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Portfolio Theory and Portfolio Theory and International Securities International Securities
MarketsMarkets
Short Review of Portfolio Theory Short Review of Portfolio Theory Diversification and GlobalizationDiversification and Globalization
22
The World Equity MarketThe World Equity Market World equity markets grew rapidly from 1992 World equity markets grew rapidly from 1992
to 2006 to 2006
Market capitalization (value) of developed Market capitalization (value) of developed countries stock markets was countries stock markets was $33$33 trillion at trillion at year end 1999. By year end 2002 it was year end 1999. By year end 2002 it was $20.9$20.9 trillion trillion
By 2005 the developed markets had By 2005 the developed markets had
recovered and their market capitalization recovered and their market capitalization reached reached $36.5$36.5 trillion trillion
33
The World Equity MarketThe World Equity Market
Markets fluctuate with economic activity Markets fluctuate with economic activity Over time markets recover with the economyOver time markets recover with the economy World markets had a strong recovery in 2003 World markets had a strong recovery in 2003
and continued into 2007.and continued into 2007. Developed world securities markets continue Developed world securities markets continue
to expandto expand Major growth also in the “emerging” marketsMajor growth also in the “emerging” markets
• Argentina - Brazil - China – Taiwan -- MexicoArgentina - Brazil - China – Taiwan -- Mexico
44
Emerging Markets ShareEmerging Markets Share2002 and 20052002 and 2005
20022002 2005 2005 Mideast and Africa Mideast and Africa 18%18% > 31% > 31% South Asia South Asia 12%12% > 14% > 14% East Asia East Asia 48%48% < 29% < 29% Eastern/Central Europe Eastern/Central Europe 7%7% > 11% > 11% Latin America Latin America 15%15% = 15% = 15%
55
Diversification BenefitsDiversification Benefits
Invest in foreign markets forInvest in foreign markets for diversificationdiversification Foreign markets do NOT move in harmony with each Foreign markets do NOT move in harmony with each
other other Diversified Diversified portfolio from many countries is less portfolio from many countries is less
volatile than domestic portfolio - could even have a volatile than domestic portfolio - could even have a higher rate of returnhigher rate of return
As the world markets become more global, returns between countries may become more harmonized.
66
Diversification Benefits Diversification Benefits cont.cont.
Correlation between the historical returns of Correlation between the historical returns of different countries is less than 1.0different countries is less than 1.0
Richard Roll: Most significant factor relating Richard Roll: Most significant factor relating to the size of the market decline in each to the size of the market decline in each
country was the beta, country was the beta, ββ,, of that market to of that market to the world market indexthe world market index
No country continually outperforms the No country continually outperforms the others on an annual basisothers on an annual basis
77
88
Panel APanel A Panel BPanel B Panel CPanel C
Perfectly Perfectly positivepositive
correlationcorrelation
returnsreturns
Perfect Perfect negative negative
correlationcorrelation
returnsreturns
Uncorrelated Uncorrelated returnsreturns
rri j i j = += +11
rri j i j = -= -11 rr
i j i j = = 0 0
As i increases in value, so does j in exact proportion to i
As i increases,
j decreases in exact proportion
to i
No correlationNo correlation
99
Developing an Efficient PortfolioDeveloping an Efficient Portfolio
Consider large number of portfolios based onConsider large number of portfolios based on Expected value Expected value Standard deviationStandard deviation Correlations between the individual securities Correlations between the individual securities A portfolio of 14 to 16 stocks is fully diversifiedA portfolio of 14 to 16 stocks is fully diversified Portfolio theory was developed by Professor Portfolio theory was developed by Professor
Harry Markowitz (1950s). Won the Nobel Harry Markowitz (1950s). Won the Nobel prize in 1990 for this workprize in 1990 for this work
1010
1111
Efficient Frontier LineEfficient Frontier Line
4 points out of 8 possibilities lie on the frontier4 points out of 8 possibilities lie on the frontier ACFH delineates the efficient set of portfolios ACFH delineates the efficient set of portfolios It is efficient because portfolios on this line It is efficient because portfolios on this line
dominate all other attainable portfoliosdominate all other attainable portfolios
ACFH line: ACFH line: efficient frontierefficient frontier because portfolios on it provide because portfolios on it provide
best risk-return trade-offbest risk-return trade-off
1212
1313
Risk Reduction with International SecuritiesRisk Reduction with International Securities
Risk Reduction with International Stocks
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1 11 21 31 41 51
Number of Securities in Portfolio
Sta
nd
ard
De
via
tio
n o
f P
ort
folio
Domestic Portfolio
International Portfolio
1414
Capital Asset Pricing Model (CAPM)Capital Asset Pricing Model (CAPM)
Professor Sharpe advancedProfessor Sharpe advanced
efficient portfoliosefficient portfolios toto
capital asset pricing modelcapital asset pricing model Assets value based on risk characteristicsAssets value based on risk characteristics CAPM takes off where efficient frontier stopsCAPM takes off where efficient frontier stops IntroduceIntroduce
• New investment outletNew investment outlet• Risk-free asset (Risk-free asset (RRFF))
1515
Risk-free (RF) AssetRisk-free (RF) Asset
Has no risk of defaultHas no risk of default Standard deviation of zero (-0-)Standard deviation of zero (-0-) Lowest/safest returnLowest/safest return
• U.S. Treasury bill U.S. Treasury bill
• U.S. Treasury bondU.S. Treasury bondZero risk
CAPM combines risk-free CAPM combines risk-free asset & efficient frontierasset & efficient frontier
1616
Capital Market Line (CML)Capital Market Line (CML)
RRFF MZ line MZ line capital market line (CML) capital market line (CML)
Formula for the capital market line Formula for the capital market line
PM
FMFP
RKRK
)(
KKpp = = Expected value of the portfolioExpected value of the portfolio
σσM M = Market standard deviation= Market standard deviation
RRF F = Risk-free rate= Risk-free rate
KKM M = Market rate of return= Market rate of return
σσPP = Portfolio standard deviation= Portfolio standard deviation
See next slide
1717
1818
Return on an Individual SecurityReturn on an Individual Security
KKi i = S= Stock return, dependent variable, Y-axistock return, dependent variable, Y-axis
aai i (alpha) = Line intersects vertical axis (alpha) = Line intersects vertical axis
bbi i (beta) = Slope of the line(beta) = Slope of the line
KKMM = M = Market return, independent variable, arket return, independent variable, X-axisX-axis
eei i = R= Random error termandom error term
aai i + + bbii KKMM : Straight line : Straight line
eeii = Deviations, nonrecurring movements = Deviations, nonrecurring movements
iMiii eKbaK
1919
BetaBeta Beta is a measure of Risk relative to a market index. In Beta is a measure of Risk relative to a market index. In
the U.S. it is usually measured over 60 months against the U.S. it is usually measured over 60 months against the broad Standard and Poor’s 500 Index.the broad Standard and Poor’s 500 Index.
BetaBeta Stock’s volatility & risk explanationStock’s volatility & risk explanation
1.21.2 20% more volatile – riskier than market20% more volatile – riskier than market
11 Average volatility – moves with marketAverage volatility – moves with market
<1<1 Less risk than the marketLess risk than the market
2020
Beginning Domestic PortfolioBeginning Domestic Portfolio
Beta Weight BB x W x W Ratings
Bank of America $100,000 0.93 10% 0.093 A-1-7
Chevron $100,000 0.87 10% 0.087 A-1-7
Cisco Systems $100,000 1.40 10% 0.140 B-2-9
Gap $100,000 0.98 10% 0.098 B-2-7
General Motors $100,000 1.15 10% 0.115 C-1-8
Johnson & Johnson $100,000 0.84 10% 0.084 B Morningstar
Lehman Bros Holdings $100,000 1.25 10% 0.125 B-2-7
Motorola $100,000 1.31 10% 0.131 C-2-7
Procter and Gamble $100,000 0.69 10% 0.069 A-1-7
Verizon $100,000 1.03 10% 0.103 B-1-7
$1,000,000 1.045 100% 1.045 Portfolio Beta
2121
Beginning Foreign PortfolioBeginning Foreign Portfolio
Netherlands ABN AMRO ABN 1.30 Hold Reuters
Hong Kong CNOOC CEO 0.76 B-1-7
China Semiconductor Mfg. SMI 1.27 C-2-9
Italy Bennetton Group BNG 0.66 B-2-7
Japan Honda HMC 0.84 B-2-7
Switzerland Novartis NVS 0.74 A-1-7
United Kingdom Barclays BCS 1.07 Buy Morningstar
Finland Nokia NOK 1.40 Hold Morningstar
Netherlands Unilever N.V. UN 0.74 A-2-7
Japan Nippon T & T NTT 0.87 B-2-7
Equal Weight Portfolio Beta = 0.965
2222
50% Domestic & 50% Foreign50% Domestic & 50% Foreign
Domestic Portfolio Beta = 1.059 50% x 1.059 = 0.5295
Foreign Portfolio Beta = 0.965 50% x 0.965 = 0.4825
PortfolioPortfolio BetaBeta 1.012
2323
The Best of Both WorldsThe Best of Both Worlds
Beta RatingRating
Bank of America 0.93 A-1-7
CNOOC 0.76 B-1-7
Cisco Systems 1.40 B-2-9
Bennetton Group 0.66 B-2-7
Honda 0.84 B-2-7
Novartis 0.74 A-1-7
Barclays 1.07 Buy Morningstar
Motorola 1.31 C-2-7
Procter and Gamble 0.69 A-1-7
Verizon 1.03 B-1-7
Equal Weight Portfolio BetaEqual Weight Portfolio Beta 0.943
2424
Correlation Coefficients Between Foreign Markets Correlation Coefficients Between Foreign Markets and U.S. Markets in $ Rates of Return and U.S. Markets in $ Rates of Return
1985-2003 2000-2005
Country Correlation Correlation
Australia 0.48 0.72
Canada 0.77 0.80
France 0.58 0.87
Germany 0.54 0.89
Italy 0.37 0.77
Japan 0.31 0.36
Netherlands 0.66 0.86
Spain 0.55 0.82
Switzerland 0.53 0.72
United Kingdom 0.64 0.82
AverageAverage 0.550.55 0.780.78
2525
Correlations of Total Return between U.S. MarketsCorrelations of Total Return between U.S. Markets and and Emerging Markets in U.S. Dollars 2000-2005 Emerging Markets in U.S. Dollars 2000-2005
Correlation Coefficients
Argentina 0.34
Brazil 0.72
Mexico 0.73
China 0.40
India 0.49
Taiwan 0.44
Russia 0.45
South Africa 0.39
2626
Return Potential in International MarketsReturn Potential in International Markets
International International diversificationdiversification
Less risk exposureLess risk exposure Possible higher returnsPossible higher returns
1.1. Several countries had long-term growth Several countries had long-term growth rates superior to U.S. in terms of real GDP:rates superior to U.S. in terms of real GDP:
• SingaporeSingapore • ChinaChina• NorwayNorway
++
2727
Returns in Developed Markets In U.S. $Returns in Developed Markets In U.S. $
2002 2003 2004 2005
United States -21.4% 31.9% 12.5% 6.6%
Japan -8.7 38.6 16.9 28.0
United Kingdom -14.2 34.2 21.3 9.1
France -18.6 42.8 20.8 11.9
Canada -10.8 56.7 24.7 28.6
Germany -29.9 65.2 16.9 11.4
Hong Kong -16.3 45.3 23.2 11.6
Spain -11.8 59.9 30.1 6.7
Switzerland -10.9 36.3 15.9 17.0
Italy -6.3 41.3 32.2 4.1
2828
5 Yr. Returns in Emerging Markets5 Yr. Returns in Emerging Markets in U.S. $ 2000-2005in U.S. $ 2000-2005
United States 3.12%
Japan 7.68%
United Kingdom 6.36%
France 6.00%
Canada 14.60%
Germany 6.60%
Hong Kong 8.40%
Spain 13.20%
Switzerland 6.00%
Italy 7.68%
2929
Return Potential in International MarketsReturn Potential in International Markets
2.2. Many countries are highly competitive in Many countries are highly competitive in automobiles, steel, & consumer electronicsautomobiles, steel, & consumer electronics
Capital formation and Capital formation and potential investment opportunitypotential investment opportunity
Germany Germany JapanJapan FranceFrance CanadaCanada
3.3.Enjoy higher Enjoy higher
individual individual savings rates savings rates
than U.S.than U.S.
3030
Annualized rates of return of world Annualized rates of return of world indexes over 32-yr. period 1969-2001indexes over 32-yr. period 1969-2001
3131
Current Quotations on Foreign Current Quotations on Foreign Market PerformanceMarket Performance
Track performance of selected world marketsTrack performance of selected world markets
1st index EAFE =Europe, Australia, FarEast1st index EAFE =Europe, Australia, FarEast Quotes are in local currencies & in U.S. $Quotes are in local currencies & in U.S. $ U.S. investors compare returns in U.S. U.S. investors compare returns in U.S.
against an investment in U.S. stock marketagainst an investment in U.S. stock market
Instructions to navigate msci website: on Power Point Instructions to navigate msci website: on Power Point tool bar click tool bar click ViewView, choose , choose Notes PageNotes Page
www.msci.com
3232
Other Market DifferencesOther Market Differences
CultureCulture Willingness to take riskWillingness to take risk Desire for dividend income versus growth in Desire for dividend income versus growth in
share valueshare value Number & type of companies available to Number & type of companies available to
stockholdersstockholders Bureaucratic differences Bureaucratic differences
3333
Other Market Differences cont.Other Market Differences cont.
Accounting conventions Accounting conventions Government regulation of marketsGovernment regulation of markets Problem with comparing P/E ratios: Problem with comparing P/E ratios:
Earnings calculated differently according Earnings calculated differently according to local or regional accountingto local or regional accounting
3434
Currency Fluctuations and Currency Fluctuations and Rates of ReturnRates of Return
Tracking foreign markets requires Tracking foreign markets requires adjustmentsadjustments
Reported returns adjusted for Reported returns adjusted for foreign currency effectsforeign currency effects How important is the foreign currency effect How important is the foreign currency effect
in relation to overall return performance in in relation to overall return performance in foreign currency? foreign currency?
Do foreign exchanges overpower actual Do foreign exchanges overpower actual return on investments in foreign countries?return on investments in foreign countries?
3535
Currency Fluctuations and Currency Fluctuations and Rates of ReturnRates of Return
Foreign currency effect is about 10 to 20% Foreign currency effect is about 10 to 20% as significant as the actual return as significant as the actual return performance in the foreign currencyperformance in the foreign currency
If dollar is rising/falling rapidly over a short If dollar is rising/falling rapidly over a short period the impact can be much greaterperiod the impact can be much greater
3636
Currency Fluctuations and Currency Fluctuations and Rates of Return Rates of Return
Investment in Switzerland: 10% return CHF declines by 5% against U.S. $ CHF profits are worth less in $Gain on investment: 110% (Investment with 10% profit) Adjusted value of CHF relative to U.S. $ = 0.95 =1.00 - 0.05 decline in currency 104.5% (= 110 x 0.95) of original investment Actual return in U.S. $ 4.5% instead of 10%
Swiss franc = CHF
3737
Currency Fluctuations and Currency Fluctuations and Rates of ReturnRates of Return
Examine currency effects in Sweden YTDExamine currency effects in Sweden YTD Return in local currency 4.58% (3Return in local currency 4.58% (3rdrd column) column) Return in U.S. $............. 6.31% (7Return in U.S. $............. 6.31% (7thth column) column) Change in $/SEK made a positive return in Change in $/SEK made a positive return in
kronor become a negative return in U.S. $kronor become a negative return in U.S. $
Swedish currency Krona (pl. Kronor) symbol SEK
See Table 19-8 next 2 slide
3838
Currency Fluctuations and Currency Fluctuations and Rates of ReturnRates of Return
Computed returns:Computed returns: 104.58% (Investment with 4.58% profit)104.58% (Investment with 4.58% profit) (Adjusted value of the SEK to U.S. $)(Adjusted value of the SEK to U.S. $)
0.896 (1.000 - 0.104 decline in currency)0.896 (1.000 - 0.104 decline in currency) 93.7% (= 104.58 x 0.896) 93.7% (= 104.58 x 0.896) of original of original
investmentinvestment
See Table 19-8 next slide
3939
4040
Other Obstacles to International Other Obstacles to International InvestmentsInvestments
Political RisksPolitical Risks Tax ProblemsTax Problems Lack of Market EfficiencyLack of Market Efficiency Administrative ProblemsAdministrative Problems Information ProblemsInformation Problems CorruptionCorruption
4141
Political RisksPolitical Risks
Danger of nationalization of foreign firms Danger of nationalization of foreign firms Restriction of capital flows to investorsRestriction of capital flows to investors Violent overthrow of political party in power Violent overthrow of political party in power Not meeting their foreign debt obligations Not meeting their foreign debt obligations Check the political/economic climateCheck the political/economic climate
4242
Tax ProblemsTax Problems Foreign countries may impose 15 to 30% Foreign countries may impose 15 to 30%
withholding tax against dividends or interest withholding tax against dividends or interest paid to nonresidentspaid to nonresidents
Tax-exempt Tax-exempt U.S. investors can secure U.S. investors can secure exemption or rebate exemption or rebate
Taxable U.S. investors can claim a U.S. tax Taxable U.S. investors can claim a U.S. tax credit for taxes paid in foreign countriescredit for taxes paid in foreign countries
Inconvenience rather than loss of fundsInconvenience rather than loss of funds
4343
Lack of Market EfficiencyLack of Market Efficiency
U.S. capital markets the most liquid & U.S. capital markets the most liquid & efficient in the worldefficient in the world
Investors accustomed to trading on NYSE will Investors accustomed to trading on NYSE will find it difficult to adjust to foreign marketsfind it difficult to adjust to foreign markets
Larger spread between bid (sell) & ask (buy) Larger spread between bid (sell) & ask (buy) priceprice
Difficulty executing large transaction Difficulty executing large transaction Higher commission rates Higher commission rates
4444
Elkins/McSherry Global Universe of Elkins/McSherry Global Universe of Transaction Costs Developed MarketsTransaction Costs Developed Markets
4 factors: price, commission, fees, mkt impact4 factors: price, commission, fees, mkt impactTotal Cost
United States, NYSE 20.14 BP
Japan 21.39 BP
United Kingdom (sells) 25.78 BP
United Kingdom (buys) 73.77 BP
France 25.77 BP
Canada 32.51 BP
Germany 23.20 BP
Hong Kong 41.71 BP
Spain 28.37 BP
Switzerland 30.38 BP
Italy 30.65 BP
4545
Market Capitalization of Developed WorldMarket Capitalization of Developed WorldMarkets (Year end 2005) in billions of U.S.Markets (Year end 2005) in billions of U.S.
United States $16,997
Japan $4,736
United Kingdom $3,058
France $1,710
Canada $1,480
Germany $1,221
Hong Kong $1,006
Spain $960
Switzerland $938
Italy $798
4646
Market Capitalization of The Largest EmergingMarket Capitalization of The Largest EmergingMarkets (year end 2005) in billions of U.S.Markets (year end 2005) in billions of U.S.
China $780
S. Korea $718
Saudi Arabia $646
South Africa $565
India $553
Russia $548
Taiwan $485
Brazil $474
4747
Market Capitalization of the ThreeMarket Capitalization of the ThreeLargest U.S. Companies in billions U.S.$Largest U.S. Companies in billions U.S.$
Exxon $446
General Electric $361
Microsoft $280
$1,087
4848
Automobile Industry Capitalization in Billions of Automobile Industry Capitalization in Billions of U.S.$U.S.$
Capitalization
Toyota $220
Honda $124
Daimler Chrysler $85
General Motors $18
Ford $15
4949
Oil Industry Capitalization in Billions of U.S.$Oil Industry Capitalization in Billions of U.S.$
Capitalization
ExxonMobil $446
Total S.A. $329
British Pete PLC $225
Royal Dutch Shell $227
Petro China ADS $208
Chevron $168
5050
Administrative ProblemsAdministrative Problems Adjusting to various local systemsAdjusting to various local systems
For example, For example, Hong Kong, Swiss, & Mexican stock markets Hong Kong, Swiss, & Mexican stock markets
settle accounts one day after the transaction settle accounts one day after the transaction London: two-week settlement London: two-week settlement Different administrative procedures add extra Different administrative procedures add extra
difficulty in executing tradesdifficulty in executing trades Avoid these difficulties by going through Avoid these difficulties by going through
mutual funds and other investment outletsmutual funds and other investment outlets
5151
Information ProblemsInformation Problems U.S. securities markets are the best at U.S. securities markets are the best at
providing investment informationproviding investment information S.E.C. has rigorous requirements for full S.E.C. has rigorous requirements for full
disclosure informationdisclosure information FASB continually providing pronouncements FASB continually providing pronouncements
on GAAP for financial reportingon GAAP for financial reporting Publicly traded companies required to Publicly traded companies required to
provide stockholders with fully audited provide stockholders with fully audited annual reportsannual reports
Evaluative reports/ratings by Moody’s, Evaluative reports/ratings by Moody’s, Standard & Poor’s, Value Line, & other firmsStandard & Poor’s, Value Line, & other firms
5252
Information ProblemsInformation Problems
Extensive economic data provided by Extensive economic data provided by governmental sources e.g.governmental sources e.g.• Department of CommerceDepartment of Commerce
• Federal Reserve SystemFederal Reserve System International firms in less sophisticated International firms in less sophisticated
foreign markets do not provide sufficient dataforeign markets do not provide sufficient data Language problems for the analystLanguage problems for the analyst
5353
Methods of Participating in Methods of Participating in Foreign InvestmentsForeign Investments
International investment International investment Investing in firms in foreign marketsInvesting in firms in foreign markets Purchasing foreign shares trading in U.S.Purchasing foreign shares trading in U.S. Open-end mutual funds investing overseasOpen-end mutual funds investing overseas Closed-end mutual funds with foreign portfolio Closed-end mutual funds with foreign portfolio Buying shares of multinational corporationsBuying shares of multinational corporations Exchange Traded Funds (ETFs)Exchange Traded Funds (ETFs)
5454
Methods of Participating in Methods of Participating in Foreign InvestmentsForeign Investments
Direct InvestmentsDirect Investments Indirect InvestmentsIndirect Investments
5555
Direct InvestmentsDirect Investments
Directly purchase shares of firm in foreign market Directly purchase shares of firm in foreign market Use foreign broker/overseas branch of U.S. brokerUse foreign broker/overseas branch of U.S. broker
Difficulties and administrative problems: Difficulties and administrative problems: Information-gathering problemsInformation-gathering problems Tax problemsTax problems Stock-delivery problemsStock-delivery problems Capital-transfer problemsCapital-transfer problems Communication difficulties in executing ordersCommunication difficulties in executing orders Sophisticated money manager follow this approachSophisticated money manager follow this approach
5656
Direct InvestmentsDirect Investments
Purchase shares of foreign firms that trade in Purchase shares of foreign firms that trade in U.S. stock markets (NYSE)U.S. stock markets (NYSE)
Purchase Purchase ADRsADRs
ADRs represent ownership interest ADRs represent ownership interest in a foreign company’s common stockin a foreign company’s common stock
Go to: Go to: 1. International1. International 2. Non-U.S. Listed Company Directory2. Non-U.S. Listed Company Directory
www.nyse.com
5757
Direct Investments - Direct Investments - Hyperlinks to some companies that Hyperlinks to some companies that
have ADRshave ADRs
www.alcan.com
www.honda.com
www.sony.com
www.britishairways.com
www.nortelnetworks.com
5858
Indirect InvestmentsIndirect Investments
Investments in international securities include: Investments in international securities include:
a)a) Purchasing shares of multinational corporationsPurchasing shares of multinational corporations
b)b) Mutual funds and/or closed-end investment Mutual funds and/or closed-end investment funds specializing in worldwide investmentsfunds specializing in worldwide investments
c)c) Investing in exchange traded funds (ETF) Investing in exchange traded funds (ETF)
d)d) Use a private firm specializing in foreign Use a private firm specializing in foreign investment portfolio managementinvestment portfolio management
5959
(a)- Purchasing Shares of (a)- Purchasing Shares of Multinational CorporationsMultinational Corporations
Firms with operations in several countriesFirms with operations in several countries Opportunity for international diversificationOpportunity for international diversification
• Major oil companies e.g. Exxon, BP, ShellMajor oil companies e.g. Exxon, BP, Shell
• Large banking firms e.g. Barclays, HSBCLarge banking firms e.g. Barclays, HSBC
• Pharmaceuticals e.g. Glaxo, NovartisPharmaceuticals e.g. Glaxo, Novartis
• Consumer Products e.g. Sony, Coca ColaConsumer Products e.g. Sony, Coca Cola
6060
(b)- Mutual Funds and Closed-(b)- Mutual Funds and Closed-End Investment CompaniesEnd Investment Companies
Mutual funds offerMutual funds offer• Diversification EfficiencyDiversification Efficiency• Professional managementProfessional management
Does not mean out performing the marketDoes not mean out performing the market• Time SavingsTime Savings
Invest in closed-end investment Invest in closed-end investment companies specializing in international companies specializing in international equity investmentsequity investments
May trade at premium/discount from NAVMay trade at premium/discount from NAV
6161
(c)- Exchange Traded Funds (c)- Exchange Traded Funds (ETFs)(ETFs)
Use ETFs to invest in international marketsUse ETFs to invest in international markets Biggest market the American Stock Exchange Biggest market the American Stock Exchange
Lists over 40 international funds Lists over 40 international funds ETF: basket of securities that track an indexETF: basket of securities that track an index Trades like an individual stock with all dayTrades like an individual stock with all day
• Trading Trading • Price trackingPrice tracking
www.amex.com
6262
Exchange Traded Funds (ETFs)Exchange Traded Funds (ETFs) An ETF mimics a major index, e.g.An ETF mimics a major index, e.g.
• Financial Times 100 for United KingdomFinancial Times 100 for United Kingdom• DAX for Germany, Heng Seng for Hong DAX for Germany, Heng Seng for Hong
KongKong ETF can track ETF can track
• A broad stock indexA broad stock index• Bond indexBond index• Broad Industry index or Sector indexBroad Industry index or Sector index
Lower costs Lower costs Better tax efficiency than mutual fundsBetter tax efficiency than mutual funds Ability to diversify using these fundsAbility to diversify using these funds
www.amex.com
6363
(d)-(d)- SpecialistsSpecialists in International Securities
Large investors may engage services of firms with Large investors may engage services of firms with specialized expertise in foreign equities specialized expertise in foreign equities
BanksBanks Investment counselorsInvestment counselors
• Morgan Guaranty Trust Company Morgan Guaranty Trust Company • State Street Bank and Trust CompanyState Street Bank and Trust Company• Batterymarch Financial ManagementBatterymarch Financial Management• Fidelity Trust Company of New YorkFidelity Trust Company of New York
Minimum investment well in excess of $100,000 Minimum investment well in excess of $100,000 Cater to large institutional investorsCater to large institutional investors
6464
WebsiteWebsite CommentsComments
www.adr.comwww.adr.com
Provides screening &research Provides screening &research services for American services for American depository receiptsdepository receipts
www.amex.comwww.amex.com Exchange Traded FundsExchange Traded Funds
www.global-investor.comwww.global-investor.comProvides international news & Provides international news & information on foreign information on foreign marketsmarkets
cbs.marketwatch.comcbs.marketwatch.com Provides news on global Provides news on global marketsmarkets
6565
WebsiteWebsite CommentsComments
www.economist.comwww.economist.comGlobal magazine Global magazine providing news on providing news on markets and economicsmarkets and economics
www.wsj.comwww.wsj.comProvides information on Provides information on global markets and global markets and economicseconomics
www.oecd.orgwww.oecd.orgProvides international Provides international economic information and economic information and links to related siteslinks to related sites
www.rubicon.comwww.rubicon.comProvides currency rates Provides currency rates and conversionsand conversions
6666
SummarySummary Diversify by investing in international
securities Different foreign markets influenced by
varying & contradictory factors Effective risk reduction
Example:Sharp & unexpected increase in energy pricesnegative impact on oil importers may beoffset by positive impact on oil exporters
6767
SummarySummaryInvestments in selected foreign equity markets Investments in selected foreign equity markets
may provide may provide Excellent return opportunitiesExcellent return opportunities Many countries’ GDP growth is = or > U.S.Many countries’ GDP growth is = or > U.S. Greater savings rates Greater savings rates Higher capital formationHigher capital formation Don’t forget demographicsDon’t forget demographics Risks – business, financial, exchange rate, Risks – business, financial, exchange rate,
market, accounting, economic, and political market, accounting, economic, and political risks. risks.