International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, + Website

CHAPTER 23

Global Investing

Trust not all your goods to one ship.

Erasmus

But divide your investments among many places for you do not know what risks might lie ahead.

Ecclesiastes 11:2

One of the many faces of globalization is the surging flow of cross-border portfolio investment into foreign stocks and bonds searching for higher yields and capital appreciation (but not managerial control). This phenomenon is rooted in the rekindling of Adam Smith's invisible hand—the dismantling or at the very least the loosening of capital controls—and powered by the explosive growth of emerging capital markets and fast-paced privatizations of state-owned companies. This chapter explores the financial logic behind global investing in the context of increasingly integrated capital markets, with a focus on stocks.

Consider, for example, the predicament of Dr. James Breech, who is the founder and CEO of Cougar Investments—a globally diversified mutual fund based in Toronto (Canada). One of his important investors is the municipal workers pension fund of the City of Toronto, which gave Cougar Investments a mandate to manage 250 million Canadian dollars (CAD). Recently Dr. Uhlman, the CFO of the City of Toronto's pension fund, has been questioning the tenets of Cougar's international diversification strategy. Quite simply, in spite of a respectable 9.2 percent performance in 2010, simple domestic investment in Canadian stocks over that same period would have yielded a significantly higher return ...