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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).

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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

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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

U.S.

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

international diversification.

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.

SECTION IV

FACTORS AFFECTING THE LEVEL AND COMPOSITION
OF FOREIGN PORTFOLIO INVESTMENTS IN THE U.S.

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.

1.

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

countries.

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

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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

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