Going on a Foreign Fling

Going on a Foreign Fling

American Depositary Receipt makes it easier than you think

Americans used to be innocents abroad when it came to foreign investing. Today, however, it`s getting easier and easier for Americans to invest overseas, even novices are joining in. The easiest way to invest abroad is to buy shares in a mutual fund that specializes in overseas companies. But increasingly investors are purchasing shares of individual companies in the form of American Depository receipts, or ADRs.

Thousands of foreign companies now trade on U.S. stock exchanges in the form of ADRs, dollar-denominated securities that represent a given number of company shares. Trading volume top trillion of dollars, more than thirty times what it was in 1990. There`s no addition to the billions of dollars of American investors poured into international equity funds.

It’s easy to understand the enthusiasm. Merrill Lynch`s ADR Composite Index has been chalking up impressive gains compared to the Standard & Poor`s 500 stock index, though no one knows whether that will continue to be the case. For some time now, however, many investment pros have felt that that U.S. stocks are pricey compared to bargains that can be found overseas.

You don`t have to leave home to buy an ADR. They are used by U.S. banks that hold the underlying foreign shares in custody, and ADRs are sold in U.S. dollars through brokers, just like stocks. All you have to do to buy one is pick up the phone or connect to Internet.

Art Nouveau in New Yorl. Photo by Elena

Getting timely information about the company whose stock you`re buying can be more difficult. About two-thirds of ADRs are listed on the “pink sheets”, a thinly traded part of the over-the-counter market that is exempt from the rules of the bigger exchanges. These companies do not have to file financial statements with the Securities and Exchange Commission nor are they required to send income reports to shareholders.

Pros generally counsel that average investors stick with the 300 or so companies trading on the big exchanges that meet U.S. standards of accounting and disclosure. In 1994, Chicago based Morningstar Inc., a publisher of mutual fund reports, started bi-weekly Morningstar American Depositary receipts. The report tracked initially more than 700 ADRs, with up to 10 years of data, business summaries, and market snapshots.

Accurate financial information doesn`t always shield investors from some of the risks inherent in ADR investing. Because the underlying stock is denominated in local currency, a strengthening dollars hurts ADR`s price. Investors in STET, one of Italy`s leading communication companies, for instance, may find that they take more than a passing interest if the Italian government falls, etc.