practical investment management by robert.a.strong slides ch15

8/14/2019 Practical Investment Management by Robert.A.Strong slides ch15

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INVESTING INTERNATIONALLYCHAPTER FIFTEEN

Practical Investment Management

Robert A. Strong


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South-Western / Thomson Learning 2004 15 - 2

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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Introduction

Insert Figure 15-1 here.


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Motivation for International Investing

Diversification: Portfolio risk reduction wasthe original motivation for international

investing. Now however, evidence indicates

that this alleged advantage may be

overstated.


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Motivation for International Investing

Market efficiency: Free lunches may exist inunderdeveloped markets.

Growth: Many markets are less efficient than

those in the United States.


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Methods of Investing: ADRs

AnAmerican depository receipt(ADR) is amarketable receipt showing ownership of a

foreign security.

Large commercial banks issue ADRs as aconvenience to would-be investors in foreign

securities.

A sponsored ADRis issued in coordination

with the underlying company.



Methods of Investing: GDRs

Global depository receipts (GDRs) are issued

in the Euromarket and are backed by the

Euromarket depositories rather than by a

specific bank.

In practice, the terms ADR, GDR, and DR are

interchangeable. They all improve a firms

access to U.S. investment capital.



Methods of Investing

A country fundis a closed-end investmentcompany whose portfolio is comprised

almost entirely of securities issued within a

particular foreign country.

The fund may contain some short-termdomestic securities for holding temporary

funds awaiting reinvestment.

Closed-end fund shares typically sell at adiscount from their apparent true value.




Individual securities: Individual andinstitutional investors may also purchase

shares directly on a foreign exchange,

especially if the exchange is well-developed.

A unit investment trustis a professionally

selected, but unmanaged, portfolio of

securities designed to meet some stated

investment objective.




International mutual funds are portfolios ofsecurities too. They provide immediate

diversification, professional management,

and ease of entry and exit from the market.

An important consideration in selecting a

mutual fund is the fee charged by the fund

manager.



Emerging Markets: Characteristics

An emerging marketis characterized by a lowper capita gross national product.

History: Todays developed markets wereonce emerging markets too.

Culture: Significant differences exist amongemerging markets, but as a group, theyshare one primary similarity - change.

The stock market of an emerging country canbe particularly volatile, especially by U.S.standards.



Emerging Markets: Characteristics

Insert Figure 15-2 (Emerging Market Volatility) here.



Emerging Markets: Rationale

Adding value: Inefficiencies in developingmarkets provide opportunities for money tobe made.

Reducing risk: While correlations among the

developed markets are increasing, emergingmarkets show little correlation withdeveloped markets or with one another.

Getting on the bandwagon: Current industrypractice is another reason for the popularityof international investing.



Emerging Markets: Investment Considerations

Accounting information: Reliable accounting

information is especially scarce in emerging

markets.

Foreign currency risk: Hedging foreign

exchange risk is complicated in emerging

markets due to the less availability of

hedging vehicles.


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Fraud: Emerging markets carry a genuine

risk of fraud, ranging from accounting

misstatements to counterfeit securities or

bucket shops. Liquidity risk: Residents of a developing

country typically have little money of their

own to invest.

Emerging Markets: Investment Considerations


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Country riskrefers to a countrys ability and

willingness to meet its foreign exchangeobligations.

The two components to country risk arepolitical riskand economic risk.

Political riskis a measure of a countryswillingness to honor its foreign obligations.

Economic riskis a measure of the countrys

ability to pay. It is largely a function of theincome statement rather than of thebalance 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, especially with

small-capitalization stocks.

Lack of financial information: Some particular

problems with financial information sourcesare 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

practical investment management by robert.a.strong slides ch15

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