chapter thirteen investing internationally practical investment management robert a. strong
TRANSCRIPT
CHAPTER THIRTEEN
INVESTING INTERNATIONALLY
Practical Investment Management
Robert A. Strong
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Outline
Motivation for International Investing Diversification Market Efficiency Growth
Methods of Investing American Depository Receipts Country Funds Individual Securities Unit Investment Trusts International Mutual Funds
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Outline
Emerging Markets Characteristics Rationale Investment Considerations
Special Risks Country Risk Trading Costs Market Pressure Lack of Financial Information
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Motivation for International Investing
Diversification: Portfolio risk reduction was the original motivation for international investing. Now however, evidence indicates that this alleged advantage may be overstated.
Market efficiency: Free lunches may exist in underdeveloped markets.
Growth: Many markets are less efficient than those in the United States.
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Methods of Investing: ADRs
An American depository receipt (ADR) is a marketable receipt showing ownership of a foreign security.
Large commercial banks issue ADRs as a convenience to would-be investors in foreign securities.
A sponsored ADR is issued in coordination with the underlying company.
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Methods of Investing: GDRs
Global depository receipts (GDRs) are issuedin the Euromarket and are backed by the Euromarket depositories rather than by a specific bank.
ADRs and GDRs improve a firm’s access to U.S. investment capital.
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Methods of Investing
A country fund is a closed-end investment company whose portfolio is comprised almost entirely of securities issued within a particular foreign country.
Individual securities: Investors may also purchase shares directly on a foreign exchange, especially if the exchange is well-developed.
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Methods of Investing
A unit investment trust is a professionallyselected, but unmanaged, portfolio of securities designed to meet some stated investment objective.
International mutual funds are portfolios of securities too. They provide immediate diversification, professional management, and ease of entry and exit from the market.
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Emerging Markets: Characteristics
An emerging market is characterized by a lowper capita gross national product.
History: Today’s developed markets wereonce emerging markets too.
Culture: Significant differences exist amongemerging markets, but as a group, they share one primary similarity - change.
The stock market of an emerging country canbe particularly volatile, especially by U.S. standards.
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Emerging Markets: Rationale
Adding value: Inefficiencies in developingmarkets provide opportunities for money to be made.
Reducing risk: While correlations among thedeveloped markets are increasing, emerging markets show little correlation with developed markets or with one another.
Getting on the bandwagon: Current industrypractice is another reason for the popularity of international investing.
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Emerging Markets: Investment Considerations
Accounting information: Reliable accountinginformation is especially scarce in emerging markets.
Foreign currency risk: Hedging foreignexchange risk is complicated in emerging markets due to the less availability of hedging vehicles.
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Fraud: Emerging markets carry a genuinerisk of fraud, ranging from accounting misstatements to counterfeit securities or bucket shops.
Liquidity risk: Residents of a developingcountry typically have little money of their own to invest.
Emerging Markets: Investment Considerations
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Country risk refers to a country’s ability andwillingness to meet its foreign exchange obligations.
The two components to country risk are political risk and economic risk.
Political risk is a measure of a country’swillingness to honor its foreign obligations.
Economic risk is a measure of the country’s ability to pay. It is largely a function of the income statement rather than of the balance sheet.
Special Risks: Country Risk
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Foreign market investing is likely to involvetrading costs at least one percent higher than investing domestically.
Market pressure can be an important trading cost in international markets.
Lack of financial information: Some particularproblems with financial information sources are inherent in emerging markets. Often, accounting standards differ too.
Special Risks
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Review
Motivation for International Investing Diversification Market Efficiency Growth
Methods of Investing American Depository Receipts Country Funds Individual Securities Unit Investment Trusts International Mutual Funds
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Review
Emerging Markets Characteristics Rationale Investment Considerations
Special Risks Country Risk Trading Costs Market Pressure Lack of Financial Information