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Colleges in Oxford and Cambridge have invested in property, bonds, and equity-like assets including private equity; they also own original works of art, rare books, vintage wine, and other such assets that would typically have been bequeathed to them. The range of assets may not have been significantly enlarged recently, but financial innovation has created more options whereby traditional assets can be accessed in a more efficient manner. This chapter examines issues that relate to overall asset allocation, primarily because it is this that shapes the individual portfolio.

Experienced investors recognize that understanding the risk profile of the overall portfolio lies at the heart of any assessment of investment alternatives. Attempting to identify the risks to college endowment portfolios (on a scale of 1 to 5 with 1 being not very important and 5 very important), with reference to various aspects of portfolio risk (such as market risk, risk relative to benchmark, liquidity risk, fiduciary risk, and ‘other’ risk factors), provides clues to the risk framework within which colleges in Oxford and Cambridge invest. A majority (85%) of colleges consider their investment committees as being responsible for risk management of endowment assets, with about half reporting that the job is done internally without the assistance of any expert external guidance. The involvement of investment consultants in managing portfolio risk, is minimal. Even in Oxford, where more institutions reported using the services of investment consultants, only 15% of Colleges used a consultant in risk management.

Chapter 1 provides the conceptual and normative framework within which this book is developed. It begins with setting out the international law context within which EU foreign investment law is born, focusing on the socio-economic reasons that require international regulation of foreign investment and the historical evolution of international investment law. The second part is dedicated to the quest for a definition of foreign investment, aiming to consolidate the divergent definitions of foreign investment that are found in international investment law and EU law. Thirdly, this chapter identifies the regulatory scope and the sources of EU foreign investment law, stressing the divergent focus of EU regulation on different aspects of foreign investment.

This chapter examines emerging capital economies from the perspective of creating the new success stories in the developing world. It focuses on the underlying (legal) causes for such successes and the impediments thereto. The perspective of international finance (e.g., foreign direct and foreign portfolio investment), and their relative pitfalls are examined along with a sea change in investment patterns as may be discerned from sovereign wealth funds, and other related issues. Financing private infrastructure projects, the access to private bond and equity markets, and the dangers of global financial contagion are all explored. Finally, the need for the prudential and legal regulation of private equity markets, and related issues, are examined in the context of furthering development objectives.

This chapter begins by defining the strategic asset allocation decision and discussing how the strategic asset allocation should be set. It introduces the factors that should be considered in setting the defined benefit (DB) strategic asset allocation. Theoretical arguments favoring allocations to stocks and bonds are considered, followed by empirical evidence that shows what pension funds actually do. Finally, the allocation of DB assets over time is discussed.

This chapter covers the demand side of the financial markets, with some example data from the USA. Three important factors driving demand are covered in detail in the three sections: the time value of money and expected returns, attitudes toward risk, and the possibility of reducing risk by holding a diversified portfolio of investments. A framework based on microeconomic theory is presented for analyzing why individuals and other investors are interested in the various types of financial instruments discussed in the previous chapter. This approach allows development of the links between demand and interest rates on bonds of different maturities or rates of return on financial instruments with different risk profiles. The willingness of an investor to hold a particular security is shown to depend on two sets of characteristics – those of the investor and those of the security.

In the advent of various developments in international financial markets, foreign portfolio investments have assumed an emerging role as a channel for international capital flows to a number of developing countries. While these countries experienced several challenges between 1979 to 1982 because of the recession, oil price increase, and the shift in US macroeconomic policy, the period between 1983 and 1989 entailed a decline in the net international capital flows received by developing countries because of the high levels of negative net transfers of resources from various countries in Latin America to banks. Since foreign direct investments were the only option of channeling in net capital flows for countries in the Western Hemisphere, such also became the case for developing countries in Asia. This chapter examines the implications of utilizing foreign portfolio investments in facilitating international capital flows specifically to developing countries.

This chapter examines the holding patterns of company stock in defined contribution (DC) plans, why employers and employees tolerate high levels of company stock holdings, and the impact of concentrated holdings on retirement incomes. It is argued that retirement systems with concentrated stock positions will always have some participants lose their DC plan savings to firm bankruptcy. Company stock in retirement portfolios leads to greater extremes in accumulated wealth due to its higher volatility, and a lower median wealth compared to a system of diverse investments.

This chapter outlines the characteristics of investing in emerging and developing markets. It first clarifies the different definitions and interpretations of emerging markets and then provides a mean-variance analysis of emerging market investment and offers evidence on the recent performance of emerging markets. Next, the chapter details the main risks and problems associated with investing in emerging markets under the headings of liquidity, information asymmetry, corporate governance, and market efficiency. It further reviews the literature on the factors that influence country and stock selection. Having reviewed the benefits and risks from direct investment in emerging markets, the chapter closes by detailing the benefits and risks from indirect investment in emerging markets using domestic assets that represent claims on foreign assets.

The composition of capital flows into Indonesia has undergone significant changes since the early 1990s and this is evident by how capital inflows reached a level of about $14.7 billion in 1994. Initially, during the 1970s, inflows commonly entered in the form of official development assistance (ODA) from bilateral sources. Because of the developments brought on by the broad-based economic reform, the composition of capital inflows leaned towards more private sources, which was further amplified as private financing shifted to non-bank sources such as portfolio investments and foreign direct investments. Such changes have relegated the state’s role in such matters, caused reforms in the financial system, and increased the openness of the Indonesian economy. This chapter analyzes how the changing composition of capital flows into Indonesia during the 1990s has affected macroeconomic management through looking into development financing, the broad-based economic adjustment programmes, and other such policy responses.

This chapter deals with the definitions and descriptions — many of which are neither self-evident nor universally understood — that articulate the defining characteristics of FDI and MNCs. First, the structure, governance, and objectives of the basic corporation — the first stage and underlying persona of an MNC — are spelled out. The next section reviews different terms used to refer to what in this book are dubbed MNCs and explains how these terms emanate from different perceptions of the behavior and management of multinational businesses. The final section specifically defines what constitutes an MNC and what constitutes FDI.

The key mechanisms through which information frictions affect the composition and the volatility of international capital flows are market based. Foreign direct investors get more efficient outcomes than foreign portfolio investors because the former have more direct control over management. Thus, they are able to make a better-informed decision of how to run the business. However, the better information mires FDI investors with the “lemons” problem: If the investors’ liquidity dries up, forcing the investors to sell off foreign subsidiaries, market participants would not know whether the subsidiary is liquidated because of the investors’ liquidity problems or because of bad inside information about the profitability of the subsidiary. Consequently, the market will place a discount on assets sold by an FDI investor, who has the inside information, unlike the FPI investor. Thus, the liquidated stock of an FDI investor is sold at a discount. High-liquidity-risk investors opt for FPI investment, whereas low-liquidity-risk investors opt for FDI investment.

Pre-World War I momentum in favour of diffusion of share ownership was sustained up to 1939. On the sell side, pressure to pay dividends, generational considerations, the periodic availability of generous exit terms, and capital-raising for mergers all continued to provide incentives to unwind control. Aspects of income tax and estate tax combined with taxation of profits and periodic economic slumps to do likewise. On the buy side, the signalling properties of dividends, the investment returns shares delivered and surges in investor optimism all continued to fortify demand for shares. Reduced scope for overseas investment and improved protection from stock exchange regulation and intermediaries organizing share offerings provided a further boost. Despite these trends and despite a bias in favour of passivity among new investors, the available empirical evidence indicates a full divorce between ownership and control remained the exception to the rule up to 1940.

Due to the recent financial crisis, the issue of liquidity has emerged. Illiquidity reflects frictions in markets, and in asset markets can arise for various reasons. This chapter analyses how the preference for liquidity is affected by the precision of anticipated information. Given a subjective ordering of investment portfolios by their liquidity, it identifies a sufficient condition under which the prospect of finer resolution of uncertainty results in a preference for more liquid positions. It then demonstrates how this condition might emerge naturally in some standard classes of sequential decision problems. The chapter considers the simplest setting whereby an agent must make choices in two periods, with the initial choice affecting the set of subsequent choices. When one has to choose between a discrete set of irreversible investments and liquid cash, greater informativeness is expected to increase the reward, other things equal, to holding liquid cash.

The term “foreign direct investment” (FDI) usually brings to mind a significant contribution of FDI to domestic investment and capital inflows. However, there has been a lot of skepticism concerning the contribution of FDI to these engines of growth. FDI (the purchase by a domestic resident of a controlling stake in a foreign company) actually requires neither capital flows nor investment in capacity. Conceptually, FDI is an extension of corporate control over international boundaries. Theories of FDI can essentially be divided into two categories: micro (industrial organization) theories and macro finance (capital costs) theories. The early literature that explains FDI in microeconomic terms focuses on market imperfections and on the desire of multinational corporations to expand their market power. This chapter shows that FDI flows play an important role in the skimming of high-productivity investment projects and thereby contribute significantly to domestic investment in both the quantity and the quality dimensions. Using an econometric approach, it estimates the interactions between domestic investment, FDI flows, international loans, and international portfolio investment.

A late 19th and early 20th century ‘corporate lag’ has been identified as a cause of Britain's 20th century economic ‘decline’. However, the number of publicly traded companies increased significantly during this period and as of 1914 the market for shares was well-developed by international standards. This chapter explains matters by reference to the ‘sell side’ and ‘buy side’. On the sell side, dilution of control became more palatable as the drive to generate profits ebbed, periodic surges in investor optimism yielded generous exit terms and capital was required to execute mergers. On the buy side, Britain was losing ground to its major economic rivals and company law, financial intermediaries and the press offered weak protection to outside investors. However, the relative investment performance of shares, the regional orientation of many public offerings, the signalling properties of dividends, and occasional investment ‘fads’ all served to fortify demand for shares.

The engagement of developing countries with the world economy witnessed a decline during the period from 1950 to 1980, particularly as compared with the past, but revived circa 1980 to gather momentum thereafter. Their share in world merchandise trade, exports and imports, more than doubled. But this rapid expansion in international trade was distributed most unevenly between regions, as much of it was attributable to Asia. The share of developing countries in foreign direct investment in the world economy increased at the expense of industrialized countries. Its distribution was less uneven between regions. International migration is perhaps the most significant form of engagement, underlying economic dynamism in industrialized countries and remittance inflows to developing countries. The three channels of engagement are connected and interactive. There is an obvious complementarity between international trade and international investment that runs in both directions. But international migration, through the diaspora, also drives international trade and international investment.

On the asset side, trustees must build a robust return-seeking asset portfolio in accordance with the risk and performance strategy defined in the ALM framework and the LDI strategy. This chapter provides the building blocks of an efficient investment portfolio strategy. Readers will understand the positive effect of diversification on the risk/return profile of portfolios and how to measure the skills of portfolio managers in security selection and the passive replication of risk-adjusted return of indexes. An overview is provided of the asset class universe and various management styles, the way to look at asset classes in terms of risk-adjusted returns. How to build various portfolios and undertake simulations in order to select the most appropriate portfolio to meet the objectives of performance and risk aversion are explained. Based on case studies, readers will learn how to analyse investment portfolios, simulations, build efficient frontiers and draw conclusions.

This chapter examines some conceptual issues concerning the regulation of sovereign wealth funds (SWFs). It begins with an overview of the emergence and extent of SWFs before discussing the reasons for their recent growth and development. It then considers the regulation of SWFs and presents examples of matrix positioning of SWFs. It also assesses the implications of public policy and regulation of portfolio investment and foreign direct investment. Finally, it explains the distinction between SWFs and emerging economy multinational enterprises, which are often state-owned enterprises.