« PreviousContinue »
WHY FOREIGNERS INVEST IN THE UNITED STATES
In the course of this study, most of the interviewees were asked to respond
to a questionnaire. The purpose of the questionnaire was to evaluate the relative
importance of different factors affecting foreign portfolio investment. A summary
of the responses of foreign investors is shown in Figure 2. This chart indicates
that the main reasons why foreigners invest internationally are to preserve
capital, to achieve long-term capital growth, and to be harbored in countries that
are politically and economically stable. Perhaps the most important reason of
all, however, is simply to achieve the greater rewards, or reduced risks, of
international diversification. This concept is not well understood by U.S. port
folio managers in general, and yet is almost taken for granted by their foreign
Figure 3 shows U.S. portfolio managers' responses to the same questionnaire.
The most significant difference, the importance to foreign investors of long term
capital growth, is discussed later in this section.
Many foreign funds are invested 20% to 80% internationally; typically, the
U.S. accounts for about half of this investment. The purpose of this section
is to examine in some detail the reasons why foreign portfolio managers invest
internationally, and especially in the U.S. The most important reasons are
TABULATION OF FOREIGN PORTFOLIO MAIJA (YERS RESPONSES TO THE QUESTION "DO YOU AGREE THAT THE FOLLOWING FACTOR IS AN IMPORTANT CONSIDERATION AFFECTING FOREIGN PORTFOLIO INVESTMENT ?"
22785 Supergly Aspoe
57% 13% 78% Strongly Agree
50%V 23% 717%, Strongly Agree
IN Strongly Disagree
5103,3103 103 Strong iy Agree
12. Political and Economic Stability
13. Availability of Natural Resources (other than energy)
14. Responsiveness of Central Banks'
15. Availability of Human Resources
(Technological skills, etc.)
6. Cor.centror on Opportunities
11. Lows Which Pertain to Securities
Tronscctions or.d Regulotions
Note: The total number of respondent raprocented in the above results i. 51.
FIGURc 3 TABULATION OF RESPONSES OF U.S. PORTFOLIO MANAGERS AND INTERMEDIARIES TO THE QUESTION "Do You AGREE THAT THE FOLLOWING FACTOR IS AN IMPORTANT CONSIDERATION AFFECTING FOREIGN PORTFOLIO INVESTMENT?
Diversification of Investment Portfolios Internationally
An important concept still largely in the theoretical stages is
based on the fact that the capital markets of the world do not move up
and down in perfect synchronization. The degree to which these markets
are not synchronized (this degree is measurable in statistical terms)
provides opportunities to improve risk-reward ratios.
The same principle is involved when a U.S. portfolio manager diversi
fies by investing in different industries. Considerable analytical effort
is devoted to ensure that the performance of the different industries in
vested in are not too closely tied to each other. Otherwise, the investor
may as well concentrate in what he believes to be the best industry rather
than diversify in the first place.
One U.S. mutual fund manager has studied the benefits of international
diversification extensively. He states that portfolio managers could achieve
"perhaps a 20% to 40% reduction in portfolio variability or risk without
sacrificing return." He also says, however, that "thus far the U.S. invest
ment community has reacted with a great collective yawn." Ironically, the
theoretical aspects seem to have been analyzed more thoroughly and been
better understood by U.S. analysts; the practical aspects, however, are
definitely better applied by foreign investment portfolio investors.
(Paradoxically, U.S. firms engaged in direct investment abroad appear to
have a sophisticated and highly developed understanding of the practical
benefits of international investment.)
2. Expectations for Long-Term Capital Growth
Almost every foreign portfolio manager cited "long-term capital gains"
as the major objective of investments in the U.S. (see Figure 2). Inter
estingly, U.S. managers don't believe that this objective is as important
to foreigners (Figure 3). The discrepancy may be explained by the dif
ferent interpretation each places on the phrase. A long term growth
strategy for U.S. investors is to buy and hold stocks in companies whose
earnings are expected to grow, until such growth is reflected in the stock
price. A long term growth strategy for foreign investors is to commit invest
ment funds to a growing market, but not necessarily to specific securities.
Consequently, their investment strategy includes taking short-term profits
in particular securities when they occur, while nonetheless preserving the
objective of long-term capital growth. This strategy is made possible be
cause foreign portfolio investors are exempt, in the majority of cases, from
U.S. capital gains taxes on security transactions. (See also the tax section
in "Legal Aspects of Foreign Portfolio Investment in the United States.")