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 reduced foreign portfolio investment [relative to what it might otherwise have been]." 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 investors. 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 multinationals 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 U.S. 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 include 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 marketability 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 ownership 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 nationality 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 U.S." A foreign investor can use an intermediary such as a Swiss bank to help keep his identity undisclosed. However, U.S. actions which promote 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 Some governmental investors are, also. AU.S. bankers said the OPEC * 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. |