LCASTOL

CHAPTER 3
THE GLOBAL MARKET INVESTMENT DECISION
 LCASTOL
LEARNING OBJECTIVES
CH. 3 – The Global Market Investment Decision

Learning Objectives
• Explain why investors should have a global perspective in their
investments
• Describe the effect of changes in currency exchange rates on return
• Explain the advantages of international diversification
• Learn about alternative investments and understand their cash flow
and risk properties
• Explain the relationships of domestic and foreign returns and its
impact on portfolio diversification
 GROWING INVESTMENT OPPORTUNITIES

Surge in Investing in Global Investments

• Advancements in communication and
technology
• Liberalization and deregulation of markets
• Introduction of new investment vehicles with
a variety of maturities, risk-return
characteristics, and cash flow patterns being
spawned due to competition and
deregulations in the financial sector
• Ability to invest from a global perspective
thanks to the globalization or integration of
domestic and foreign financial markets
 GLOBAL INVESTMENTS
Why invest?
• Access to opportunities existing • Offsetting risks pertaining to • Access to instruments that allow
in different markets (possible domestic markets and negating currency exchange risk
greater returns) diversification of a portfolio (low and may guarantee greater gains.
correlation)

Risks
• Sovereign risk
• Currency risk
• Credit risk
• Liquidity risk
Challenges in Investing
• Political and economic turbulence can greatly affect
such investments
• Accessibility to and availability of vital information
related to foreign firms and markets
• Complications are rendered by legislations and
varying operating conditions of foreign markets
Global Equity Portfolio Risk
• Low positive correlation (Exhibit 3.6)
• The correlation of world equity markets resembles that for bonds; however, the average correlation between U.S. and foreign
markets is about 0.65, lower than that for bonds from 1988 to 2010.
• Again, the U.S.–Canada correlation is 0.76, whereas the U.S.–Japan correlation is only 0.42.
• Opportunities to reduce risk of a stock portfolio by including foreign stocks, as illustrated in Exhibit 3.7.
 GLOBAL INVESTMENTS
Democratization of International Personal Investing

Before
• International investing was done through foreign private
banks
• High minimum investment requirements
• High fees
• Low access to information

Now
• Variety of choices of international online brokers
• Low minimum investment requirements
• Low to zero fees
• Wide variety of investment choices (stocks, fixed-income,
currencies, commodities, ETFs, structured products,
cryptos, etc)
 POP QUIZ
Which of the following statements about global investing is false?
a. Global investing enables you to access investment opportunities that are not present domestically. Developed
markets like the US are home to some of the world’s largest tech companies – something you cannot access by
investing in Philippines.
b. Investing overseas exposes you to currency appreciation (or depreciation).
c. Global investing provides for a diversified portfolio, which acts as a source of stability during market volatility.
When you spread out your investments across geographies, there is a low correlation between them. This
means that the volatility in one market is likely not to affect your other assets.
d. None of the above

Answer: D
 GLOBAL INVESTMENT CHOICES

FIXED-INCOME EQUITY
01. INVESTMENTS
02. INVESTMENTS

SPECIAL EQUITY FUTURES

03. INSTRUMENTS
04. CONTRACTS

POOLED FUNDS/
05. INVESTMENT COMPANIES 06. REAL ESTATE

LOW-LIQUIDITY
07. INVESTMENTS
 FIXED INCOME INVESTMENTS

Current Account/Savings Account (CASA)

• Fixed earnings
• Convenient
• Liquid and low risk
• Low rates
• Certificates of Deposit (CDs)
• Money Market Certificates
• Compete against Treasury bills (T-bills)
• Minimum placement amount and maturity
• Redeemable only at bank of issue
• Penalty if withdrawn before maturity
 POP QUIZ
A bond denominated in a currency from the country where it is issued from is called a:
a. Yankee bond
b. Samurai bond
c. Dimsum bond
d. None of the above

Answer: D
They are called Eurobonds
COMMON FEATURES OF FIXED INCOME SECURITIES
It is an instrument that allow issuers to borrow money from investors. It pays investors interest on certain
payment dates, and the principal on maturity date

MATURITY PAR VALUE COUPON RATE RIGHTS OF A

The coupon rate is the interest
Maturity is the date The amount the issuer BONDHOLDER
when the issuer is agrees to at maturity rate that the bondholder will
• The right to receive the
obligated to redeem the date. receive. It can either be fixed or
floating, and the frequency can face value of the bond at
bonds, while tenor is the the maturity date.
time left to maturity. differ per issue
• The right to receive
periodic interest
payments, at a specified
percent of the bond’s
face value.
YIELD CURVE • Priority over company
• A graphical representation of assets upon default &
the yields available for bonds of equal credit liquidation.
quality and different maturity dates.
• We generally use the Treasury yield curve to
represent the market. SOURCES OFINCOME
• Normally upward sloping as investors seek • Coupon interest
higher yields as tenor increases • Bond price increase
resulting from interest
rate/credit changes
 MENU OF FIXED-INCOME SECURITIES
ISSUER TENOR
Natl. Government: T-bills, FXTNs Short-term: T-bills (91, 182 & 364 days)
GOCCs: PSALM, NFA, Fannie Mae, Ginnie and Commercial Paper
Mae Long-term: Bonds and Notes.
LGUs: Municipal Bonds (GOs & RBs) Century
Corporations: CPs, Bonds Perpetual: Example: Ayala & Petron
Banks: Tier 2, LTNCDs
Supranational: Example: ADB (2005)

LEVEL OF RISK COUPON

Senior secured (mortgaged, Collateral Coupon bonds: Floaters and Fixed
trust, equipment) With step-up provision
With negative provisions Zeroes
Senior
Junior (Subordinated)
MENU OF FIXED-INCOME SECURITIES
BY PURPOSE BY MANNER OF PRINCIPAL
General – working capital, CAPEX, PAYMENT
acquisition, retirement of debt Amortizing
Sustainable purposes – green and Bullet
social (Example: renewable energy,
waste mgmt., clean transportation –
AC, AEV, MWC, BPI, etc.) BY COUNTRYOF ISSUANCE
Eurobond
Yankee, Samurai, Dimsum, etc.

CURRENCY
Locally-denominated EMBEDDED OPTIONS
Foreign Currency Plain vanilla: no options
Hybrid (GPN) Callable: with a call option
Putable: with a put option
SAMPLE RTB OFFERING
SAMPLE CORPORATE BOND OFFERING
COMMON FEATURES OF EQUITY SECURITIES

LIFE VOTING RIGHTS

Many equity securities are issued with an Shareholders with voting rights collectively elect the board of
infinite life, perpetual or issued without directors, who will monitor the company’s business activities on their
maturity dates. Some equity securities are behalf. But significant decisions such as the decision to acquire
issued with a maturity date. another company, usually require the approval of shareholders with
voting rights.

PAR VALUE
The par value of a share is the stated CASHFLOW RIGHTS
value, or face value, of the equity security
The rights of shareholders to distributions, such as dividends, made by
the company. In the event of the company being liquidated, assets are
distributed following a priority of claims, or seniority ranking.
Shareholders have a lower priority of claim versus debtholders which
SOURCES OF INCOME can affect the amount that an investor will receive upon liquidation.
• Dividends
• Increases in stock price
 TYPES OF EQUITY SECURITIES
COMMON SHARES

1 •

•
Also known as ordinary shares, or voting shares is the main type of equity security issued by
companies.
A common share represents an ownership interest in a company.
• Common shares have an infinite life; in other words, they are issued without maturity dates
• Classifications: Industrial, Financial, Utilities, Transportation, Holding Companies, etc.
• Examples: ALI, MBT, JFC, TEL, etc.

PREFERRED SHARES

2 •

•
These shares are called preferred because owners of preferred stock will receive dividends before
common shareholders.
They also have a higher claim on the company’s assets compared with common shareholders if the
company ceases operations.
• Preferred stock has characteristics of both bonds and common stock which enhances its appeal to
certain investors.
• Voting or non-voting. Cumulative or non-cumulative. Participating or non-participating
• Examples: SMC2C, ACP and PNX3A
• https://www.sanmiguel.com.ph/storage/files/reports/Offer_Terms_Sheet1.pdf
 ACQUIRING FOREIGN EQUITIES
Purchase of American Shares
• Issued in the United States by transfer agent on behalf of a
foreign firm
• Higher expenses
• Limited availability

Direct Purchase of Foreign Shares

• In the foreign firms’ own country
• Listed on a foreign stock exchange outside the home
country (e.g., French firms on LSE)
• Listed on a U.S. stock exchange

Global Mutual Funds or ETFs

• Global funds: Invest in both U.S. and foreign stocks
• International funds: Invest mostly outside the U.S.
• Funds can specialize by country or type of market
• Diversification across many countries
• Exchange-traded funds or ETFs are a recent innovation in
2011
 ACQUIRING FOREIGN EQUITIES
No. Name Ticker Industry
American Depositary Receipts (ADRs) 1
2
Aboitiz Equity Ventures
Aboitiz Power
ABTZY Financial Services
ABZPY Electricity
• The term American depositary receipt (ADR) refers to 3 AgriNurture ANURY Food Producers
4 Alliance Global Group ALGGY Food &Drug Retailers
a negotiable certificate issued by a U.S. depositary 5 Atlas Consolidated Mining ACMDY Mining
6 Ayala AYALY General Industrials
bank representing a specified number of shares of a 7 Ayala Land AYAAY Real Estate Inv&Serv
foreign company's stock. 8
9
Bank of the Philippine Islands-BPI
BDO Unibank
BPHLY Financial Services
BDOUY Banks
• Certificates representing ownership of foreign stock 10 Cebu Air CEBUY Travel & Leisure
11 D&L Industries DLNDY General Industrials
held in trust. 12 DMCI DMCHY Construct.&Materials
13 First Gen FSGCY Oil & Gas Producers
• The ADR trades on U.S. stock markets as any 14 Globe Telecom GTMEY Mobile Telecom.
15 Holcim Philippines HCPHY Construct.&Materials
domestic shares would 16 International Container Terminal ICTEY IndustrialTransport.
• ADRs offer U.S. investors a way to purchase stock in 17
18
JG Summit Holdings, Inc.
Jollibee Foods
JGSMY General Industrials
JBFCY Food Producers
overseas companies that would not otherwise be 19 Manila Electric MAEOY Construct.&Materials
20 Manila Water Company MWTC Gas,H20&Multiutility
available. 21 Megaworld Y
MGAW Real Estate Inv&Serv
22 Metro Pacific Investments Y
MPCIY General Industrials
• Foreign firms also benefit, as ADRs enable them to 23 Metropolitan Bank & Trust-Metrobank MTPOY Banks
24 Phil. Long Distance Telephone Company PHI Telecommunications
attract American investors and capital without the 25 Premium Leisure PMMLY Leisure Goods
hassle and expense of listing on U.S. stock exchanges 26 Puregold Price Club PRGLY Food &Drug Retailers
27 Rizal Commercial Banking Corporation RZLLY Banks
• About 1,700 ADRs are now available in the US, with 28 Robinsons Land RBLAY Real Estate Inv&Serv
29 Robinsons Retail RRETY General Retailers
most of them traded on the OTC market. 30 San Miguel Corp. SMGBY Beverages
31 Universal Robina UVRBY Food Producers
 PHILIPPINE DEPOSITORY RECEIPTS (PDRs)
Definition
• Similar to an ADR. Issued to raise foreign capital given
foreign ownership limitations
• A PDR consists of a deposit price and an option price,
which is considered as payment when the buyer opts to
convert said PDRs to a corporation’s share.
• PDRs are not evidences or statements nor certificates of
ownership of a corporation.
• However, each PDR represents a share, even in a
restricted company, and when bought by a foreign entity,
gives the buyer the right to all the dividends due the shares
of stock acquired
 SPECIAL EQUITY INSTRUMENTS: OPTIONS
Definition
• These are equity-derivative securities which have a claim on the common stock of a firm.
• Options are rights to buy or sell common stock or other underlying assets at a stated price for a period of time.
• Puts are options to sell
• Calls are options to buy

STOCK RIGHTS

1 • A rights offering (rights issue) is a group of rights offered to existing shareholders to purchase
additional stock shares in proportion to their existing holdings during a short period of time (1 to 2
weeks)
• The subscription price at which each share may be purchased is generally discounted relative to the
current market price
• Examples: ACEN (1:1.11 shares) and CEB (1:1.1825 shares)

WARRANTS

2 • It entitles the holder to buy a pre-specified amount of common stock of the issuing company at a
pre-specified per share price (called the exercise price or strike price) prior to a pre-specified
expiration date that’s more than one year
• Warrants are traded and listed in the exchange
• Examples: LRW
 FUTURES CONTRACTS
Definition
• Exchange of a particular asset at a specified delivery date for a
stated price paid at the time of delivery
• Deposit (10% margin) is made by buyer at contract to protect the
seller
• Commodities trading is largely in futures contracts
• Current price depends on expectations

Financial Futures
• Recent development of contracts on financial instruments such as T-
bills, Treasury bonds, and Eurobonds
• Traded mostly on Chicago Mercantile Exchange (CME) and
Chicago Board of Trade (CBOT)
• Allow investors and portfolio managers to protect against volatile
interest rates
• Currency futures allow protection against changes in exchange rates
• Various stock futures on market indexes such as the S&P 500 and
Value Line Index
 POP QUIZ
Which of the following statements about futures is false?
a. Futures are traded in an organized exchange
b. Contract transaction sizes can be customized
c. Futures contracts can be used for hedging
d. Future contracts are derivatives

Answer: B
Since futures are traded in an exchanged, contract sizes are standardized
 LCASTOL
POOLED FUNDS & INVESTMENT COMPANIES

Investment Companies
• Rather than buy individual securities directly from the issuer
they can be acquired indirectly through shares in an
investment company
• Investment companies sell shares in itself and uses proceeds
to buy securities
• Investors own part of the portfolio of investments
• Locally, several are run by insurance companies
 LCASTOL
POOLED FUNDS & INVESTMENT COMPANIES

Unit Investment Trust Fund (UITF)

• An open-ended pooled trust fund which is operated and
administered by a trust entity and made available by
participation.
• Most UITFs are considered medium to long term
investments.
• Offered by banks/quasi-banks with Trust licenses
 TYPES OF POOLED FUNDS
Money Market Funds Balanced Funds
• Acquire high-quality, short-term investments • Invest in a combination of stocks and bonds depending on their
• Yields are higher than normal bank CDs stated objectives

Bond Funds Index Funds

• Invest in long-term government, corporate, or municipal bonds • These are mutual funds created to track the performance of a
• Bond funds vary in bond quality from the risk-free government market index like the PSEi, S&P 500, etc.
bonds to the high-yield or junk bonds • Appeal to passive investors who want to simply experience
• Expected returns also differ reflecting the risk level of bonds in returns equal to some market index
the fund • Numerous non-stock indexes including various bond indexes
have been created (i.e. MSCI Indexes)
Common Stock Funds
• Many different funds with varying stated investment objective Exchange-Traded Funds (ETFs)
(aggressive growth, income, international stocks) • These are depository receipts for a portfolio of securities
• Offer diversification to smaller investors deposited at a financial institution in a unit trust that issues a
certificate of ownership for the portfolio of stocks
• Sector funds concentrate in an industry
• The stocks in a portfolio are those in an index like the S&P 500
• International funds invest outside
and dozens of country or industry indexes
• Global funds invest in the PH and other countries
• ETFs can be bought and sold continuously on an exchange like
common stock
 LCASTOL
TYPES OF POOLED FUNDS – Example (PAMI Bond Fund)
 LCASTOL
TYPES OF POOLED FUNDS – Example (PAMI Equity Index Fund)
 LCASTOL
TYPES OF POOLED FUNDS – Example (PAMI Balanced Fund)
 REAL ESTATE – HISTORICAL RETURN & CORRELATION
Historical Performance
• Returns are difficult to derive due to lack of data
• Residential shows lower risk and return than
commercial real estate
• REITs have shown higher returns with lower risk than
stock in short-term but lower return with lower risk
than stock in long-term
• Negative correlation between residential and farm
real estate and stocks
• Low positive correlation between commercial real
estate and stocks
• Potential for diversification
 REAL ESTATE
Direct Real Estate Investment
• Purchase of house/raw land for future resale at a profit
• Land development
• Ownership provides a negative cash flow due to mortgage payments, taxes and property maintenance
Rental Property
• Acquire apartment buildings or houses with low down payments
• Derive enough income from the rents to pay the expenses of the structure, including the mortgage payments, and
generate a good return
• Rental property provides a cash flow and an opportunity to profit from the sale of the property
Real Estate Investment Trusts (REITs)
• It’s a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs
pool the capital of numerous investors. This makes it possible for investors to earn dividends from real estate
investments—without having to buy, manage, or finance any properties themselves.
• Construction and development trusts provide builders with construction financing, mortgage trusts provide long-term
financing for properties, while equity trusts own various income-producing properties
• Examples: AREIT and DDMPR
 POP QUIZ
Which of the following real estate properties will likely be least found in a REIT asset pool?
a. Malls
b. Office buildings
c. Raw land
d. A and B

Answer: C
REIT asset pools normally contain cash flow generating assets
 LOW LIQUIDITY INVESTMENTS
Basic Concepts
• Some investments don’t trade on securities markets
• Lack of liquidity keeps many investors away
• Auction sales create wide fluctuations in prices
• Without notional markets, dealers incur high transaction costs
• Correlation coefficients vary, providing good diversification
• Some may consider them more as hobbies than investments
• Investors might fall in love with these investments, making
liquidation difficult!

Examples
• Art
• Antiques
• Coins & stamps
• Diamonds & jewelry
• Sports cards & memorabilia
• Comic books
• Sneakers