ADR trading offers intriguing opportunities

February 04, 1994|By Andrew Leckey | Andrew Leckey,Tribune Media Services

International investing by Americans is on a roll, and it involves a lot more than just stock mutual funds.

Trading in American depositary receipts, which represent individual shares of foreign companies, is setting records. The .. $200 billion in ADR volume in this country last year was 60 percent higher than three years ago.

One hundred twenty-four ADRs were introduced in the United States last year to push the total number past 1,200, according to the Bank of New York.

The opportunities are intriguing. From China, Shanghai Petrochemical listed its ADR on the NYSE last year, while Shanghai Erfangji and Shanghai Tyre and Rubber established over-the-counter programs.

"We find that clients have an enormous appetite for quality international investment ideas," said Scott Kalb, managing director in charge of emerging markets research for Smith Barney Shearson. "Our ADR trading has tripled, and perhaps the best sign of investor interest is that our gross revenues in ADRs have doubled every year for the past four years."

An ADR is a negotiable certificate that represents and is interchangeable with shares of the publicly traded securities of a foreign corporation. The underlying shares remain on deposit in a local custodian bank while the ADRs trade in the United States, either on an exchange, in the over-the-counter market or through private placements.

Unlike a stock mutual fund, which invests in many stocks, or a closed-end mutual fund that emphasizes one region or country, each ADR represents one specific firm. They may be issued on a one-to-one basis to the underlying shares, or represent a fractional share or multiple shares of the foreign firm.

Top ADRs in NYSE volume include Telefonos de Mexico; Glaxo Holdings of the United Kingdom; Hanson PLC, U.K.; Royal Dutch Petroleum, the Netherlands; British Petroleum PLC; YPF Sociedad Anonima, Argentina; SmithKline Beecham, U.K.; News Corp., Australia; Wellcome PLC, U.K.; and Unilever, the Netherlands. Most-popular ADRs trading over the counter are Ericsson Telephone "B" Shares of Sweden and Senetek PLC of the U.K.

"The plus with an ADR is that you can get price quotes on it every day in the paper," said Thomas Robinson, international equity strategist for Merrill Lynch & Co. "The overwhelming number of ADRs are from the United Kingdom, with other significant examples being Japan, Australia, South Africa, Hong Kong, Mexico and the Netherlands."

While exchange rates still affect share prices and dividend yields, currency exchange problems are minimized because ADRs trade through U.S. dollar-denominated quotes. Dividends and interest are also paid in U.S. dollars. The ADR settles trades according to U.S. trading rules with settlement occurring in five business days.

"Demand is building on supply, for the more that are issued, the more people want to invest," said Kristin Merrigan, an associate analyst at Kemper Securities. "An ADR provides flexibility in that the tax issues, currency issues and custodial issues are all monitored by the custodian bank."

Select an ADR as you would the stock of a domestic company, taking into account its long-term fundamentals and not simply geographic location.

Some Merrill Lynch recommendations include Development Bank of Singapore, a large bank well-positioned in a number of Asian markets and featuring a likely five-year 17 percent annual earnings growth rate; Cable & Wireless, the U.K. telecommunications firm that owns a large chunk of Hong Kong and Australian telecommunications companies and has an expected five-year 16 percent growth rate; Fletcher Challenge, a New Zealand forest products company that is likely to have a five-year 20 percent earnings growth rate; and Telecommunicacoes Brasileiras (Telebras), the Brazilian telecommunications company that could have a five-year 30 percent growth rate.

Smith Barney Shearson suggests Ek Chor Motorcycle, a Chinese motorcycle manufacturer expected to grow at a 25 percent to 35 percent annual rate; Consorcio G Grupo Dina, a Mexican truck and bus manufacturer likely to have a 20 percent to 25 percent growth rate; and Companias de Telefonos de Chile, the Chilean telecommunications firm with a likely 30 percent annual growth rate for several years.

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