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the issues in this report have been tested at a particular moment in time on the

strength of personal opinions---albeit opinions of some of the most knowledgeable

people engaged in international investment today.

The major issues covered in this inquiry include the following:

Why do foreign investors make portfolio investments

in the U.S.?

What factors influence the level and composition of

such investments?

By what mechanisms do these foreign investors make

their investments?

How do they obtain the necessary information for

investment decision-making?

What effect does the foreign portfolio investor have

on U.S. capital markets?

What relationships exist between portfolio and direct


In what ways do U.S. portfolio investments abroad

differ from foreign portfolio investments in this country?

The most important conclusions in connection with each of these issues are sum

marized below.

The desire for international diversification of portfolios is probably the major

motive for foreign portfolio investment in the U.S. This process by itself assists

investors in achieving other principal objectives such as preservation of capital

and long-term capital growth. The U.S. is also viewed as being politically

stable and committed to capitalism. The U.S. enjoys a reputation for not treating

the capital wealth of foreigners capriciously. Finally, the U.S. capital markets

represent approximately two-thirds of the total opportunity for private invest

ment in securities in the free world; the sheer size of the U.S. markets, their

extensive liquidity, and wide range of investment choices are compelling reasons

why international investors of consequence cannot overlook the U.S.

The level of investment in the U.S. by foreign money managers is determined

by their views about relative political stability, predicted outlooks for national

economies and their capital markets, and dividends and interest rates on

securities. Significant changes in either the U.S. laws relating to beneficial

ownership or withholding tax on interest and dividends could also influence

investment levels significantly. Decisions pertaining to portfolio composition

relate primarily to the prospects of economic growth for specific industries and

companies within industries. The liquidity of individual stocks and the extent to

which specific companies are known also influence composition.

To execute transactions, foreign portfolio investors use essentially the same

channels as U.S. institutions. In order of importance, they use the New York

and American Stock Exchanges, regional exchanges, the over-the-counter market

and foreign exchanges that list U.S. securities. For the most part, foreign

institutions use U.S. brokers to execute trades. To save on commissions (among

other reasons), many foreign financial institutions have formed U.S. subsidiaries

which are allowed membership on regional U.S. exchanges.

In addition to their own subsidiaries and a small number of selected U.S.

brokers, foreign investors rely upon Federal publications, the financial press

and company visits and financial reports for information. Foreign investors

have access to virtually the same information as their U.S. counterparts; they

feel, nonetheless, that all too often they learn about significant events too late.

The liquidity of U.S. markets is doubtless enhanced by the presence of

the foreign portfolio investor. Whereas these investors are by and large seeking

long-term capital growth, they no longer hesitate to take short term profits, and

therefore probably add to market volatility (price fluctuations) as well.

The characteristics which make a portfolio investment attractive are, in many

important respects, the opposites of characteristics sought for in direct invest

ments. The portfolio investor wants liquidity, safety and freedom from re

strictions of sale. He wants no management responsibility or complex legalities

associated with his investments. He often takes special precautions to monitor

his total percentage holdings of outstanding shares in a given company, and may

establish maximum limits of 1% or 2%, usually well below the maximums prescribed

by U.S. law for public disclosure. With rare and extraordinary exceptions, foreign

portfolio investors do not seek control of U.S. companies or knowingly violate

pertinent U.S. securities laws.

U.S. portfolio managers make only limited investments abroad, for many of

the same reasons that compel foreign portfolio investors to invest in the U.S. In

general, the opportunities at home are satisfactory to most U.S. institutional money

managers today. However, a few U.S. institutions have begun to make small

portfolio investments abroad. Their reasons include: (a) to take advantage of

the different cycles in different markets, achieving satisfactory return on invest

ment at lower risk; and (b) to participate in markets that have higher rates of

growth or higher yields than U.S. markets. Consequently, U.S. investors in

foreign stocks are generally more concerned with which foreign markets they

are investing in rather than particular stocks or industries. Specialized

situations have resulted in exceptions in the past, such as the investment in

gold stocks during the 1960's. In addition, significant U.S. portfolio investments

abroad are in bonds, particularly those of Canada and international institutions

(e.g., the International Bank for Reconstruction and Development, known as

the World Bank), originally sold in the U.S. by the borrowers.

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