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AC6104 International Portfolio Management

Issues to Consider in International Investing:


Country Risk
Transfer risks restrictions on capital flows.
Operational risks constraints on management and
corporate activity.
Ownership-Control risks govt. Policies with regard to

management/ownership control.

Exchange controls
Expropriation of assets
Changes in tax policy
Changes in the business environment
Default risk due to govt. actions
Information barriers

1. Taxation
Decisions taken by governments may have complex
motivations that reach beyond simply revenue generation.
Focus on taxation affecting dividends, interest and capital
gains.
Differ significantly from country to country.
Institutional arrangements i.e. tax exemptions for Pension
funds, tax deferral for insurance companies.
Some investment returns may be exempt from tax e.g.
Interest paid on securities issued by state and municipal
entities in the U.S. is exempt from Federal income tax.
Worldwide income concept almost all countries tax their
resident taxpayers on returns from portfolio investment,
whether the underlying securities have been issued and are
held abroad.
Significant number of countries, however, who tax returns
from foreign securities held abroad only when funds
repatriated (U.K.)
Tax Havens:
Adoption of legal confidentiality provisions
Aggressive moves by developed countries to minimise the
use of tax haven jurisdictions by international investors
System of qualifying foreign financial intermediaries
adopted by U.S. which effectively makes foreign banks
responsible to collect taxes on securities holdings of
investors who are potentially U.S. taxpayers

2. Foreign Exchange Controls


More direct affect on international portfolio management
(IPM) than taxation.
Intended to directly affect capital flows.
Usually imposed for balance of payment issues or the effort
to reserve financial capital for domestic use.
Link to fixed exchange rates China
Restriction on the issuance of securities in national capital
markets by foreign entities, thereby making foreign
securities unavailable to domestic investors.
Controls on the extent of foreign ownership of domestic
companies.

3. Capital Market Regulation


Independent regulatory agencies.
Monetary Policy independence

4. Transaction Costs
Transaction costs for cross-border trading tend to be
significantly higher than those incurred in domestic
investing.
However costs have declined significantly in recent years
with the advent of cross-border trading platforms.
5. Liquidity
Liquidity can be a particularly important issue for large
scale investors as well as investors with short term
investing horizons.
Crucial to be able to trade large positions without
compromising the trade price significantly

Barriers to F.I.
1. Political risk regulatory risk
2. Legal risk

1. Liquidity
2. Contract enforcement
3. Access to information
Structure of F.I.
1. RetailFunds(1. Active high cost 2. Passive low cost)
2. Institutional
ETFs more cost-effective Individual assets

Low correlation More diversification

Developed economics
Emerging market economics-less correlation

BRIC: Brazil, Russia, India and China,