In order to get prepared for participation in the class discussion of the questions, write a short essay on the following:

a) The difference between FDI and portfolio investment.

(Use: to acquire, managerial control, to set up, joint venture, foreign branch, multinational enterprises, new technology, competition, purchase of stock)

b) Activities of institutional investors.

(Use: to invest, to diversify, stock, government bonds, to monitor, portfolio, pension funds, mutual funds, investment trusts)

c) The essence of the "economies of scale" notion in finance.

(Use: gains, to raise new capital, more easily and cheaply, to pool risks, to increase profits, to diversify activities, to reduce cost of production, large-scale production, to increase production)

Ex. 15. Prepare a short talk on the following:

a) What aspects of economic order is investment activity associated with?

b) Multinational enterprises: how firms from different countries grow into multinational enterprises; where they are welcome (developed or developing countries); relations with the host country.

c) Why are investments made? Why are foreign investments important to all countries?

Ex. 16. Scan local newspapers to find examples of FDI and portfolio investments. Comment on the benefits of the investment projects for the local business and the country on the whole.

Reading practice

Ex. 17. a) Look through the text below to find the explanation why administrators of pension and endowment funds are referred to as investment engineers.

b) Reread the text more carefully and explain how administrators of funds make decisions about choosing the assets to invest.

Investment Skill Is a Rare Commodity

Administrators of pension and endowment funds might be surprised to find themselves referred to as investment engineers. Yet these particular institutional investors (who are often called "plan sponsors") face the complex problem of efficiently allocating their assets among various investment managers so as to best achieve their stated investment objectives. The disciplined process through which this manager "structuring" problem can best be resolved is analogous to an engineer designing a building or a machine.

When plan sponsors choose to invest in a particular asset class, especially a well-defined and liquid one such as the US common stock market, they typically choose a market index to characterize the expected return and risk opportunities of the asset class and to serve as a benchmark against which to evaluate the subsequent performance of their investments. In this context, the selected market index is called an asset class target. For example, a plan sponsor might specify the Standard & Poor's 500 and the Solomon Brothers Broad Bond Index as the asset class targets for its US common stock and fixed-income investments, respectively.

Plan sponsors rarely opt to conduct all of their investment in an asset class on a strictly passive basis. Instead, they typically hire a number of active investment managers. In aggregate, these active managers are expected to exceed the performance of the asset class target on a risk-adjusted basis.

For various reasons most active investment managers pursue distinct investment styles, focusing their efforts in particular niches of the marketplace. For example, some common stock managers concentrate on small capitalization growth stocks, whereas some bond managers invest only in mortgage-backed securities.

Just as an investment manager will diversify within a portfolio to avoid unintended risks, a plan sponsor will diversify across investment managers. This manager diversification reduces the possibility that one manager's mistakes will seriously harm the plan sponsor's total portfolio. Further, it avoids the risk that the total portfolio will be excessively exposed to the results of a specific investment style.

The goal of efficient style diversification is to be style neutral relative to the asset class target. That is, in aggregate, the investment styles of a plan sponsor's managers should exhibit exposures to factors of risk and return similar to those of the asset class target.

Words you may need:

endowment fund благотворительный фонд

analogous adj аналогичный

asset class класс актива

market index рыночный индекс

benchmark n база, ориентир, отправная точка

asset class target цель по классу актива

opt v выбирать

in aggregate в целом

on a risk-adjusted basis с учетом риска

small capitalization growth stocks акции мелких быстрорастущих компаний

exposed to the results (зд.) зависеть от результатов

exposure n (зд.) подверженность

Ex. 18. a) Read the text below quickly to find what investment trusts are referred to.

b) Reread the text more carefully to find parts of the text describing the specific features of the funds.