88 TABULATION OF RESPONSES TO THE QUESTION "DO YOU AGREE THAT THE FOLLOWING FACTORS ARE IMPORTANT CONSIDERATIONS AFFECTING THE CHOICE OF A U.S. BROKER/INTERMEDIARY?' (Responses of International Portfolio Managers in Europe and Japan) 1. Execution Expertise 100 60 2. Investment Research Capability To a greater extent than their U.S. counterparts, most foreign portfolio managers pay for securities research with so-called "soft" dollars. This means that the manager agrees to place a certain volume of business with the broker in exchange for access to the firm's research capability. Frequently, the commissions to be given to the U.S. broker in exchange for such services are determined in advance for the next year. For example, a foreign portfolio investor may agree to pay a U.S. brokerage firm $25,000 in commissions during 1976 in exchange for economic and research advice. These agreements are seldom, if ever, in writing. During periods of relatively inactive markets, a portfolio investor may "fall behind" his agreed-upon quota. In the latter part of 1975 one foreign banker stated that he was "two years behind" in meeting his obligations. When volume increases, the number of commission dollars available may exceed the commitments, and the foreign investor will then "get ahead" of the broker. The complexity of these arrangements has caused most foreign institutional portfolio managers to use the services of a relatively small number of U.S. brokers. Four to eight at one time appears to be the present norm compared with 20 or 30 during the late 1960's. In addition, the recent concentration of security analysts into fewer firms has further reduced the universe of brokers handling foreign accounts. Since almost all foreign investors are dependent on U.S. brokers for research and other information on U.S. companies, the foreign investors are not as "commission conscious" as their U.S. counterparts. While they expect a reduction from the fixed rates of pre-May 1, 1975, most indicated that they do not seek the lowest possible cost. None of those interviewed said they did any business with U.S. brokers offering only execution services at the lowest rates. "Where else would I get research?", was a typical remark. Some foreign investors also expressed concern that the competitive commission structure would result in a significant reduction in the amount of investment research that U.S. brokers provide; their comments reflect their dependence upon U.S. brokers for such information. One recent development in the selection of U.S. brokers was noted by several foreigners. Said one, "We now follow the peregrinations of the individual analyst rather than sticking with his firm." Mechanisms for Option Investments Foreign portfolio investors are increasing their investment in options on the Chicago Board of Options Exchange (CBOE) and other U.S. exchanges. The mechanisms for option investments are similar to those for equity investments. For the most part, institutional investors are sellers of call options against a portion of their portfolio rather than buyers of calls for appreciation. Mechanisms for Debt Investments Eurodollar bonds are typically used by foreign portfolio managers to acquire debt obligations of U.S. companies. The mechanism normally used is for the foreign bank to join the underwriting group, if possible, and then to sell to his accounts directly. Less frequently, the foreign portfolio manager will purchase these securities from U.S. or foreign underwriters of these issues. Few foreign investors purchase domestically issued U.S. corporate debt obligations. However, some Canadian and U.K. insurance companies maintain a portfolio expert in the United States to effect participation in original underwritings. SECTION VI HOW FOREIGN INVESTORS OBTAIN INFORMATION TO AID IN DECISIONS ABOUT U.S. INVESTMENTS In general, there are six major sources of information for foreign portfolio investors. These sources include: U.S. broker/dealers U.S. subsidiaries of foreign financial institutions Federal government statistics and reports on the overall economy The financial press Company reports (annual and quarterly) Visits with U.S. companies and institutional investors Relationships among foreign financial institutions, U.S. brokerage firms, U.S. subsidiaries of foreign financial institutions, and other U.S. financial institutions are well established. Some foreign financial institutions have been investing in the United States for decades, or even a hundred years and more. Although foreign institutions execute a majority of their transactions in American securities on U.S. stock exchanges (primarily the New York Stock Exchange), 49 |