« PreviousContinue »
In addition, U.S. corporate executives travel abroad regularly to address
investor groups. One British banker estimated there might be a luncheon
each working day in London where investors and analysts could listen to
an executive from a U.S. company.
Foreign investors are also "sold" U.S. securities by their own local
brokers. A Japanese firm sponsored, over a period of time, a 3-week tour
of the U.S. for over a hundred Japanese securities salesmen; with a discipline
that is somewhat unique to Japan, they have successfully promoted the sales
of a U.S. security when desired (such as when participating in an under
writing or sponsoring the listing of a U.S. security on the Tokyo exchange).
Some investors view the efficiency of the U.S. markets as a reason for
not investing in the U.S.; most, however, consider efficiency to be a
positive factor. The former say they can only make good profits on markets
where manipulation is common. The latter say that the full disclosure re
quired of accounting information in the U.S. provides a broader knowledge
of the companies in which to invest. By contrast, companies that are listed
Efficient markets are markets where information is widely available and almost instantaneously reflected in the prices of stocks. This means that even inside information is no guarantee of consistent returns in excess of those earned by the market as a whole. In theory, in an efficient market, it is not possible to predict future prices on the basis of historical information.
on foreign markets provide very limited information. The information that
is provided is often poorly presented, incomplete or even manipulated. In
a broad comment intended to cover commissions and the cost of gathering
information, among others, a U.S. banker stated, "Historically, the U.S.
capital market has provided the overall lowest cost (to purchase financial
assets). We should take care not to lose the mechanism." A British banker
says, "The continental markets are highly suspect." (Most international
investors interviewed believe the Tokyo and London markets are almost
In addition to those listed above, there are many other reasons why
foreign portfolio managers invest in the U.S. In certain areas, investments
are made in the U.S. because children of the beneficial owners are being
educated and/or are otherwise living in the U.S.; the traditionally close
ties of Chinese families in Hong Kong, for example (where 30% of the high
school students are said to graduate abroad, primarily in the U.S. and
Canada) are thus partially responsible for inward investments in the
At the end of 1970, Japan had a huge trade surplus, and the Minister
of Finance strongly encouraged foreign investments. Until the oil crisis
in 1973, Japanese investors were active all over the world, especially in
the U.S. One Japanese broker said that speculation about a great earth
quake in Japan within the next 10 to 20 years has even caused some outward
The introduction of price controls in Canada apparently has led to in
creased foreign holdings (primarily in the U.S.) of many Canadian portfolios.
Finally, at times of serious political crises in the free world, large sums
of money have typically flowed from that area into Swiss (primarily) and U.S.
banks and thence, in all probability, into U.S. securities to varying degrees.
FACTORS AFFECTING THE LEVEL AND COMPOSITION
This section discusses the many factors influencing the level and composition
of foreign portfolio investments in the U.S.
These factors are constantly changing
in relative importance; moveover, each portfolio manager establishes his own
subjective weights for applying them in specific investment situations.
The factors can be classified into two general groups; those which affect
primarily (1) the level of investment, and (2) the investment vehicle and industry
composition of the portfolio.
The following factors primarily affect the level of investment in a
given country. When deciding how much to invest in each market,
the investor compares these factors for different potential investee
An assessment of the long-term political stability of each
major investee country. Much of the portfolio capital that has been
invested in the U.S. recently is said to have been moved here be
cause of this factor. The point is not that the U.S. has become more
stable, but that certain other countries have become less stable.
The relative levels and trends predicted for the major
capital markets in the free world. "Market timing" is considered
by some international portfolio managers to be the most important
consideration in the investment decision process. However, because
of their remoteness to the U.S. financial markets and the poor invest
ment performance experienced during the 1969-70 period, many
foreign investors today are not trying to participate in market swings,
but rather are seeking companies with good balance sheets that are
"relatively less sensitive to market timing."
Changes in the exchange rates between currencies. Changes
in currency exchange rates affect levels of investment by altering the
investor's perception of the long-term economic stability and prospects
of a given country. The anticipation of changes in exchange rates can
cause short term shifts in investment funds, both into the strengthening
currency, and out of the weakening one. Moreover, currency fluctuations
add risk to the international investment decision; some investors may
choose to avoid such risks by investing locally.
Exchange rate fluctuations before 1971, while important, were
relatively infrequent because they required governmental action.
Since 1971, when rates began to "float," this factor has received in
creased attention. Now, for some investors, the currency of denomination
has become the most important factor. For example, at the time the