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Relative Economic and Political Stability of the U.S.
International portfolio investors deal with different criteria than their
domestic and U.S. counterparts. For the vast majority of U.S. money
managers, the first policy decision is virtually automatic, "restrict investments
to U.S.A." Thereafter, the most important criteria include portfolio liquidity
(such as the percent in cash or cash equivalents), the mix between stocks
and bonds, industry choices and the selection of specific securities.
With international money managers, however, the first and foremost
decision is the "currency" (or country) in which to invest. This decision
requires the assessment of international economies and monetary matters,
as well as political stability.
Currency of denomination is central to the international portfolio manage
ment process. Floating rates have added an entirely new dimension to invest
ment risk-taking. A dramatic example of the importance of currency occurred
when floating rates came into effect. At that time, a number of British portfolio
managers had borrowed Swiss francs to purchase U.S. securities.
to the pound, the franc went up and the dollar went down while the U.S.
stock market dropped, resulting in compounding losses for the investors.
An investor can see his market, industry and stock decisions all produce
Borrowing was made necessary because of U.K. exchange controls. Switzerland was one of the few countries where such borrowing was possible. Moreover, interest rates in Switzerland were relatively low.
net gains, but have these gains wiped out by currency fluctuations.
Indeed investors can tolerate decisions which produce capital losses,
so long as they don't produce substantial currency losses. Investors
"flee" from currencies they expect to weaken and "chase" those they
believe are going to strengthen.
In the past fifty years, Western Europeans have seen their invest
ments in the USSR, Europe, Asia, and more recently, in parts of Africa,
almost totally disappear. They have experienced revolutions, expro
priations, dictatorships, wars, inflation and depression to an extent
that is virtually impossible for most Americans to comprehend.
The U.S. is popular with foreign portfolio managers in large measure
because of its relative political stability. Perhaps surprisingly, the
Watergate episode was viewed by many foreign investors as a dramatic
display of the political stability of the U.S.
One investor interviewed said, "The U.S. is the only major capitalistic
country where the profit motive has not been seriously damaged." Others
note that there is little danger of confiscation in the U.S., less "leftward
drift" and "it is still a large and growing economy." One Canadian
investor stated that a "well-run U.S. portfolio should outperform a well
run Canadian portfolio---the opportunities are better." An investor
in Hong Kong said, "The U.S. is self-sufficient and could withstand a deep
worldwide recession better (than other major countries in the free world)."
An Italian banker commented, "The U.S. is the only major country where
workers can be laid off. Governments in Europe seek 100% employment,
thereby perpetuating rising costs and inflation." According to a Swiss
banker, "In the U.S., even the unions are committed to capitalism."
The Size and Liquidity of the U.S. Capital Markets
From the viewpoint of a foreign portfolio managers, 60% to 70% of the
total investment opportunity in the free world is in the U.S. Consequently,
the U.S. markets must be considered on the basis of sheer size. In the words
of one financier, "If you talk about portfolio investments, a big international
investor has no alternative except to put a sizable amount into the U.S."
A Swiss banker says, "Switzerland is small and is forced to look abroad for
investment opportunities." Another notes that a $2 million trade for the stock
of a large European firm might take 3-4 weeks to make in European markets
without unduly influencing the price, whereas a comparable trade in the
U.S. for a security of comparable capitalization could normally be executed
Organization and Regulation of U.S. Capital Markets
During many interviews investors cited the regulation of the U.S.
securities markets as a strong attraction to foreign investment. Other
investors noted that the U.S. markets are better organized; that is, the
mechanisms for initiating and concluding a trade are more systematic
settlement for equities occurs five days after trade date, specialists act
Many foreign portfolio managers invest in the U.S. to participate in
industries that simply don't exist locally. From the standpoint of major
portfolio investors, there are only 5 or 6 really sizable companies in
Belgium or Holland, and only 15 or 20 in Germany. By contrast, hundreds
of major corportions are publicly traded in the U.S.
Most high technology industries, such as computer, communications, and
aerospace, are concentrated in the U.S. Therefore, investments in such
industries tend to be in U.S. companies. Foreign investors are also attracted
to the natural resources of the U.S., such as oil, gas and timber. Finally,
in some foreign countries, the choice of issues is limited because the local
government is in charge of many sectors of economic activity; hence, to
invest in airlines, railroads or even utilities, it may be necessary to
invest abroad. The U.S. markets are also unique in offering a large
variety of such instruments as warrants, options, rights and convert
ible debentures. As one financier put it, "If you are a non-U.S. person
and you have money, you will find the opportunities to invest locally
are very limited. The U.S. has a large menu--there are many dishes."
7. U.S. Securities Are Often "Sold" As Well As "Bought"
In general, foreign investors feel they incurred significant losses in
the late 60's and early 70's on the basis of recommendations by salesman
for U.S. broker/dealers and mutual funds. These investors continue,
nonetheless, to purchase U.S. securities through U.S. firms in which
they have confidence. More often than not, the broker/dealers that now
enjoy this confidence are not salesmen per se; they are more likely to be
analysts, economists, or investment managers. However, they are also,
in the broadest sense of the word, excellent salesmen for U.S. securities.
While foreign investors claim they attach little importance to "salesmanship,"
U.S. brokers in general are reputed to be better salesmen than the European
banks (many of which are also the leading brokers).