Morgan Stanley Emerging Markets Fund, Inc.

Transcription

1 Directors Frank L. Bowman Kathleen A. Dennis Nancy C. Everett Jakki L. Haussler James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael F. Klein Michael E. Nugent, Chair of the Board W. Allen Reed Fergus Reid Officers John H. Gernon President and Principal Executive Officer Stefanie V. Chang Yu Chief Compliance Officer Joseph C. Benedetti Vice President Francis J. Smith Treasurer and Principal Financial Officer Mary E. Mullin Secretary Adviser and Administrator Morgan Stanley Investment Management Inc. 522 Fifth Avenue New York, New York Sub-Advisers Morgan Stanley Investment Management Limited 25 Cabot Square, Canary Wharf London, E14 4QA, England Morgan Stanley Investment Management Company 23 Church Street Capital Square, Singapore Custodian State Street Bank and Trust Company One Lincoln Street Boston, Massachusetts Stockholder Servicing Agent Computershare Trust Company, N.A. 211 Quality Circle, Suite 210 College Station, Texas Legal Counsel Dechert LLP 1095 Avenue of the Americas New York, New York Counsel to the Independent Directors Kramer Levin Naftalis & Frankel LLP 1177 Avenue of the Americas New York, New York Independent Registered Public Accounting Firm Ernst & Young LLP 200 Clarendon Street Boston, Massachusetts 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 toll free 1 (800) or visit our website at All investments involve risks, including the possible loss of principal Morgan Stanley. CEMSFANN EXP INVESTMENT MANAGEMENT Morgan Stanley Investment Management Inc. Adviser Morgan Stanley Emerging Markets Fund, Inc. NYSE: MSF Annual Report e-delivery: Go Paperless It s faster, easier and greener. Sign up today at: May not be available for all accounts.

2 Table of Contents Letter to Stockholders... 3 Portfolio of Investments... 5 Statement of Assets and Liabilities Statement of Operations Statements of Changes in Net Assets Financial Highlights Notes to Financial Statements Report of Independent Registered Public Accounting Firm Portfolio Management Investment Policy Dividend Reinvestment and Cash Purchase Plan U.S. Privacy Policy Director and Officer Information

3 Letter to Stockholders (unaudited) Performance For the year ended, the Morgan Stanley Emerging Markets Fund, Inc. (the Fund ) had total returns of %, based on net asset value, and % based on market value per share (including reinvestment of distributions), compared to its benchmark, the MSCI Emerging Markets Net Index (the Index )*, which returned %. On, the closing price of the Fund s shares on the New York Stock Exchange was $12.85, representing a 10.1% discount to the Fund s net asset value per share. Past performance is no guarantee of future results. Factors Affecting Performance Emerging markets equities underperformed in 2015, with the Index returning % versus the MSCI World Index s flat return of -0.87%. Over the course of the year, markets grew increasingly concerned about China s slowing economy and waning liquidity with the Federal Reserve interest rate hike looming, both of which put downward pressure on global growth. While commodity prices declined, providing a windfall to the consumer, corporate profits hit multi-year lows. Markets that suffered the most in 2015 were commodity exporters such as Colombia, Peru, Brazil and South Africa. Political issues in Greece, Brazil, Turkey and Poland also weighed heavily on markets. Positive contributors to the Fund s performance during the period included our stock selection in India, South Africa, China and Taiwan. Both an overweight allocation and stock selection in Eastern Europe added value, as did an underweight allocation and stock selection in Brazil. Additionally, a hedge on the Fund s euro exposure, managed using foreign exchange futures, was beneficial to performance. Key detractors from performance included the Fund s position in Korea, where stock selection and an underweight allocation were unfavorable. Stock selection and a neutral allocation in both Colombia and Peru also hampered returns. Management Strategies Several factors are likely to contribute to continued market volatility for some time in 2016: comprehension of China s true economic growth trajectory, reaction to potential additional devaluation of China s currency, and further adjustment to the consequences of the U.S. Federal Reserve s rate increase path. But we think emerging market equities are heading toward an eventual important turning point, even if precise timing is difficult to determine. Presently, emerging market valuations in aggregate appear attractive, trading at about a 30% discount to developed equities not as deep as the 50% discount seen in the period, but below their 20-year average discount of over 20%. i But as a catalyst, we think what will drive emerging market equities at some point, perhaps later this year, is when the market focuses on economic growth inflections shifting in favor of emerging markets relative to developed markets. Historically, the best time to buy emerging markets, as an asset class, has been when their gross domestic product growth rates were increasing by more than those in developed countries. We believe strongly that there will be big differences among countries for both growth rates and equity performance. Country allocation will be critical to generating excess returns in this environment. 3

4 Letter to Stockholders (unaudited) (cont d) As we have for many years, we remain underweight China and commodities-related plays such as Brazil and Russia in the portfolio. We still consider Central/Eastern Europe an attractive investment opportunity. After two recessions in five years, Western European growth is recovering and beginning to unleash a great deal of pent-up demand for goods and services which we believe could benefit Poland, the Czech Republic and Romania. We also remain positive on the Philippines. In our view, the Philippines continues to deliver some of the most attractive well-rounded growth with the business process outsourcing sector performing well, keeping overall consumption fairly strong. Lower oil prices could provide a tailwind for consumption and help bring inflation down. Our overweight position in India is tempered by its status as a market consensus favorite. While views on India s macro prospects are divided, we find select bottom-up stories attractive. In Mexico, economic growth is starting to turn around, as reflected in company earnings. Consumption is finally picking up and credit is at last beginning to grow, and it has among the lowest credit penetration levels of any emerging market country. Sincerely, John H. Gernon President and Principal Executive Officer January 2016 *The MSCI Emerging Markets Net Index is a free float-adjusted market capitalization weighted index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Net Index currently consists of 23 emerging market country indices. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends. It is not possible to invest directly in an index. i Source: FactSet and Morgan Stanley Investment Management. Emerging markets and developed markets are represented by the MSCI Emerging Markets Index and MSCI World Index, respectively. 4

5 Portfolio of Investments Value Shares (000) COMMON STOCKS (97.1%) Austria (2.3%) Banks Erste Group Bank AG (a) 117,569 $ 3,675 Insurance Vienna Insurance Group AG Wiener Versicherung Gruppe 43,751 1,194 4,869 Brazil (5.2%) Banks Banco Bradesco SA (Preference) 264,315 1,273 Itau Unibanco Holding SA (Preference) 302,593 1,977 3,250 Diversified Telecommunication Services Telefonica Brasil SA (Preference) 77, Food & Staples Retailing Raia Drogasil SA 120,809 1,080 Food Products BRF SA 231,432 3,232 Internet Software & Services MercadoLibre, Inc. (b) 13,714 1,568 Oil, Gas & Consumable Fuels Ultrapar Participacoes SA 62, ,781 Chile (0.6%) Multi-line Retail SACI Falabella 181,969 1,157 China (17.7%) Automobiles Chongqing Changan Automobile Co., Ltd. B Shares 224, Banks Bank of China Ltd. H Shares (c) 8,601,000 3,807 China Construction Bank Corp. H Shares (c) 5,907,810 4,011 7,818 Beverages Tsingtao Brewery Co., Ltd. H Shares (b)(c) 60, Value Shares (000) Construction & Engineering China Machinery Engineering Corp. H Shares (c) 603,000 $ 440 Diversified Consumer Services TAL Education Group ADR (a)(b) 24,218 1,125 Diversified Telecommunication Services China Unicom Hong Kong Ltd. (c) 426, Food Products China Mengniu Dairy Co., Ltd. (c) 438, Hotels, Restaurants & Leisure Shanghai Jin Jiang International Hotels Group Co., Ltd. H Shares (c) 708, Independent Power Producers & Energy Traders Huadian Power International Corp., Ltd. H Shares (c) 862, Insurance China Pacific Insurance Group Co., Ltd. H Shares (c) 531,200 2,179 China Taiping Insurance Holdings Co., Ltd. (a)(c) 297, ,090 Internet & Catalog Retail JD.com, Inc. ADR (a) 42,188 1,361 Internet Software & Services Alibaba Group Holding Ltd. ADR (a)(b) 9, NetEase, Inc. ADR 4, Tencent Holdings Ltd. (c) 408,000 7,959 9,508 Machinery CRCC High-Tech Equipment Corp., Ltd. H Shares (a)(c) 968, Pharmaceuticals CSPC Pharmaceutical Group Ltd. (c) 662, Sihuan Pharmaceutical Holdings Group Ltd. (c)(d)(e) 1,916, ,392 Real Estate Management & Development China Overseas Land & Investment Ltd. (c) 442,000 1,535 The accompanying notes are an integral part of the financial statements. 5

6 Portfolio of Investments (cont d) Value Shares (000) China (cont d) Textiles, Apparel & Luxury Goods Shenzhou International Group Holdings Ltd. (c) 210,000 $ 1,201 Transportation Infrastructure Shenzhen International Holdings Ltd. (c) 454, Wireless Telecommunication Services China Mobile Ltd. (c) 436,500 4,892 36,634 Colombia (0.7%) Construction Materials Cemex Latam Holdings SA (a) 154, Diversified Financial Services Grupo de Inversiones Suramericana SA 45, Grupo de Inversiones Suramericana SA (Preference) 48, ,041 1,544 Czech Republic (1.1%) Banks Komercni Banka AS 11,730 2,324 Egypt (0.5%) Banks Commercial International Bank Egypt SAE 210,815 1,023 Hong Kong (2.7%) Insurance AIA Group Ltd. 384,800 2,292 Textiles, Apparel & Luxury Goods Samsonite International SA 1,080,300 3,241 5,533 India (10.4%) Automobiles Maruti Suzuki India Ltd. 31,469 2,192 Banks HDFC Bank Ltd. 110,751 2,232 IndusInd Bank Ltd. 179,773 2,621 4,853 Value Shares (000) Construction & Engineering Larsen & Toubro Ltd. 75,831 $ 1,454 Construction Materials Shree Cement Ltd. 11,380 1,976 Consumer Finance Shriram Transport Finance Co., Ltd. 157,899 2,042 Machinery Ashok Leyland Ltd. 2,011,499 2,657 Oil, Gas & Consumable Fuels Bharat Petroleum Corp., Ltd. 125,479 1,688 Personal Products Marico Ltd. 510,380 1,742 Pharmaceuticals Glenmark Pharmaceuticals Ltd. 103,149 1,429 Sun Pharmaceutical Industries Ltd. 64, ,223 Wireless Telecommunication Services Idea Cellular Ltd. 299, ,475 Indonesia (3.0%) Diversified Telecommunication Services Link Net Tbk PT (a) 2,657, XL Axiata Tbk PT (a) 3,926,200 1,035 1,798 Machinery United Tractors Tbk PT 278, Media Surya Citra Media Tbk PT 2,948, Multi-line Retail Matahari Department Store Tbk PT 1,509,500 1,906 Pharmaceuticals Kalbe Farma Tbk PT 8,989, Trading Companies & Distributors AKR Corporindo Tbk PT 1,229, Transportation Infrastructure Jasa Marga Persero Tbk PT 305, ,308 6 The accompanying notes are an integral part of the financial statements.

7 Portfolio of Investments (cont d) Value Shares (000) Korea, Republic of (13.0%) Aerospace & Defense Korea Aerospace Industries Ltd. (a) 12,801 $ 846 LIG Nex1 Co., Ltd. (a) 5, ,359 Automobiles Kia Motors Corp. (a) 36,139 1,610 Banks KB Financial Group, Inc. (a) 45,216 1,270 Chemicals LG Chem Ltd. (a) 4,747 1,311 Construction & Engineering Hyundai Development Co-Engineering & Construction (a) 11, Household Durables Coway Co., Ltd. (a) 27,040 1,929 Industrial Conglomerates SK Holdings Co., Ltd. (a) 6,784 1,379 Internet Software & Services NAVER Corp. (a) 2,742 1,527 Personal Products Amorepacific Corp. (a) 5,846 2,053 Cosmax, Inc. (a) 5, ,854 Software Nexon Co., Ltd. 83,300 1,352 Specialty Retail Hotel Shilla Co., Ltd. (a)(b) 18,623 1,219 Tech Hardware, Storage & Peripherals Samsung Electronics Co., Ltd. 6,715 7,170 Samsung Electronics Co., Ltd. (Preference) 3,290 3,045 10,215 Wireless Telecommunication Services SK Telecom Co., Ltd. 2, ,868 Malaysia (0.1%) Media Astro Malaysia Holdings Bhd 190, Value Shares (000) Mexico (6.9%) Banks Grupo Financiero Banorte SAB de CV Series O 507,185 $ 2,790 Grupo Financiero Inbursa SAB de CV Series O 372, ,464 Beverages Fomento Economico Mexicano SAB de CV ADR 49,315 4,554 Chemicals Mexichem SAB de CV 511,915 1,149 Construction Materials Cemex SAB de CV ADR (a) 435,452 2,425 Industrial Conglomerates Alfa SAB de CV 925,634 1,833 Multi-line Retail El Puerto de Liverpool SAB de CV 77, ,370 Pakistan (1.2%) Banks United Bank Ltd. 974,500 1,443 Construction Materials Lucky Cement Ltd. 205, ,410 Panama (0.2%) Airlines Copa Holdings SA, Class A (b) 9, Peru (0.9%) Banks Credicorp Ltd. 19,332 1,881 Philippines (4.1%) Banks BDO Unibank, Inc. 400, Metropolitan Bank & Trust Co. 1,056,368 1,807 2,698 Diversified Financial Services Metro Pacific Investments Corp. 12,604,300 1,391 The accompanying notes are an integral part of the financial statements. 7

8 Portfolio of Investments (cont d) Value Shares (000) Philippines (cont d) Industrial Conglomerates DMCI Holdings, Inc. 3,123,800 $ 913 LT Group, Inc. 3,187, SM Investments Corp. 108,872 1,994 3,906 Transportation Infrastructure International Container Terminal Services, Inc. 409, ,606 Poland (3.6%) Banks Bank Pekao SA 33,268 1,213 Food & Staples Retailing Eurocash SA 71, Jeronimo Martins SGPS SA 123,581 1,606 2,488 Oil, Gas & Consumable Fuels Polski Koncern Naftowy Orlen SA 63,039 1,083 Road & Rail PKP Cargo SA 53, Textiles, Apparel & Luxury Goods CCC SA 31,109 1,095 LPP SA ,814 7,533 Russia (2.0%) Food & Staples Retailing X5 Retail Group N.V. GDR (a) 58,330 1,106 Internet Software & Services Mail.ru Group Ltd. GDR (a) 70,574 1,587 Yandex N.V., Class A (a) 89,385 1,405 2,992 4,098 South Africa (6.4%) Health Care Providers & Services Life Healthcare Group Holdings Ltd. 435, Household Durables Steinhoff International Holdings N.V. H Shares 378,142 1,920 Value Shares (000) Media Naspers Ltd., Class N 28,549 $ 3,903 Oil, Gas & Consumable Fuels Sasol Ltd. 51,021 1,375 Paper & Forest Products Mondi PLC 105,287 2,092 Wireless Telecommunication Services MTN Group Ltd. 162,345 1,392 Vodacom Group Ltd. 172,867 1,701 3,093 13,367 Taiwan (10.5%) Chemicals Formosa Plastics Corp. 237, Diversified Financial Services Chailease Holding Co., Ltd. 677,508 1,164 Fubon Financial Holding Co., Ltd. 952,000 1,294 2,458 Electronic Equipment, Instruments & Components Delta Electronics, Inc. 275,758 1,294 Hon Hai Precision Industry Co., Ltd. 1,047,550 2,562 3,856 Food Products Uni-President Enterprises Corp. 1,108,070 1,846 Internet Software & Services PChome Online, Inc. 55, Semiconductors & Semiconductor Equipment Advanced Semiconductor Engineering, Inc. 1,469,000 1,679 Advanced Semiconductor Engineering, Inc. ADR 14, Hermes Microvision, Inc. 11, Taiwan Semiconductor Manufacturing Co., Ltd. 1,207,455 5,210 7,388 Tech Hardware, Storage & Peripherals Catcher Technology Co., Ltd. 192,000 1,608 Pegatron Corp. 570,000 1,239 2,847 Textiles, Apparel & Luxury Goods Eclat Textile Co., Ltd. 102,404 1,410 8 The accompanying notes are an integral part of the financial statements.

9 Portfolio of Investments (cont d) Value Shares (000) Taiwan (cont d) Wireless Telecommunication Services Taiwan Mobile Co., Ltd. 260,000 $ ,696 Thailand (2.3%) Hotels, Restaurants & Leisure Minor International PCL (Foreign) 1,093,620 1,093 Professional Services DKSH Holding AG (a) 22,803 1,429 Real Estate Management & Development Land and Houses PCL (Foreign) 2,887, Wireless Telecommunication Services Advanced Info Service PCL (Foreign) 265,600 1,113 Total Access Communication PCL (Foreign) 227, Total Access Communication PCL NVDR 146, ,423 4,701 Turkey (1.0%) Food Products Ulker Biskuvi Sanayi AS 163, Household Durables Arcelik AS 214,703 1,028 2,014 United States (0.7%) Hotels, Restaurants & Leisure Yum! Brands, Inc. 18,559 1,356 TOTAL COMMON STOCKS (Cost $195,050) 201,107 INVESTMENT COMPANY (0.5%) Thailand (0.5%) Transportation Infrastructure BTS Rail Mass Transit Growth Infrastructure Fund (Foreign) (Units) (f) (Cost $1,434) 3,850,700 1,090 No. of Value Rights (000) RIGHT (0.0%) Brazil (0.0%) Banks Banco Bradesco SA (a) (Cost $ ) 8,658 $ 4 Shares SHORT-TERM INVESTMENTS (4.6%) Securities held as Collateral on Loaned Securities (2.0%) Investment Company (1.7%) Morgan Stanley Institutional Liquidity Funds Money Market Portfolio Institutional Class (See Note E) 3,590,216 3,590 Face Amount (000) Repurchase Agreements (0.3%) Barclays Capital, Inc., (0.32%, dated 12/31/15, due 1/4/16; proceeds $210; fully collateralized by a U.S. Government obligation; 1.38% due 2/29/20; valued at $214) $ Merrill Lynch & Co., Inc., (0.31%, dated 12/31/15, due 1/4/16; proceeds $420; fully collateralized by a U.S. Government agency security; 3.50% due 3/20/45; valued at $428) TOTAL SECURITIES HELD AS COLLATERAL ON LOANED SECURITIES (Cost $4,220) 4,220 Shares INVESTMENT COMPANY (2.6%) Morgan Stanley Institutional Liquidity Funds Money Market Portfolio Institutional Class (See Note E) (Cost $5,426) 5,426,195 5,426 TOTAL SHORT-TERM INVESTMENTS (Cost $9,646) 9,646 TOTAL INVESTMENTS (102.2%) (Cost $206,130) Including $5,111 of Securities Loaned (g)(h)(i) 211,847 LIABILITIES IN EXCESS OF OTHER ASSETS (-2.2%) (4,651) NET ASSETS (100.0%) $207,196 The accompanying notes are an integral part of the financial statements. 9

10 Portfolio of Investments (cont d) (a) Non-income producing security. (b) All or a portion of this security was on loan at. (c) Security trades on the Hong Kong exchange. (d) Security has been deemed illiquid at. (e) At, the Fund held a fair valued security valued at approximately $718,000, representing 0.4% of net assets. This security has been fair valued as determined in good faith under procedures established by and under the general supervision of the Fund s Directors. (f) Consists of one or more classes of securities traded together as a unit; stocks with attached warrants. (g) Securities are available for collateral in connection with an open foreign currency forward exchange contract. (h) The approximate fair value and percentage of net assets, $172,739,000 and 83.4%, respectively, represent the securities that have been fair valued under the fair valuation policy for international investments as described in Note A-1 within the Notes to the Financial Statements. (i) At, the aggregate cost for Federal income tax purposes is approximately $205,759,000. The aggregate gross unrealized appreciation is approximately $32,877,000 and the aggregate gross unrealized depreciation is approximately $26,789,000 resulting in net unrealized appreciation of approximately $6,088,000. ADR American Depositary Receipt. GDR Global Depositary Receipt. NVDR Non-Voting Depositary Receipt. Portfolio Composition* Percentage of Classification Total Investments Other** 63.7% Banks 16.8 Internet Software & Services 7.8 Tech Hardware, Storage & Peripherals 6.3 Wireless Telecommunication Services 5.4 Total Investments 100.0%*** * Percentages indicated are based upon total investments (excluding Securities held as Collateral on Loaned Securities) as of December 31, ** Industries and/or investment types representing less than 5% of total investments. *** Does not include an open foreign currency forward exchange contract with unrealized appreciation of approximately $31,000. Foreign Currency Forward Exchange Contract: The Fund had the following foreign currency forward exchange contract open at : Contracts In to Exchange Unrealized Deliver For Delivery Appreciation Counterparty (000) (000) Date (000) UBS AG EUR 5,393 $5,894 1/21/16 $31 EUR Euro 10 The accompanying notes are an integral part of the financial statements.

11 Financial Statements Statement of Assets and Liabilities (000) Assets: Investments in Securities of Unaffiliated Issuers, at Value(1) (Cost $197,114) $202,831 Investment in Security of Affiliated Issuer, at Value (Cost $9,016) 9,016 Total Investments in Securities, at Value (Cost $206,130) 211,847 Foreign Currency, at Value (Cost $30) 30 Cash 298 Dividends Receivable 132 Receivable for Investments Sold 46 Unrealized Appreciation on Foreign Currency Forward Exchange Contracts 31 Tax Reclaim Receivable 27 Receivable from Affiliate 1 Other Assets 19 Total Assets 212,431 Liabilities: Collateral on Securities Loaned, at Value 4,517 Payable for Advisory Fees 222 Dividends Declared 200 Payable for Investments Purchased 157 Payable for Custodian Fees 88 Payable for Professional Fees 22 Payable for Administration Fees 6 Payable for Stockholder Servicing Agent Fees 2 Other Liabilities 21 Total Liabilities 5,235 Net Assets Applicable to 14,500,376 Issued and Outstanding $0.01 Par Value Shares (100,000,000 Shares Authorized) $207,196 Net Asset Value Per Share $ Net Assets Consist of: Common Stock $ 145 Paid-in-Capital 223,516 Distributions in Excess of Net Investment Income (419) Accumulated Net Realized Loss (23,250) Unrealized Appreciation (Depreciation) on: Investments 7,182 Foreign Currency Forward Exchange Contracts 31 Foreign Currency Translations (9) Net Assets $207,196 (1) Including: Securities on Loan, at Value: $ 5,111 The accompanying notes are an integral part of the financial statements. 11

12 Financial Statements (cont d) Statement of Operations Year Ended (000) Investment Income: Dividends from Securities of Unaffiliated Issuers (Net of $615 of Foreign Taxes Withheld) $ 4,180 Income from Securities Loaned Net 33 Dividends from Security of Affiliated Issuer (Note E) 12 Total Investment Income 4,225 Expenses: Advisory Fees (Note B) 2,894 Custodian Fees (Note D) 353 Administration Fees (Note C) 185 Professional Fees 144 Stockholder Reporting Expenses 35 Stockholder Servicing Agent Fees 9 Directors Fees and Expenses 6 Other Expenses 50 Total Expenses 3,676 Waiver of Administration Fees (Note C) (105) Rebate from Morgan Stanley Affiliate (Note E) (7) Net Expenses 3,564 Net Investment Income 661 Realized Gain (Loss): Investments Sold (Net of $23 of Capital Gain Country Tax) (12,563) Foreign Currency Forward Exchange Contracts 382 Foreign Currency Transactions (232) Net Realized Loss (12,413) Change in Unrealized Appreciation (Depreciation): Investments (Net of Decrease in Deferred Capital Gain Country Tax of $485) (13,059) Foreign Currency Forward Exchange Contracts (188) Foreign Currency Translations 28 Net Change in Unrealized Appreciation (Depreciation) (13,219) Net Realized Loss and Change in Unrealized Appreciation (Depreciation) (25,632) Net Decrease in Net Assets Resulting from Operations $(24,971) 12 The accompanying notes are an integral part of the financial statements.

13 Financial Statements (cont d) Statements of Changes in Net Assets Year Ended Year Ended December 31, 2014 (000) (000) Increase (Decrease) in Net Assets: Operations: Net Investment Income $ 661 $ 1,002 Net Realized Loss (12,413) (701) Net Change in Unrealized Appreciation (Depreciation) (13,219) (11,594) Net Decrease in Net Assets Resulting from Operations (24,971) (11,293) Distributions from and/or in Excess of: Net Investment Income (722) (1,688) Capital Share Transactions: Repurchase of Shares (51,376 and 0 shares) (725) Net Decrease in Net Assets Resulting from Capital Share Transactions (725) Total Decrease (26,418) (12,981) Net Assets: Beginning of Period 233, ,595 End of Period (Including Distributions in Excess of Net Investment Income of $(419) and $(552)) $207,196 $233,614 The accompanying notes are an integral part of the financial statements. 13

14 Financial Highlights Selected Per Share Data and Ratios Year Ended December 31, Net Asset Value, Beginning of Period $ $ $ $ $ Net Investment Income Net Realized and Unrealized Gain (Loss) (1.77) (0.85) (0.27) 2.72 (3.33) Total from Investment Operations (1.72) (0.78) (0.18) 2.81 (3.20) Distributions from and/or in excess of: Net Investment Income (0.05) (0.12) (0.05) (0.08) Anti-Dilutive Effect of Share Repurchase Program Anti-Dilutive Effect of Tender Offer 0.04 Net Asset Value, End of Period $ $ $ $ $ Per Share Market Value, End of Period $ $ $ $ $ TOTAL INVESTMENT RETURN: Market Value (11.37)% (5.30)% 0.22% 20.59% (21.03)% Net Asset Value(1) (10.64)% (4.60)% (0.93)% 19.85% (18.18)% RATIOS, SUPPLEMENTAL DATA: Net Assets, End of Period (Thousands) $207,196 $233,614 $246,595 $250,935 $248,003 Ratio of Expenses to Average Net Assets(2) 1.54%+ 1.55%+ 1.56%+ 1.57%+ 1.52%+ Ratio of Net Investment Income to Average Net Assets(2) 0.29%+ 0.40%+ 0.50%+ 0.54%+ 0.79%+ Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets 0.00% 0.00% 0.01% 0.01% 0.01% Portfolio Turnover Rate 38% 41% 52% 47% 57% (2) Supplemental Information on the Ratios to Average Net Assets: Ratios Before Expenses Waived by Administrator Ratio of Expenses to Average Net Assets 1.59% 1.60% 1.62% 1.63% 1.58% Ratio of Net Investment Income to Average Net Assets 0.24% 0.35% 0.44% 0.48% 0.73% (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. Per share amount is based on average shares outstanding. Amount is less than $0.005 per share. + The Ratios of Expenses and Net Investment Income reflect the rebate of certain Fund expenses in connection with the investments in Morgan Stanley affiliates during the period. The effect of the rebate on the ratios is disclosed in the above table as Ratio of Rebate from Morgan Stanley Affiliates to Average Net Assets. Amount is less than 0.005%. 14 The accompanying notes are an integral part of the financial statements.

15 Notes to Financial Statements The Morgan Stanley Emerging Markets Fund, Inc. (the Fund ) was incorporated on August 27, 1991 and is registered as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the Act ). The Fund applies investment company accounting and reporting guidance. The Fund s investment objective is long-term capital appreciation through investments primarily in emerging country equity securities. To the extent that the Fund invests in derivative instruments that the adviser, Morgan Stanley Investment Management Inc. (the Adviser ) and sub-advisers, Morgan Stanley Investment Management Company ( MSIM Company ) and Morgan Stanley Investment Management Limited ( MSIM Limited ) (together, the Sub-Advisers ), believe have economic characteristics similar to emerging country equity securities, such investments will be counted for purposes of meeting the Fund s investment objective. To the extent the Fund makes such investments, the Fund will be subject to the risks of such derivative instruments as described herein. A. Significant Accounting Policies: The following significant accounting policies are in conformity with U.S. generally accepted accounting principles ( GAAP ). Such policies are consistently followed by the Fund in the preparation of its financial statements. GAAP 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: (1) An equity portfolio security listed or traded on an exchange is valued at its latest reported sales price (or at the exchange official closing price if such exchange reports an official closing price), if there were no sales on a given day, the security is valued at the mean between the last reported bid and asked prices; (2) all other equity portfolio securities for which over-the-counter ( OTC ) market quotations are readily available are valued at its latest reported sales price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (3) when market quotations are not readily available, including circumstances under which the Adviser or Sub- Advisers determine that the closing price, last sale price or the mean between the last reported bid and asked prices are not reflective of a security s market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Fund s Board of Directors (the Directors ). Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities trade) and the close of business of the New York Stock Exchange ( NYSE ). If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Directors or by the Adviser using a pricing service and/or procedures approved by the Directors; (4) quotations of foreign portfolio securities, other assets and liabilities and forward contracts stated in foreign currency are translated into U.S. dollar equivalents at the prevailing market rates prior to the close of the NYSE; (5) investments in mutual funds, including the Morgan Stanley Institutional Liquidity Funds, are valued at the net asset value ( NAV ) as of the close of each business day; and (6) short-term debt securities with remaining maturities of 60 days or less at the time of purchase may be valued at amortized cost, unless the Adviser determines such valuation does not reflect the securities market value, in which case these securities will be valued at their fair market value determined by the Adviser. The Directors have responsibility for determining in good faith the fair value of the investments, and the Directors 15

16 Notes to Financial Statements (cont d) may appoint others, such as the Fund s Adviser or a valuation committee, to assist the Directors in determining fair value and to make the actual calculations pursuant to the fair valuation methodologies previously approved by the Directors. Under procedures approved by the Directors, the Fund s Adviser has formed a Valuation Committee whose members are approved by the Directors. The Valuation Committee provides administration and oversight of the Fund s valuation policies and procedures, which are reviewed at least annually by the Directors. These procedures allow the Fund to utilize independent pricing services, quotations from securities and financial instrument dealers, and other market sources to determine fair value. The Fund has procedures to determine the fair value of securities and other financial instruments for which market prices are not readily available. Under these procedures, the Valuation Committee convenes on a regular and ad hoc basis to review such securities and considers a number of factors, including valuation methodologies and significant unobservable valuation inputs, when arriving at fair value. The Valuation Committee may employ a market-based approach which may use related or comparable assets or liabilities, recent transactions, market multiples, book values, and other relevant information for the investment to determine the fair value of the investment. An incomebased valuation approach may also be used in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Due to the inherent uncertainty of valuations of such investments, the fair values may differ significantly from the values that would have been used had an active market existed. The Valuation Committee employs various methods for calibrating these valuation approaches including a regular review of valuation methodologies, key inputs and assumptions, transactional back-testing or disposition analysis, and reviews of any related market activity. 2. Fair Value Measurement: Financial Accounting Standards Board ( FASB ) Accounting Standards Codification TM ( ASC ) 820, Fair Value Measurement ( ASC 820 ), defines fair value as the value that the Fund would receive to sell an investment or pay to transfer a liability in a timely transaction with an independent buyer in the principal market, or in the absence of a principal market the most advantageous market for the investment or liability. ASC 820 establishes a three-tier hierarchy to distinguish between (1) inputs that reflect the assumptions market participants would use in valuing an asset or liability developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) inputs that reflect the reporting entity s own assumptions about the assumptions market participants would use in valuing an asset or liability developed based on the best information available in the circumstances (unobservable inputs) and to establish classification of fair value measurements for disclosure purposes. Various inputs are used in determining the value of the Fund s investments. The inputs are summarized in the three broad levels listed below. Level 1 unadjusted quoted prices in active markets for identical investments Level 2 other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) Level 3 significant unobservable inputs including the Fund s own assumptions in determining the fair value of investments. Factors considered in making this determination may include, but are not limited to, information obtained by contacting the issuer, analysts, or the appropriate stock exchange (for exchange-traded securities), analysis of the issuer s financial statements or other available documents and, if necessary, available 16

17 Notes to Financial Statements (cont d) information concerning other securities in similar circumstances The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities and the determination of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each security. The following is a summary of the inputs used to value the Fund s investments as of. Level 2 Level 1 Other Level 3 Unadjusted significant Significant quoted observable unobservable prices inputs inputs Total Investment Type (000) (000) (000) (000) Assets: Common Stocks Aerospace & Defense $ $ 1,359 $ $ 1,359 Airlines Automobiles 4,295 4,295 Banks 5,345 29,567 34,912 Beverages 4, ,824 Chemicals 1,149 1,865 3,014 Construction & Engineering 2,273 2,273 Construction Materials 2,425 3,446 5,871 Consumer Finance 2,042 2,042 Diversified Consumer Services 1,125 1,125 Diversified Financial Services 4,890 4,890 Diversified Telecommunication Services 3,015 3,015 Electronic Equipment, Instruments & Components 3,856 3,856 Level 2 Level 1 Other Level 3 Unadjusted significant Significant quoted observable unobservable prices inputs inputs Total Investment Type (000) (000) (000) (000) Assets: (cont d) Common Stocks (cont d) Food & Staples Retailing $ $ 4,674 $ $ 4,674 Food Products 6,772 6,772 Health Care Providers & Services Hotels, Restaurants & Leisure 1,356 1,390 2,746 Household Durables 1,920 2,957 4,877 Independent Power Producers & Energy Traders Industrial Conglomerates 1,833 5,285 7,118 Insurance 6,576 6,576 Internet & Catalog Retail 1,361 1,361 Internet Software & Services 4,522 11,620 16,142 Machinery 593 2,996 3,589 Media 4,685 4,685 Multi-line Retail 945 3,063 4,008 Oil, Gas & Consumable Fuels 5,097 5,097 Paper & Forest Products 2,092 2,092 Personal Products 4,596 4,596 Pharmaceuticals 3, ,468 Professional Services 1,429 1,429 Real Estate Management & Development 2,291 2,291 Road & Rail

18 Notes to Financial Statements (cont d) Level 2 Level 1 Other Level 3 Unadjusted significant Significant quoted observable unobservable prices inputs inputs Total Investment Type (000) (000) (000) (000) Assets: (cont d) Common Stocks (cont d) Semiconductors & Semiconductor Equipment $ 85 $ 7,303 $ $ 7,388 Software 1,352 1,352 Specialty Retail 1,219 1,219 Tech Hardware, Storage & Peripherals 13,062 13,062 Textiles, Apparel & Luxury Goods 7,666 7,666 Trading Companies & Distributors Transportation Infrastructure 1,561 1,561 Wireless Telecommunication Services 11,310 11,310 Total Common Stocks 27, , ,107 Investment Company 1,090 1,090 Right 4 4 Short-Term Investments Investment Company 9,016 9,016 Repurchase Agreements Total Short-Term Investments 9, ,646 Foreign Currency Forward Exchange Contract Total Assets $36,666 $174,494 $718 $211, Transfers between investment levels may occur as the markets fluctuate and/or the availability of data used in an investment s valuation changes. The Fund recognizes transfers between the levels as of the end of the period. As of, securities with a total value of approximately $718,000 transferred from Level 2 to Level 3. Securities that were valued using other significant observable inputs at December 31, 2014 were valued using significant unobservable inputs at. Following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value. Common Stock (000) Beginning Balance $ Purchases Sales Amortization of discount Transfers in 718 Transfers out Corporate actions Change in unrealized appreciation (depreciation) Realized gains (losses) Ending Balance $718 Net change in unrealized appreciation (depreciation) from investments still held as of $ The following table presents additional information about valuation techniques and inputs used for investments that are measured at fair value and categorized within Level 3 as of. Various valuation techniques were used in the valuation of certain investments and weighted based on the level of significance. Fair Impact to Value at Valuation December 31, from an 2015 Valuation Unobservable Selected Increase (000) Technique Input Range Value in Input Pharmaceuticals Market Common Transaction Precedent Stock $718 Method Transaction $0.23 $0.23 $0.23 Increase

19 Notes to Financial Statements (cont d) Fair Impact to Value at Valuation December 31, from an 2015 Valuation Unobservable Selected Increase (000) Technique Input Range Value in Input Pharmaceuticals (cont d) Weighted Discounted Average Cost Cash Flow of Capital 16.5% 16.5% 16.5% Decrease Long-Term Growth Rate 2.0% 3.0% 2.5% Increase Market Comparable Enterprise Companies Value/EBITDA 11.5x 15.8x 11.5x Increase Discount for Lack of Marketability/ Company Specific Risk 30.0% 30.0% 30.0% Decrease 3. Repurchase Agreements: The Fund may enter into repurchase agreements under which the Fund lends 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 which are held as 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 that the value of the collateral does not decrease below the repurchase price plus accrued interest as earned. If such a decrease occurs, additional collateral will be requested and, when received, will be added to the account to maintain full collateralization. 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 of the collateral proceeds may be subject to cost and delays. The Fund, along with other affiliated investment companies, may utilize a joint trading account for the purpose of entering into repurchase agreements. 4. Foreign Currency Translation and Foreign Investments: The books and records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars 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 rates 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 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) on investments in securities 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 forward exchange contracts, disposition of foreign currencies, currency gains (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 19

20 Notes to Financial Statements (cont d) exchange rates are reflected as a component of unrealized appreciation (depreciation) in investments and foreign currency translations in the Statement of Assets and Liabilities. The change in 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 securities of issuers located in emerging markets, which are denominated in foreign currencies. Changes in currency exchange rates will affect the value of and investment income from such securities. Emerging markets securities are often subject to greater price volatility, limited capitalization and liquidity, and higher rates of inflation than securities of companies based in the U.S. In addition, emerging market issuers may be subject to substantial governmental involvement in the economy and greater social, economic and political uncertainty. Such securities may be concentrated in a limited number of countries and regions and may vary throughout the year. Governmental approval for foreign investments may be required in advance of making an investment under certain circumstances in some countries, and the extent of foreign investments in domestic companies may be subject to limitation in other countries. Foreign ownership limitations also may be imposed by the charters of individual companies to prevent, among other concerns, violations of foreign investment limitations. As a result, an additional class of shares (identified as Foreign in the Portfolio of Investments) may be created and offered for investment. The local and foreign shares market values may differ. In the absence of trading of the foreign shares in such markets, the Fund values the foreign shares at the closing exchange price of the local shares. 5. Foreign Real Estate Companies: The Fund may invest up to 10% of its net assets in foreign real estate companies. Foreign real estate companies pool investor funds for investments primarily in commercial real estate properties. They may also include among other businesses, real estate developers, brokers and operating companies whose products and services are significant related to the real estate industry such as building suppliers and mortgage lenders. 6. Derivatives: The Fund may, but is not required to, use derivative instruments for a variety of purposes, including hedging, risk management, portfolio management or to earn income. Derivatives are financial instruments whose value is based, in part, on the value of an underlying asset, interest rate, index or financial instrument. Prevailing interest rates and volatility levels, among other things, also affect the value of derivative instruments. A derivative instrument often has risks similar to its underlying asset and may have additional risks, including imperfect correlation between the value of the derivative and the underlying asset, risks of default by the counterparty to certain transactions, magnification of losses incurred due to changes in the market value of the securities, instruments, indices or interest rates to which the derivative instrument relates, risks that the transactions may not be liquid and risks arising from margin requirements. The use of derivatives involves risks that are different from, and possibly greater than, the risks associated with other portfolio investments. Derivatives may involve the use of highly specialized instruments that require investment techniques and risk analyses different from those associated with other portfolio investments. All of the Fund s holdings, including derivative instruments, are marked-tomarket each day with the change in value reflected in unrealized appreciation (depreciation). Upon disposition, a realized gain or loss is recognized. Certain derivative transactions may give rise to a form of leverage. Leverage magnifies the potential for gain and the risk of loss. Leverage associated with derivative transactions 20

21 Notes to Financial Statements (cont d) may cause the Fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet earmarking or segregation requirements, pursuant to applicable Securities and Exchange Commission rules and regulations, or may cause the Fund to be more volatile than if the Fund had not been leveraged. Although the Adviser and/or Sub-Advisers seek to use derivatives to further the Fund s investment objectives, there is no assurance that the use of derivatives will achieve this result. Following is a description of the derivative instruments and techniques that the Fund used during the period and their associated risks: Foreign Currency Forward Exchange Contracts: In connection with its investments in foreign securities, the Fund also entered into contracts with banks, brokers or dealers to purchase or sell securities or foreign currencies at a future date. A foreign currency forward exchange contract ( currency contract ) is a negotiated agreement between the contracting parties to exchange a specified amount of currency at a specified future time at a specified rate. The rate can be higher or lower than the spot rate between the currencies that are the subject of the contract. Currency contracts may be used to protect against uncertainty in the level of future foreign currency exchange rates or to gain or modify exposure to a particular currency. To the extent hedged by the use of currency contracts, the precise matching of the currency contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date on which the contract is entered into and the date it matures. Furthermore, such transactions may reduce or preclude the opportunity for gain if the value of the currency should move in the direction opposite to the position taken. There is additional risk to the extent that currency contracts create exposure to currencies in which the Fund s securities are not denominated. Unanticipated changes in currency prices may result in poorer overall performance for the Fund than if it had not entered into such contracts. The use of currency contracts involves the risk of loss from the insolvency or bankruptcy of the counterparty to the contract or the failure of the counterparty to make payments or otherwise comply with the terms of the contract. A currency contract is markedto-market daily and the change in market value is recorded by the Fund as unrealized gain or loss. The Fund records realized gains (losses) when the currency contract is closed equal to the difference between the value of the currency contract at the time it was opened and the value at the time it was closed. FASB ASC 815, Derivatives and Hedging ( ASC 815 ), is intended to improve financial reporting about derivative instruments by requiring enhanced disclosures to enable investors to better understand how and why the Fund uses derivative instruments, how these derivative instruments are accounted for and their effects on the Fund s financial position and results of operations. The following tables set forth the fair value of the Fund s derivative contracts by primary risk exposure as of. Foreign Currency Forward Exchange Contracts Asset Derivatives Statement of Assets and Primary Risk Value Liabilities Location Exposure (000) Unrealized Appreciation on Foreign Currency Forward Exchange Contracts Currency Risk $31 The following tables set forth by primary risk exposure the Fund s realized gains (losses) and change in unrealized appreciation (depreciation) by type of derivative contract for 21