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the issues in this report have been tested at a particular moment in time on the
strength of personal opinions---albeit opinions of some of the most knowledgeable
people engaged in international investment today.
The major issues covered in this inquiry include the following:
Why do foreign investors make portfolio investments
in the U.S.?
What factors influence the level and composition of
By what mechanisms do these foreign investors make
How do they obtain the necessary information for
What effect does the foreign portfolio investor have
on U.S. capital markets?
What relationships exist between portfolio and direct
In what ways do U.S. portfolio investments abroad
differ from foreign portfolio investments in this country?
The most important conclusions in connection with each of these issues are sum
The desire for international diversification of portfolios is probably the major
motive for foreign portfolio investment in the U.S.
This process by itself assists
investors in achieving other principal objectives such as preservation of capital
and long-term capital growth. The U.S. is also viewed as being politically
stable and committed to capitalism. The U.S. enjoys a reputation for not treating
the capital wealth of foreigners capriciously. Finally, the U.S. capital markets
represent approximately two-thirds of the total opportunity for private invest
ment in securities in the free world; the sheer size of the U.S. markets, their
extensive liquidity, and wide range of investment choices are compelling reasons
why international investors of consequence cannot overlook the U.S.
The level of investment in the U.S. by foreign money managers is determined
by their views about relative political stability, predicted outlooks for national
economies and their capital markets, and dividends and interest rates on
securities. Significant changes in either the U.S. laws relating to beneficial
ownership or withholding tax on interest and dividends could also influence
investment levels significantly. Decisions pertaining to portfolio composition
relate primarily to the prospects of economic growth for specific industries and
companies within industries. The liquidity of individual stocks and the extent to
which specific companies are known also influence composition.
To execute transactions, foreign portfolio investors use essentially the same
channels as U.S. institutions. In order of importance, they use the New York
and American Stock Exchanges, regional exchanges, the over-the-counter market
and foreign exchanges that list U.S. securities. For the most part, foreign
institutions use U.S. brokers to execute trades. To save on commissions (among
other reasons), many foreign financial institutions have formed U.S. subsidiaries
which are allowed membership on regional U.S. exchanges.
In addition to their own subsidiaries and a small number of selected U.S.
brokers, foreign investors rely upon Federal publications, the financial press
and company visits and financial reports for information. Foreign investors
have access to virtually the same information as their U.S. counterparts; they
feel, nonetheless, that all too often they learn about significant events too late.
The liquidity of U.S. markets is doubtless enhanced by the presence of
the foreign portfolio investor. Whereas these investors are by and large seeking
long-term capital growth, they no longer hesitate to take short term profits, and
therefore probably add to market volatility (price fluctuations) as well.
The characteristics which make a portfolio investment attractive are,
important respects, the opposites of characteristics sought for in direct invest
ments. The portfolio investor wants liquidity, safety and freedom from re
strictions of sale. He wants no management responsibility or complex legalities
associated with his investments. He often takes special precautions to monitor
his total percentage holdings of outstanding shares in a given company, and may
establish maximum limits of 1% or 2%, usually well below the maximums prescribed
by U.S. law for public disclosure. With rare and extraordinary exceptions, foreign
portfolio investors do not seek control of U.S. companies or knowingly violate
pertinent U.S. securities laws.
U.S. portfolio managers make only limited investments abroad, for many of
the same reasons that compel foreign portfolio investors to invest in the U.S. In
general, the opportunities at home are satisfactory to most U.S. institutional money
managers today. However, a few U.S. institutions have begun to make small
portfolio investments abroad. Their reasons include: (a) to take advantage of
the different cycles in different markets, achieving satisfactory return on invest
ment at lower risk; and (b) to participate in markets that have higher rates of
growth or higher yields than U.S. markets. Consequently, U.S. investors in
foreign stocks are generally more concerned with which foreign markets they
are investing in rather than particular stocks or industries. Specialized
situations have resulted in exceptions in the past, such as the investment in
gold stocks during the 1960's. In addition, significant U.S. portfolio investments
abroad are in bonds, particularly those of Canada and international institutions
(e.g., the International Bank for Reconstruction and Development, known as
the World Bank), originally sold in the U.S. by the borrowers.