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 underwriting or sponsoring the listing of a U.S. security on the Tokyo exchange). 8. The Greater Efficiency of the U.S. Markets 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 required 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 as efficient as the U.S. markets.) 9. Additional Reasons 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 earthquake 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 increased 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 because 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 28 consideration in the investment decision process. However, because of their remoteness to the U.S. financial markets and the poor investment 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 increased attention. Now, for some investors, the currency of denomination has become the most important factor. For example, at the time the |