------------------------------------------------
$ 1,492 $ -- $ 432 $ --
The amount and character of income and capital gain distributions to be paid by
the Fund are determined in accordance with Federal income tax regulations, which
may differ from accounting principles generally accepted in the United States of
America. The book/tax differences are considered either temporary or permanent
in nature.
Temporary differences are attributable to differing book and tax treatments for
the timing of the recognition of gains and losses on certain investment
transactions and the timing of the deductibility of certain expenses.
Permanent differences may result in reclassifications among undistributed net
investment income (loss), accumulated net realized gain (loss) and paid-in
capital. 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.
At December 31, 2002, the components of distributable earnings on a tax basis
were are follows:
UNDISTRIBUTED UNDISTRIBUTED
ORDINARY INCOME LONG-TERM CAPITAL GAIN
(000) (000)
----------------------------------------------------------
$ 438 $ --
----------------------------------------------------------
At December 31, 2002, the U.S. Federal income tax cost basis of investments
(excluding foreign currency if applicable) was $45,437,000 and, accordingly, net
unrealized appreciation for U.S. Federal income tax purposes was $298,000, of
which $5,697,000 related to appreciated securities and $5,399,000 related to
depreciated securities.
At December 31, 2002, the Fund had a capital loss carryforward for U.S. Federal
income tax purposes of approximately $75,824,000 available to offset future
capital gains of which $5,416,000 will expire on December 31, 2005, $65,683,000
will expire on December 31, 2006, $2,720,000 will expire on December 31, 2007,
and $2,005,000 will expire on December 31, 2009. To the extent that capital
gains are offset, such gains will not be distributed to the stockholders. During
the year ended December 31, 2002, the Fund utilized capital loss carryforwards
for U.S. Federal income tax purposes of approximately $2,720,000.
Net capital and currency losses incurred after October 31, and within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. For the year ended December 31, 2002, the Fund deferred to January
1, 2003, for U.S. Federal income tax purposes, post-October currency losses of
$11,000 and post-October capital losses of $640,000.
F. OTHER: During the year ended December 31, 2002, the Fund made purchases
and sales totaling approximately $17,061,000 and $17,237,000, 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.
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. At December 31, 2002, the deferred fees payable, under the Plan,
11
THE MALAYSIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONT'D) December 31, 2002
totaled $26,000 and are included in Payable for Directors' Fees and Expenses on
the Statement of Net Assets. The deferred portion of Directors' Fees and
Expenses shown on the Statement of Operations is impacted by fluctuations in the
market value of the investments selected by each Director. For the fiscal year
ended December 31, 2002, Directors' Fees and Expenses were decreased by $198 due
to these fluctuations.
On July 15, 2002, the Fund commenced a share repurchase program for purposes of
enhancing stockholder value and reducing the discount at which the Fund's shares
traded from their net asset value. During the year ended December 31, 2002, the
Fund repurchased 24,167 of its shares at an average discount of 16.72% from net
asset value per share. The Fund expects to continue to repurchase its
outstanding shares at such time and in such amounts as it believes will further
the accomplishment of the foregoing objectives, subject to review by the Board
of Directors.
On December 13, 2002 the Officers of the Fund, pursuant to authority granted by
the Board of Directors declared a distribution of $0.1034 per share, derived
from net investment income, payable on January 10, 2003 to stockholders of
record on December 24, 2002.
12
THE MALAYSIA FUND, INC.
INDEPENDENT AUDITORS' REPORT December 31, 2002
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF
THE MALAYSIA FUND, INC.
We have audited the accompanying statement of net assets of The Malaysia Fund,
Inc. (the "Fund") as of December 31, 2002, and the related statement of
operations for the year then ended, the statement of changes in 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. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for each of
the two years in the period ended December 31, 1999 were audited by other
auditors whose report, dated February 18, 2000, expressed an unqualified opinion
on those financial highlights.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2002 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Malaysia Fund, Inc. at December 31, 2002, 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, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 7, 2003
13
THE MALAYSIA FUND, INC.
Director and Officer Information (Unaudited) Overview
Independent Directors:
NUMBER OF
TERM OF PORTFOLIOS
OFFICE IN FUND
AND COMPLEX
POSITION(S) LENGTH OVERSEEN
NAME, AGE AND ADDRESS OF HELD WITH OF TIME PRINCIPAL OCCUPATION(S) BY OTHER DIRECTORSHIPS HELD
DIRECTOR REGISTRANT SERVED* DURING PAST 5 YEARS DIRECTOR** BY DIRECTOR
------------------------- ----------- -------- ------------------------- ---------- -------------------------
John D. Barrett II (67) Director Director Chairman and Director of 71 Director of the Ashforth
565 Fifth Avenue since Barrett Associates, Inc. Company (real estate).
New York, NY 10017 1996 (investment counseling).
Thomas P. Gerrity (61) Director Director Professor of Management, 71 Director, ICG Commerce,
219 Grays Lane since formerly Dean, Wharton Inc.; Sunoco; Fannie Mae;
Haverford, PA 19041 2001 School of Business, Reliance Group Holdings,
University of Inc., CVS Corporation and
Pennsylvania; formerly Knight-Ridder, Inc.
Director, IKON Office
Solutions, Inc., Fiserv,
Digital Equipment
Corporation, Investor
Force Holdings, Inc. and
Union Carbide Corporation.
Gerard E. Jones (65) Director Director Of Counsel, Shipman & 72 Director of Tractor
Shipman & Goodwin, LLP since Goodwin, LLP (law firm). Supply Company, Tiffany
43 Arch Street 1996 Foundation, and Fairfield
Greenwich, CT 06830 County Foundation.
Director of the India
Magnum Fund Ltd.
Joseph J. Kearns (60) Director Director Investment consultant; 71 Director, Electro Rent
Kearns & Associates LLC since formerly CFO of The J. Corporation and The Ford
PMB 754 2001 Paul Getty Trust. Family Foundation.
23852 Pacific Coast Hwy.
Malibu, CA 90265
Vincent R. McLean (71) Director Director Formerly, Executive Vice 71 Director, Banner Life
702 Shackamaxon Drive since President, Chief Insurance Co.; William
Westfield, NJ 07090 2001 Financial Officer, Penn Life Insurance
Director and Member of Company of New York.
the Executive Committee
of Sperry Corporation
(now part of Unisys
Corporation).
C. Oscar Morong, Jr. (67) Director Director Managing Director, 71 Trustee of the mutual
1385 Outlook Drive West since Morong Capital funds in the Smith
Mountainside, NJ 07092 2001 Management; formerly, Barney/CitiFunds fund
Senior Vice President complex.
and Investment Manager
for CREF, TIAA-CREF
Investment Management,
Inc. (investment
management); formerly,
Director, The Indonesia
Fund (mutual fund).
William G. Morton, Jr. Director Director Chairman Emeritus and 71 Director of Radio Shack
(65) 304 Newbury Street, since former Chief Executive Corporation (electronics).
#560 Boston, MA 02115 2000 Officer of Boston Stock
Exchange.
Michael Nugent (66) Director Director General Partner, Triumph 194 Director of various
c/o Triumph Capital, L.P. since Capital, L.P. (private business organizations;
237 Park Avenue 2001 investment partnership); Chairman of the Insurance
New York, NY 10017 formerly, Vice President, Committee and Director or
Bankers Trust Company and Trustee of the retail
BT Capital Corporation. families of funds advised
by Morgan Stanley
Investment Advisors Inc.
Fergus Reid (70) Director Director Chairman and Chief 72 Trustee and Director of
85 Charles Colman Blvd. since Executive Officer of approximately 30
Pawling, NY 12564 1996 Lumelite Plastics investment companies in
Corporation. the JPMorgan Funds
complex managed by
JPMorgan Investment
Management Inc. Director
of the India Magnum Fund Ltd.
14
THE MALAYSIA FUND, INC.
DIRECTOR AND OFFICER INFORMATION (CONT'D) Overview
Interested Directors:
TERM OF NUMBER OF
OFFICE PORTFOLIOS
AND IN FUND
POSITION(S) LENGTH COMPLEX
NAME, AGE AND HELD WITH OF TIME PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER DIRECTORSHIPS
ADDRESS OF DIRECTOR REGISTRANT SERVED* DURING PAST 5 YEARS DIRECTOR** HELD BY DIRECTOR
-------------------- ----------- -------- --------------------------- -------------- --------------------
Barton M. Biggs Chairman Chairman Chairman, Director and 72 Member of the Yale
(70) 1221 Avenue and and Managing Director of Development Board
of the Americas Director Director Morgan Stanley Investment
New York, NY 10020 since Management Inc. and
1996 Chairman and Director of
Morgan Stanley Investment
Management Limited;
Managing Director of
Morgan Stanley & Co.
Incorporated; Director
and Chairman of the Board
of various U.S.
registered companies
managed by Morgan Stanley
Investment Management Inc.
Ronald E. Robison President President President and Trustee; 72
(63) 1221 Avenue and and Chief Global Operations
of the Americas Director Director Officer and Managing
New York, NY 10020 since Director of Morgan
2001 Stanley Investment
Management, Inc.;
Managing Director of
Morgan Stanley & Co.
Incorporated; formerly,
Managing Director and
Chief Operating Officer
of TCW Investment
Management Company;
Director and President of
various funds in the Fund
Complex.
----------
* Each Director serves an indefinite term, until his or her successor is
elected.
** The Fund Complex includes all funds advised by Morgan Stanley Investment
Management Inc. and any funds that have an investment advisor that is an
affiliated entity of Morgan Stanley Investment Management Inc. (including,
but not limited to, Morgan Stanley Investments LP, Morgan Stanley Investment
Advisors Inc. and Van Kampen Asset Management Inc.).
15
THE MALAYSIA FUND, INC.
DIRECTOR AND OFFICER INFORMATION (CONT'D) Overview
Officers:
TERM OF
POSITION(S) OFFICE AND
HELD WITH LENGTH OF
NAME, AGE AND ADDRESS OF EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
------------------------------------------ ----------- -------------- -----------------------------------------------------
Ronald E. Robison (63) President President Chief Global Operations Officer and Managing
Morgan Stanley Investment Management Inc. and and Director Director of Morgan Stanley Investment Management
1221 Avenue of the Americas Director since 2001 Inc.; Director and President of various U.S.
New York, NY 10020 registered investment companies managed by Morgan
Stanley Investment Management Inc.; previously,
Managing Director and Chief Operating Officer of
TCW Investment Management Company.
Stefanie V. Chang (36) Vice Vice Executive Director of Morgan Stanley & Co.
Morgan Stanley Investment Management Inc. President President Incorporated and Morgan Stanley Investment
1221 Avenue of the Americas since 1997 Management Inc.; formerly, practiced law with New
New York, NY 10020 York law firm of Rogers & Wells (now Clifford
Chance US LLP); Vice President of certain funds in
the Fund Complex.
Lorraine Truten (41) Vice Vice Executive Director of Morgan Stanley Investment
Morgan Stanley Investment Management Inc. President President Management Inc.; Head of Global Client Services,
1221 Avenue of the Americas since 2001 Morgan Stanley Investment Management Inc.;
New York, NY 10020 President, Morgan Stanley Fund Distribution, Inc.
formerly, President of Morgan Stanley Institutional
Fund Trust; Vice President of certain funds in the
Fund Complex.
Mary E. Mullin (35) Secretary Secretary Vice President of Morgan Stanley & Co.,
Morgan Stanley Investment Management Inc. since 1999 Incorporated and Morgan Stanley Investment
1221 Avenue of the Americas Management, Inc.; formerly, practiced law with the
New York, NY 10020 New York law firms of McDermott, Will & Emery and
Skadden, Arps, Slate, Meagher & Flom LLP; Secretary
of certain funds in the Fund Complex.
James W. Garrett (34) Treasurer Treasurer Executive Director of Morgan Stanley & Co.
Morgan Stanley Investment Management Inc. since 2002 Incorporated and Morgan Stanley Investment
1221 Avenue of the Americas Management Inc. and Treasurer of various U.S.
New York, NY 10020 registered investment companies managed by Morgan
Stanley Investment Management Inc.; formerly, with
Price Waterhouse LLP (now PricewaterhouseCoopers
LLP).
Belinda A. Brady (34) Assistant Assistant Fund Administration Senior Manager, J.P. Morgan
J.P. Morgan Investor Services Co. Treasurer Treasurer Investor Services Co. (formerly Chase Global Funds
73 Tremont Street since 2001 Services Company); formerly, Senior Auditor at
Boston, MA 02108-3913 Price Waterhouse LLP (now PricewaterhouseCoopers
LLP). Assistant Treasurer of certain funds in the
Fund Complex.
----------
* Each Officer serves an indefinite term, until his or her successor is elected.
16
THE MALAYSIA FUND, INC.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
each stockholder will be deemed to have elected, unless American Stock Transfer
& Trust Company (the "Plan Agent") is otherwise instructed by the stockholder 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
stockholders 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 or distributions.
In the case of stockholders, such as banks, brokers or nominees, that 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
stockholder as representing the total amount registered in the stockholder's
name and held for the account of beneficial owners who are participating in the
Plan.
Stockholders who do not wish to have distributions automatically reinvested
should notify the Plan Agent in writing. There is no penalty for
non-participation or withdrawal from the Plan, and stockholders 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 Malaysia Fund, Inc.
American Stock Transfer & Trust Company
Dividend Reinvestment and Cash Purchase Plan
59 Maiden Lane
New York, New York 10030
1-800-278-4353
17