risk-adjusted returns that American assets offer and the desire for a diversified portfolio. If American assets offer high returns, then investors may be prepared to buy more of them. But at some point the desire for a diversified portfolio will impose a limit. Got enough greenbacks, thanks Investors' recent behaviour suggests that foreigners Losing their lustre appetite for American assets may already be beginningsbn to flag. In the past couple of years, the composition of capital inflows has changed significantly, and in a worrying direction. Private investors, who in the late of US securities 1990s were snapping up American shares, bonds and factories, more or less stopped buying anything but bonds in 2001. Foreign direct-investment flows, which reached a peak of 1. 6% of GDP in 2000, have turned negative. And as purchases of American securities by private foreign investors have fallen the current-account deficit has risen(see chart 6). According to Jim O'Neill, 600 head of economic research at Goldman Sachs(and no 1991929394959699920000100 relation to Paul), private portfolio flows and direct C12-month moving total investment in the first three months of 2003 were worth Sources: Deutsche Bank: US Bureau af Economlc Analysis only 1.4% of GDP. The remainder of the current-account deficit of 5. 1% of gDP was funded by short-term speculative capital flows and official purchases of bonds by foreign central banks This lack of enthusiasm for American assets clearly shows up in the fall in the dollar since the beginning of 2002: to entice buyers, their relative price had to fall. Some of this drop may have been temporary, caused by low bond yields and a sluggish stockmarket. Indeed, as bond markets temporarily rallied in the second quarter of 2003, portfolio flows picked up. And as America's economic prospects have brightened in recent months, part of the dollar drop has been reversed But there are also good reasons to believe that foreign investors have got enough dollar assets in their portfolios Every three months, The Economist asks a group of global portfolio investors about their asset allocation. The most recent figures show that American stocks make up 53%of the typica investors equity portfolio and American-issued dollar bonds around 44% of the typical bond portfolio. Those proportions are slightly lower than at their peak in 2001, with 54% and 50% respectively. In the mid-1990s, in contrast global investors allocated only around 30% of their assets to American dollar assets. In the late 1990s, therefore, the typical investor hugely increased the average share of American assets in his portfolio. In order to raise the average so quickly, the marginal investment in American assets must have shot up. Catherine Mann, an economist at the Institute for International Economics in Washington, DC, who has pioneered the portfolio-based analysis of current-account sustainability, calculates that in 1998-2001 the typical investor allocated an average of 80% of his increased wealth to American assets. The question is whether this can continue. Ms Mann calculates that if the current-account deficit is to remain sustainable, foreigners will have to go on allocating 80-90% of their marginal investments to American assets over the next couple of years. That is not inconceivable, but it seems unlikelyrisk-adjusted returns that American assets offer, and the desire for a diversified portfolio. If American assets offer high returns, then investors may be prepared to buy more of them. But at some point the desire for a diversified portfolio will impose a limit. Got enough greenbacks, thanks Investors' recent behaviour suggests that foreigners' appetite for American assets may already be beginning to flag. In the past couple of years, the composition of capital inflows has changed significantly, and in a worrying direction. Private investors, who in the late 1990s were snapping up American shares, bonds and factories, more or less stopped buying anything but bonds in 2001. Foreign direct-investment flows, which reached a peak of 1.6% of GDP in 2000, have turned negative. And as purchases of American securities by private foreign investors have fallen, the current-account deficit has risen (see chart 6). According to Jim O'Neill, head of economic research at Goldman Sachs (and no relation to Paul), private portfolio flows and direct investment in the first three months of 2003 were worth only 1.4% of GDP. The remainder of the current-account deficit of 5.1% of GDP was funded by short-term speculative capital flows and official purchases of bonds by foreign central banks. This lack of enthusiasm for American assets clearly shows up in the fall in the dollar since the beginning of 2002: to entice buyers, their relative price had to fall. Some of this drop may have been temporary, caused by low bond yields and a sluggish stockmarket. Indeed, as bond markets temporarily rallied in the second quarter of 2003, portfolio flows picked up. And as America's economic prospects have brightened in recent months, part of the dollar drop has been reversed. But there are also good reasons to believe that foreign investors have got enough dollar assets in their portfolios. Every three months, The Economist asks a group of global portfolio investors about their asset allocation. The most recent figures show that American stocks make up 53% of the typical investor's equity portfolio and American-issued dollar bonds around 44% of the typical bond portfolio. Those proportions are slightly lower than at their peak in 2001, with 54% and 50% respectively. In the mid-1990s, in contrast, global investors allocated only around 30% of their assets to American dollar assets. In the late 1990s, therefore, the typical investor hugely increased the average share of American assets in his portfolio. In order to raise the average so quickly, the marginal investment in American assets must have shot up. Catherine Mann, an economist at the Institute for International Economics in Washington, DC, who has pioneered the portfolio-based analysis of current-account sustainability, calculates that in 1998-2001 the typical investor allocated an average of 80% of his increased wealth to American assets. The question is whether this can continue. Ms Mann calculates that if the current-account deficit is to remain sustainable, foreigners will have to go on allocating 80-90% of their marginal investments to American assets over the next couple of years . That is not inconceivable, but it seems unlikely