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3.

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

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managers had borrowed Swiss francs to purchase U.S. securities.

Relative

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.

"I 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."

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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

in hours.

5. 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

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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

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ible debentures. As one financier put it, "If you are a non-U.S. person

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and you have money, you will find the opportunities to invest locally

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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

or 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).

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