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The interviews combined the benefits of both unstructured and structured

techniques. For the most part, the interviews were unstructured and notes

were edited and organized for the final report. The structured portion of the

interviews consisted of two questionnaires to which most interviewees were

asked to respond; one questionnaire asked foreign portfolio managers to assess

the relative importance of 15 different factors influencing foreign portfolio in

vestment (see Section III); the second questionnaire assessed the relative

importance of 8 considerations affecting the choice of a U.S. broker or other

intermediary (see Section V).

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The most notable characteristic of foreign portfolio investment in the U.S.

is its relatively recent rapid growth. From the end of World War II until 1957,

there was very little foreign portfolio investment activity in the U.S. because

of the tremendous post-war need for internal capital, and the consequent exchange

controls that limited investment abroad by residents of most major countries.

However, as exchange controls were eased and savings began to accumulate,

mutual funds sold in Europe but invested in U.S. securities gained a foothold.

U.S. brokers claim that the first substantial movement of portfolio capital

into the U.S. since World War II began in the early 1960's. From 1955-1965,

See text of questionnaires in Appendix A.

various tax treaties were signed which reduced U.S. taxes on interest and

dividends for foreign investors in many countries; this may have led to in

creased portfolio investment flows from those countries that had no offsetting

tax.

In 1968, net foreign investment in U.S. securities was sizable for the first

time since World War II. Typically, foreign investment strategies were said

to be similar to those prevailing in the U.S. at that time; i.e., highly per

formance-oriented. The market drop of 1969-70 stemmed the flood. In addition,

while technically not involving a U.S. mutual fund, the 10S/Cornfeld debacle

brought U.S. mutual fund business overseas to a standstill.

Many financiers believe the devaluations of the dollar, first in 1971, and

again in 1973, had a dramatic impact on the attitudes of foreign investors.

Some foreign investors, for example, claim to have slowed or reversed invest

ment flows to the U.S. in anticipation of devaluations. More recently (especially

during 1975) they claim to have increased their level of investing in the U.S.

to take advantage of "bargains" on the assumption that the U.S. dollar had

dropped too far and would soon recover. (Of course, these comments are

subjective and not readily susceptible to quantification. For complete analysis

of the subject in terms of both gross and net investment, one would also have

to compare foreign actions with those taken by U.S. investors during the

same period.)

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For the period 1969-1974, foreign investors' net purchases of U.S. stocks

averaged approximately $1.5 billion per year, reaching a peak of $2.8 billion

in 1973. After a sharp drop in the bear market of 1974, this figure soared to

$ 4.4 billion in 1975. At the same time foreign portfolio managers have been

investing heavily in the U.S., there has been a simultaneous flow of U.S.

money into foreign assets, mainly in the form of direct investment and purchases

of foreign and international bond issues. Those interviewed believed that the

dramatic increase in foreign investment has been due in part to the belief that

the world is entering a period of comparative stability in international currencies.

Other factors cited include the relative degree of political stability, lower in

flation rates, and the long-term growth prospects of the free world's security

markets.

Roughly a third of the total portfolio investment opportunity in the free world

is outside the U.S.; two-thirds is inside. Clearly, the portfolio managers of the

world, both foreign and domestic, have the power to shift many billions of

portfolio capital either into or out of the U.S. The remainder of this report

reviews their objectives as well as the procedures followed, the constraints

imposed, and other important influences on the process of foreign portfolio

investment in the U.S.

SECTION II

SUMMARY

International portfolio managers behave differently from one country to the

next. In some cases, such differences are mandated by law; in other cases,

the differences simply reflect different historical backgrounds, cultural dif

ferences, and attitudinal differences. Figure 1 summarizes the most relevant

features of those countries responsible for a large percentage of total foreign

portfolio capital flows into the U.S.

The summary suggests two points that

underlie this entire subject.

1.

Portfolio capital enters the U.S. for different reasons and in

varying amounts because of fundamental differences between

investing countries.

2. Many

the most significant characteristics are changing all

the time; sometimes quite abruptly and visibly as in the case

of laws pertaining to currency controls and exchange rates;

sometimes slowly and imperceptibly as in the case of

attitudes.

This section highlights the most significant of these factors. As mentioned

previously, the results of this study are based primarily upon interviews

in the fall of 1975 with financiers throughout the free world. In other words,

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BELGIUM

Very limited variety of local issues from which to choose.
Investors tend to be more oriented toward income (e.g., via bonds) then toward
long-term capital growth.

NETHERLANDS

A limited variety of domestic corporations in which to invest.
Formerly a trading country with centuries of experience in international
investment,

CANADA

Closeness to U.S., in terms of distance, language and culture dominates interational investment picture.

FRANCE

Limitations on foreign investment imposed largely by strong central government,
Pension funds, for example, allowed to invest only a small portion in foreign
common stocks,
Much of the private wealth invested internationally is managed by Swiss banks.

MIDDLE EAST OIL PRODUCING COUNTRIES (As viewed by U.S. and European intermedicries)

Wealth of major families ranges from $50-$500 million each.
Private and government funds are often intermixed. Much investment in local
projects; often through joint ventures with foreign corporations.
Tend to be secretive; prefer that transactions take place outside of the Middle East.
Fear of invasions, government shifts, has moved money out of the Middle East.
Governments in particular show no propensity to contio! portfolio investments.
Iron has established an official guidelire to ensure that exported capital is viewed
as friendly capital.
"If they want to take over the U.S., it will not be via the secondary market.
Their investment would become hostages".
"Ar the present time, they are mainly conce med about interest rates ---they
buy few shares".

GERMANY

Has a wide selection of investment opportunities.
Little reason to invest outside except for unique industries and companies or
a desire for internationel diversification.

HONG-KONG

An almost totally open economy. Government acts as advisor to financial
institutions.
Very limited investment opportunities locally.
Real estate in Canada and U.S. of considerable interest.
Much of the wealth of Chinese families throughout Southeast Asia is managed
through Hong-Kong.

SWITZERLAND

The Swiss banks are the largest en trepôt for international portfolio funds.
Three reasons for using a Swiss bank---secrecy, tax avoidance (in local country) and
currency protection. Bank secrecy is protected by law, is much like a "doctor-patient
relationship".
The number of large Swiss companies to invest in is very limited; banks discuss with clients
the relative merits of investing in other countries.
Preservation of capital is probably of much greater importance to the customer of a
Swiss bank than income.

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Strict controls imposed on ou tward investments. Very little local management of investments in foreign countries; U.S. and Swiss intermediaries are used extensively.

UNITED KINGDOM

The British have been investing overseas for hundreds of years; they have excellent
investment management,
Private capital in England is trapped by exchange controls and to xation.
One legal mechanism for investing is to hypotheca te British securities and borrow abroad.
No outflow of currency results.

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JAPAN

After World War II, the U.S. "fashioned the Japanese financial system after our
own image".
99 of the 300 largest free-world corporations outside of North America are Japanese .
Government and business work closely together to set and achieve common goals.
The four or five wealthiest families each control similar financial organization which
include a banking corporation, a brokerage firm (and a U.S. subsidiary), an
insurance company and an investmen't trust. The investment trusts and insurance
companies are the major portfolio investors overseas.

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