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dollar was first devalued, some investors in U.S. securities had used
low-interest loans of Swiss francs to buy the securities. They lost
in the market as well as on both currency transactions. Some of the
so-called "loan funds", which promoted such investments, are said
to have disappeared altogether.
A French banker stated "the real difficulty for a French investor
to put money abroad is the fact that we have to think of the stock, the
industry, the country, and now the currency. This didn't exist a few
years ago. Floating currency has added to the risk and therefore re
duced foreign portfolio investment [relative to what it might otherwise
A German banker said his organization required the potential for
growth in the value of a stock to be at least three times the potential
downside currency risk, or he would not recommend it.
Most portfolio managers assert they are not in the business of
making money on currency speculation. To the extent practicable (or
permitted by local rules), some managers actually buy U.S. stocks and
sell a comparable sum of dollars forward in order to hedge against any
short-term currency fluctuation. Currency speculation is impossible
to avoid altogether, however, and is in fact actively pursued by some
A British financier made the interesting comment that he might
choose a "national" over a "multi-national" U.S. oil company just to
maintain better control over currency diversification. The point
here, presumably, is that he at least knows he is investing in dollars
with the national company, whereas the currency exposure of multi
nationals is extremely difficult to assess.
The short and long-term economic outlook of potential investee
countries. Federal Reserve credit policy is widely believed to have a
significant and direct impact on security prices in general. Therefore,
the projected "money supply" is of special interest to investors in the
Economic projections can also influence portfolio composition as
well as level of investment. For example, some investors stated that
as the U.S. economy began to recover, this recovery would be re
flected first in retail trade stocks.
Yields, maturities and liquidity of secondary markets for
debt securities. Most of the U.S. corporation bonds which have been
purchased by foreigners have been those issued in the Euro-market.
This market lacks the disclosure protection of internal U.S. issues, and also lacks a seasoned secondary market. However, its advantages in
clude no withholding tax on interest, and a tendency to offer higher rates
of return and relatively short maturities (5 to 15 years). Many of the
foreign investors said that if the withholding tax on interest payments
were repealed, much of their investment in Eurodollar offerings would
be directed into U.S. domestic bonds. The main reason given was the
better secondary market. One investor said that the better market
ability was worth 10 to 25 basis points in yield. Some said that if
they traded in the domestic market, they might lengthen their maturity
schedules somewhat. One banker noted that for the same effective
yield, "we would buy a 25 General Electric domestic bond rather than
an 8 year Eurodollar Canadian utility." Not all agreed on this point,
however. A Swiss banker said, "We don't conceive of lending money
to anybody for more than ten years. We have seen too much political
instability to have that kind of foresight."
Any significant change in Governmental requirements for
disclosure of beneficial ownership. Corporate pension and trust
funds (investment trusts and unit trusts) are not sensitive to disclosure
of beneficial ownership. By and large, private investors in Canada,
100 basis points equals one per cent.
the U.K., and Japan are also indifferent to this subject. Many private
investors elsewhere in the free world, however, insist upon privacy.
Many of the financiers interviewed said that any significant U.S.
regulatory change requiring increased disclosure of beneficial owner
ship would unquestionably shift large quantities of portfolio capital
out of the U.S. Tax considerations are rarely at issue when the question
of disclosure is involved. Some investors, in fact, will actually pay
additional taxes to preserve their anonymity. (This occurs when a
beneficial owner is domiciled in a country with a low treaty rate and
has his portfolio managed, for example, by a Swiss bank. In order to
qualify for the lower tax treatment, the bank would have to certify the
nationality of the client. The client may decline to certify his nation
ality and pay at the higher rate, if he is sensative about disclosure,
even though the risk of disclosure is small.)
The motivation for privacy may be literally a matter of life or
death to some. This is especially true for private investors in South
America and Southeast Asia. An advisor to wealthy Chinese individuals
made the following statement: "The Chinese in Southeast Asia live in
countries where they are not part of the native population. Indonesia,
Malaysia, Thailand and South Korea, for example, all have laws that
are basically anti-Chinese. The Chinese are worried that governments
may change rapidly. They don't want their families to contribute to
social welfare by forced repatriation of their money. If U.S. disclosure
laws are broadened, we would have to advise them not to invest in the
A foreign investor can use an intermediary such as a Swiss bank
to help keep his identity undisclosed. However, U.S. actions which pro
mote the use of such intermediaries tend to reduce foreign investment
in the U.S. relative to what it would have been if the investor had used
a U.S. bank. Whereas a U.S. bank will typically invest all trust assets
in the U.S., the Swiss bank today will place only 20-40% in the U.S.*
Private investors are not alone in being sensitive to disclosure.
Some governmental investors are, also. A U.S. bankers said the OPEC
countries, for example, "don't want some fourth world country to say
to them, 'would you plese lend us X billion of dollars; we know you
just invested Y billion in U.S. securities.''
Clearly, an individual investor could instruct the institution where to invest; but even without discretionary investment authority, the institution's recommendations are likely to be considered. Swiss institutions in particular tend to recommend international diversification of investment funds.