Page images
PDF
EPUB

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

such investments?

By what mechanisms do these foreign investors make

their investments?

How do they obtain the necessary information for

investment decision-making?

What effect does the foreign portfolio investor have

on U.S. capital markets?

What relationships exist between portfolio and direct

investments?

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

marized below.

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 investment 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, in many important respects, the opposites of characteristics sought for in direct invest

ments. The portfolio investor wants liquidity, safety and freedom from restrictions 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 investment 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.

« PreviousContinue »