The Ins and Outs of International Investing
What do BMW, Burberry and Prada have in common?
Well, yes, all three are European companies with an old pedigree that produce highly-sought-after luxury goods, but besides that?
Unlike some of their peers—such as Daimler AG (DDAIF) or Moet Hennessey Louis Vuitton (LVMUY), none trade in the United States as a liquid ADR.
In addition to trading on German and French exchanges, respectively, both DDAIF and LVMH trade in the American over-the-counter pink sheets. Plenty of other European firms trade on the New York Stock Exchange or Nasdaq—including household names like Britain’s Vodafone (VOD) and Spain’s Telefonica (TEF) and Banco Santander (STD), to name a few.
The world of ADRs is not limited to European companies, of course. China Mobile (CHL), Turkcell (TKC), and AmBev (ABV) all trade as U.S. ADRs and hail from China, Turkey and Brazil, respectively. And there are hundreds more.
In contrast, BMW trades on the Xetra in Germany, Burberry trades on the London Stock Exchange, and Prada trades in Hong Kong of all places. Buying shares requires having a broker with access to these markets; a seat at the New York Stock Exchange will not suffice.
For the uninitiated in international investing, this requires a little explanation. An American Depository Receipt (“ADR”) is a security trading in the U.S. markets that represents shares of a non-U.S. company. The shares trade in U.S. dollars and pay any dividends in U.S. dollars. Aside from the occasional withholding of foreign dividends for tax purposes, a U.S. investor will generally notice no difference between holding an ADR and holding a regular U.S. stock.
Companies have their own assorted reasons for going the ADR route, but for most it is a matter of prestige and access to capital. As the largest and most liquid market in the world, the United States has been a favored place for multinational giants to raise capital for decades. In fact, the first ADR was issued as far back as 1927, for the British retailer Selfridges.
For investors, the rationale is much the same. Historically, it has been difficult for Americans to buy shares of locally-traded foreign firms. You would either need a broker in that country or a full-service U.S. broker with access to those markets, and in either event you are dealing with time zone differences, currency differences, higher trading costs and often times a serious lack of information about the stock you’re wanting to trade.
Buying the stock as an ADR alleviates these concerns and also potentially gives you better corporate governance. Sponsored ADRs trading on the NYSE (as opposed to those trading over the counter on the pink sheets) have essentially the same reporting requirements as listed U.S. firms.
For all of these reasons, ADRs are usually the best option for U.S. investors when given the choice. All else equal, I’d prefer to buy the Daimler ADR than to buy the German-traded shares.
But you shouldn’t limit yourself to the world of ADRs. Doing so may eliminate some otherwise great investment opportunities.
Consider BMW, which I mentioned above. I love BMW for precisely the same reasons I like Daimler. Luxury German cars are an aspirational status symbol around the world, but particularly in emerging markets. I consider BMW a fine “backdoor” way to profit from the rise of China’s nouveau riche, and the company’s operating results have been nothing short of stellar even in the midst of a European debt crisis. BMW had record profits in 2011 and raised its dividend to a new record level. More rises are likely. I’d prefer the ease of buying BMW as an ADR, but I would be perfectly comfortable buying it on the German exchange as well.
Much the same could be said for the two fashion brands I mentioned above. I love ADR-traded LVMH as an indirect bet on emerging market growth. But if I love LVMH, why would I also not love Burberry or Prada? All three companies are wildly profitable, have incredible brand equity and cater to the taste of high-income earners in Asia and elsewhere.
As capital markets become more globally integrated and information more dispersed, the barriers to buying and selling locally-traded shares are getting smaller. Most large, foreign blue chip companies publish their annual reports in an English version, and even for those that do not there is usually ample data available to help you in your decision making. Reporting standards do vary from country to country, but this should be no impediment to a motivated investor willing to roll up his sleeves and do a little research.
The logistics of trading have also gotten easier. These days, even many discount brokers offer some level of access to foreign-traded shares. To give two examples, Sizemore Capital primarily uses Interactive Brokers and Scottrade for trading and custody. Interactive Brokers allows me to buy or sell on virtually any major exchange in the world and to hold my cash balances in any major world currency. Scottrade’s international options are a little more limited, but Scottrade too allows for trading in a handful of foreign markets. Depending on the market in question, the trading commissions at both brokers are often about the same as they would be for regular domestic stocks.
Sure, it can be a little confusing at times when you look at your account statement and see that you just received a dividend denominated in, say, Norwegian kroner. But this is nothing to be afraid of and your broker will usually exchange it into dollars for you automatically.
Bottom line: In a world in which companies and their customers know no national boundaries, investors too should be willing to invest globally.
As a side note about over-the-counter ADRs, a lot of investors are put off by buying something on the pink sheets. I understand completely.
The pink sheets are notorious for being the home of micro-cap pump-and-dump scams, and I would never recommend to investors to walk into a minefield like that. But it is important to view ADRs on a case-by-case basis. Daimler and LVMH have more than ample size and liquidity to trade on the New York Stock Exchange, as would Swiss confectionary giant Nestle (NSRGY). They instead choose to go the pink sheet route because they don’t want to deal with the expensive headaches of dealing with Sarbanes-Oxley and other recent U.S. legislation. They trade on well-regulated exchanges in Europe, so their lack of regulation here is nothing I would consider a red flag. But in the case of, say, Russian gas giant Gazprom (OGZPY), the lack of governance would be something I’d have to take into consideration.
Disclosures: At time of writing Sizemore Capital holds long positions in CHL, DDAIF, LVMUY , NSRGY,TEF and TKC in client portfolios.