The investor's passport: ADRs provide you access to companies abroad - American depository receipts - Global Investing

Black Enterprise, Feb, 1997 by James Anderson

Go global. It's the rallying cry that the entire investment community has adopted of late, and for good reason--if growth is what you're after.

Though some foreign markets sagged toward the end of 1996, others soared. The Brazilian stock market was up 51%, Mexico logged a 20% gain and Venezuela's stock index rocketed 192%. In comparison, the U.S. market saw a healthy, yet much smaller, 20% rise in the sow Jones industrial average.

With all due respect to corporate America, some of the world's most profitable companies lie beyond these shores. "As recently as the early '80s, portfolio managers recommended a 5% weighting in overseas investments," says Jarvis Cromwell, a spokesman for Citibank. "These days that advised allocation has grown to 10%, and sometimes 20% [for more aggressive money managers].

As an investor, you're probably wondering what passport will take you abroad. Well, here's a three-letter answer for you: ADR (American depository receipt). ADRs are traded just like stocks of U.S. companies, and many are listed on American stock exchanges (prices and dividends are quoted in U.S. dollars).

Yes, investing in global and international mutual funds allows you to diversify your portfolio with foreign shares. But if you're angling toward holding a piece of an overseas corporation, ADRs are the answer. "If you want to invest in the automobile industry, why just look at GM and Ford," says Cromwell, "when there's Toyota, Volvo and a host of international players to choose from."

ADRs were created back in the 1920s to allow American investors to tap into the British stock market. These holdings represent a set number of shares in a foreign company--Volvo, for instance--held in a foreign stock market--in this case, Sweden.

An ADR certifies a shareholder's ownership of a foreign company's stock held on deposit at a foreign branch of an American bank. ADRs simplify foreign investment by providing holders documentation and insuring divider payments that otherwise might be difficult to track.

With interest in overseas investing booming, U.S. holds in foreign stocks has mushroomed over the past 10 years, from $10 billion. Also, the dollar value of ADR shares on the New York, American and Nasdaq exchanges rose 36% to $179 billion, during the first half of 1996.

The number of corporations available on the ADR market has grown as well, from Brazil's primary telephone company, Telebras, to British Petroleum, and from pharmaceutical giant, Glaxo Wellcome, to cellular equipment maker, Nokia. The choices are broad enough to cover various mayor industries.

There's also quite a selection of nations. South Africa's reentry into the world community continues, with five companies offering new ADRs in the first half of 1996. Brazil also ranked among the biggest countries for new issues with five.

That's not to say there aren't factors to consider prior to jumping into the global investing fray. One thing to check is whether the ADR is sponsored or unsponsored. Sponsored issues must conform to many U.S. reporting requirements, ensuring that as an investor you are provided with regular documentation such as annual reports covering the company's results and operations.

Investors should also consider currency risk, advises Neil Wolfson, a managing director at KPMG Peat Marwick's personal finance division. A foreign company's showing is often tied to the local currency. Should that nation's money value shrink relative to the U.S. dollar, investors might be in for a rough ride. The stability of the local government and economy are also worth pondering, especially the possibility of political upheaval or nationalization of key industries.

As with domestic stocks, you go through a broker to purchase ADRs. Large international conglomerates, such as Sony, will have an 800 number so that you can request company information. Also, your broker might be able to provide you with annual reports, in addition to other data on a foreign industry, company or country.