The Case for ADR's - Debunking some Myths
April 9, 2012 | Jack White, CFA | Partner, Senior Portfolio Manager
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One common misperception we have encountered is that investors using only American Depository Receipts (ADRs) are not as sophisticated as those that use only Ordinaries. As a manager using only ADRs we find that myth a little perplexing. After all, ADRs are exchange traded financial instruments, issued by banks to represent a foreign company's publicly traded stock and they trade just like US stocks. In otherwords, they simplify investing in international markets, but there's nothing unsophisticated about them. There are several other types of securities designed to achieve the same goal, such as American Depository Shares, Global Depository Receipts, Participatory Notes and securities of that ilk. The goal of each of these securities is to allow US investors (among others) to purchase securities from other global stock markets in dollar terms.
We see benefits to investing using ADRs. Specifically:
- The selection of foreign securities that can be purchased using ADRs or similar securities is vast. Over 95% of International stocks with more than $10 Billion in market capitalization are available in US exchanges as some variation of an ADR.
- Investors can avoid commingled funds when investingusing ADRs. International mutual funds are frequently used to simplify the process for US investors buying in dollars, but can lead to the loss of tax harvesting flexibility and transparency of fees and trading. ADRs allow investors to hold individual securities and readily see the fees they are being charged.
- Liquidity is available for ADR transactions as manyof the large trading firms will create them for you from their inventory of foreign stocksfor a very modest fee.
- ADR performance closely tracks the movement of the underlying securities and the currency conversion. Since there is an arbitrage opportunity between the local markets and the US ADRs, this match in performance is self enforcing and occurs naturally.
- Investors can buy ADRs without the complexity of having to perform currency exchange. This simplifies the transaction to a single purchase, instead of a currency conversion and then a purchase.
- Investors can buy ADRs without needing a foreign brokerage account. This eliminates the needs to abide by specific exchange rules and regulations for non-US exchanges, or deal with the time difference between the US and International Markets.
- The sponsoring banks issue US statements to account for dividends and foreign withholding taxes that investors will want to claim. This simplifies accounting and paperwork for investors.
We have had some investors ask us if ADRs accurately track the underlying security, including the currency exchange differentials. In a word, yes, they do. To illustrate this, we have prepared the following example using Siemens. If you had purchased two lots of $10,000 worth of Siemens at the beginning of 2011; one in ordinariesincluding the currency conversion, and one in ADRs, the annual returns for both transactions were within $10, or 0.1% of each other. The example is presented below.
A $10,000 position in Siemens is initiated at the beginning of 2011 and closed out at the end of 2011. We will show the investment's return under two scenarios: 1) purchasing ordinary shares in the local market, and 2) purchasing ADRs in the U.S. market.
|Local Market Investment||Investment in ADRs|
Using the End of Day exchange rate, one would convert 10,000 USD into Euros at the bid rate of 0.7454898, yielding €7,454.898 (10,000 x 0.7454898).
One would then purchase shares of Siemens on the local market at a price of €92.70/share, yielding 80.4196 shares (€7,454.898/€92.70/share).
Using the end of day price, you would purchase Siemen's ADRs at $124.25/share, yielding 80.4829 shares ($10,000 x $124.25/share).
You would receive a dividend payment of €2.70/share, yielding €217.1329 (€2.70/share x 80.4196 shares). We will assume the funds from the dividend are not reinvested.
You would receive a dividend payment of $3.68874/share, yielding $296.88 ($3.68874/share x 80.4829 shares). We will assume the funds from the dividend are not reinvested.
To close out the position, you would sell the 80.4196 shares at a price of €73.94/share, yielding €5,946.2252 (€73.94/share x 80.4196 shares). This would leave you with funds of €6,163.358(€5,946.2252 + €217.1329).
You would then convert these funds into USD at the ask rate of 0.770238, yielding $8,001.888.
Your return on the investment would therefore be, (($8,001.888 - $10,000)/$10,000) = -19.98% or approximately -20%.
To close out the position, you would sell his 80.4829 shares at a price of $95.61/share, yielding $7,694.97 ($95.61/share x 80.4829 shares). This would leave you with funds of $7,992.85 ($7,694.97 + $296.88).
There is no currency conversion necessary.
Your return on the investment would therefore be, (($7,992.85 - $10,000)/$10,000) = -20.08% or approximately -20%.
For those that are still skeptical, we have included a chart below (Chart 1) illustrating that the correlation between the S&P ADR index and both the MSCI EAFE and MSCI ACWI ex-US indexes is over 98%. Our experience has been that ADRs allow us a full slate of attractive investment alternatives that provide easy access to international stocks for our clients. While there may be a less representative list of options available for smaller cap investors, our experience indicates that for large cap investors, ADRs performance opportunities equal Ordinaries.
As always, feel free to contact us if you desire any additional information or have any questions. A full listing of ADRs available for companies over$10B is attached for your review.
International Companies Above $10B Market Cap with ADRs or Similar Securities
|ABB Ltd.||Companhia de Bebidas das Americas|
|Barrick Gold Corp.||adidas AG|
|Anglo American PLC||Agrium Inc.|
|Koninklijke Ahold N.V.||Air Liquide S.A.|
|Akzo Nobel N.V.||America Movil S.A.B. de C.V.|
|ArcelorMittal||Australia & New Zealand Banking Group Ltd.|
|ARM Holdings PLC||ASML Holding N.V.|
|Atlas Copco AB||BCE Inc.|
|Barclays PLC||Bank of Montreal|
|BNP Paribas S.A.||Bank of Nova Scotia|
|BP PLC||Bridgestone Corp.|
|BRF-Brasil Foods S.A.||BG Group PLC|
|Banco Santander S.A.||British Sky Broadcasting Group PLC|
|BT Group PLC||British American Tobacco PLC|
|Anheuser-Busch InBev||Canon Inc.|
|CNOOC Ltd.||Cheung Kong (Holdings) Ltd.|
|China Mobile Ltd.||Chunghwa Telecom Co. Ltd.|
|China Unicom (Hong Kong) Ltd.||Central Japan Railway Co.|
|CLP Holdings Ltd.||Canadian Imperial Bank of Commerce|
|Compass Group PLC||Canadian National Railway Co.|
|Canadian Natural Resources Ltd.||Canadian Oil Sands Ltd.|
|Canadian Pacific Railway Ltd.||Centrica PLC|
|CRH PLC||Commerzbank AG|
|Credit Suisse Group AG||Crescent Point Energy Corp|
|Cenovus Energy Inc.||Danone S.A.|
|Deutsche Bank AG||DBS Group Holdings Ltd.|
|NTT DoCoMo Inc.||Daimler AG|
|Diageo PLC||Deutsche Post AG|
|Deutsche Telekom AG||Denso Corp.|
|Deutsche Boerse||Encana Corp.|
|China Life Insurance Co. Ltd. (China)||L'Oreal S.A.|
|Lukoil Holdings||LVMH Moet Hennessy Louis Vuitton|
|Lloyds Banking Group PLC||Manulife Financial Corp.|
|Mizuho Financial Group Inc.||Mitsubishi Electric Corp.|
|Mitsubishi Estate Co. Ltd.||MTN Group Ltd.|
|Mitsubishi Corp.||Mitsubishi UFJ Financial Group Inc.|
|National Australia Bank Ltd.||Newcrest Mining Ltd.|
|National Grid PLC||Nomura Holdings Inc.|
|Nokia Corp.||Naspers Ltd.|
|Nissan Motor Co. Ltd.||Nestle S.A.|
|Nintendo Co. Ltd.||Nippon Telegraph & Telephone Corp.|
|Novo Nordisk A/S||Novartis AG|
|Petrobras Petroleo Brasileiro (Pfd)||Petrobras Petroleo Brasileiro (Ord)|
|Potash Corp. of Saskatchewan Inc.||Pearson PLC|
|PetroChina Co. Ltd.||Prudential PLC|
|Rogers Communications Inc. Cl B||Royal Dutch Shell PLC (CL A)|
|Royal Dutch Shell PLC (CL B)||Repsol YPF S.A.|
|Roche Holding AG||Transocean Ltd.|
|Rio Tinto Ltd.||Rio Tinto PLC|
|RWE AG||Royal Bank of Canada|
|Rolls-Royce Holdings PLC||SAP AG|
|SABMiller PLC||Taiwan Semiconductor Manufacturing Co. Ltd.|
|Grupo Televisa S.A.B.||UBS AG|
|Unilever N.V.||Unilever PLC|
|United Overseas Bank Ltd.||Cia Vale do Rio Doce Pfd Sh -A-|
|Cia Vale do Rio Doce Ord Sh||Vinci S.A.|
|Vivendi||Volkswagen AG (Pfd Non-Vtg)|
|Vodafone Group PLC||Volvo AB|
|Valeant Pharmaceuticals International Inc.||Westpac Banking Corp.|
|Westfield Group Australia||Wal-Mart de Mexico S.A.B. de C.V.|
|Woodside Petroleum Ltd.||WPP Plc|
|Zurich Financial Services AG||AIA Group Ltd.|
|Fanuc Corp.||Holcim Ltd.|
|Housing Development Finance Corp. Ltd.||Hon Hai Precision Industry Co. Ltd.|
|H&M Hennes & Mauritz AB||Inpex Corp.|
|Itochu Corp.||JX Holdings Inc.|
|Kansai Electric Power Co. Inc.||KDDI Corp.|
|Kia Motors Corp.||Keyence Corp.|
|Li & Fung Ltd.||LG Chem Ltd.|
|Linde AG||Marubeni Corp.|
|Michelin||Murata Manufacturing Co. Ltd.|
|Wm. Morrison Supermarkets PLC||MS&AD Insurance Group Holdings Inc.|
|Mitsubishi Heavy Industries Ltd.||Mitsui Fudosan Co. Ltd|
|Muenchener Rueckversicherungs-Gesellschaft AG||Nippon Steel Corp.|
|Tata Consultancy Services Ltd.||Takeda Pharmaceutical Co. Ltd.|
|National Bank of Canada||Tullow Oil PLC|
|UniCredit S.p.A.||AngloGold Ashanti Ltd.|
|Yamana Gold Inc.||Aviva PLC|
|AXA S.A.||Astra International|
|AstraZeneca PLC||Allianz SE|
|BAE Systems PLC||Brookfield Asset Management Inc. Cl A|
|BASF SE||Bayer AG|
|Banco Bradesco S/A||BHP Billiton Ltd.|
|BHP Billiton PLC||Banco Bilbao Vizcaya Argentaria S.A.|
|Enbridge Inc.||ENI S.p.A.|
|Enel S.p.A.||E.ON AG|
|Ericsson LM Shs B||Eisai Co. Ltd.|
|Experian PLC||Fresenius Medical Care AG & Co. KGaA|
|Fresenius SE||Fomento Economico Mexicano S.A.B. de C.V.|
|France Telecom||FUJIFILM Holdings Corp.|
|GDF Suez S.A.||Gold Fields Ltd.|
|Goldcorp Inc.||GlaxoSmithKline PLC|
|Gazprom OAO||HSBC Holdings PLC|
|HDFC Bank Ltd.||Henkel Kgaa Akt Vorz Akt Stimm|
|Power Assets Holdings Ltd.||Heineken N.V.|
|Hitachi Ltd.||Hong Kong Exchanges & Clearing Ltd.|
|Honda Motor Co. Ltd.||Hong Kong & China Gas Co. Ltd.|
|Hutchison Whampoa Ltd.||Iberdrola S.A.|
|Industrial & Commercial Bank of China Ltd.||Imperial Oil Ltd.|
|Impala Platinum Holdings Ltd.||Infosys Ltd.|
|ING Groep N.V.||Intesa Sanpaolo S.p.A.|
|Itau Unibanco Holding S.A||Japan Tobacco Inc.|
|Imperial Tobacco Group PLC||KB Financial Group Inc.|
|Kao Corp.||Kinross Gold Corp.|
|Koninklijke Philips Electronics N.V.||Koninklijke KPN N.V.|
|Komatsu Ltd.||Keppel Corp. Ltd.|
|Kyocera Corp.||Societe Generale S.A. (France)|
|Seadrill Ltd.||Sandvik AB|
|Singapore Telecommunications Ltd.||Shinhan Financial Group Co. Ltd.|
|Sun Hung Kai Properties Ltd.||Shire PLC|
|Siemens AG||Sun Life Financial Inc|
|Silver Wheaton Corp.||Mitsui & Co. Ltd.|
|Sumitomo Mitsui Financial Group Inc.||Sumitomo Corp.|
|Sony Corp.||China Petroleum & Chemical Corp.|
|Sanofi S.A.||SSE PLC|
|Sasol Ltd.||Samsung Electronics Co. Ltd.|
|Samsung Electronics Co Prf||Statoil ASA|
|Santos Ltd.||Suncor Energy Inc.|
|Svenska Handelsbanken A||Swiss Re AG|
|Swedbank AB||Syngenta AG|
|Teck Resources Ltd.||Toronto-Dominion Bank|
|Telefonica S.A||Telenor ASA|
|Teva Pharmaceutical Industries Ltd.||Telecom Italia S.p.A.|
|Tokio Marine Holdings Inc.||Tokyo Gas Co. Ltd.|
|Talisman Energy Inc.||TeliaSonera AB|
|Telstra Corp. Ltd.||Toyota Motor Corp.|
|Toshiba Corp.||Total S.A.|
|Thomson Reuters Corporation||TransCanada Corp.|
|Toray Industries Inc.||Tesco PLC|
|Astellas Pharma Inc.||AMP Ltd.|
|Assicurazioni Generali S.p.A.||Bank of China Ltd.|
|BMW AG||Brambles Ltd.|
|Compagnie Financiere Richemont S.A.||Chubu Electric Power Co. Inc.|
|China Construction Bank Corp.||CIMB Group Holdings Bhd|
|China Steel Corp.||Commonwealth Bank of Australia|
|CSL Ltd.||Compagnie de Saint-Gobain S.A.|
|Carrefour S.A.||China Shenhua Energy Co. Ltd.|
|Daiichi Sankyo Co. Ltd.||European Aeronautic Defence & Space Co. EADS N.V.|
|BM&F Bovespa S/A Bolsa de Valores Mercadorias e Futuros||East Japan Railway Co.|
|Essilor International S.A.||Nordea Bank AB|
|Novatek Jt Stk Co Spon Gdr Reg S||Old Mutual PLC|
|Origin Energy Ltd.||Oversea-Chinese Banking Corp. Ltd.|
|Bank Central Asia||Pernod Ricard S.A.|
|Ping An Insurance (Group) Co. of China Ltd.||PPR S.A.|
|QBE Insurance Group Ltd.||Reckitt Benckiser Group PLC|
|Reliance Industries Ltd.||Rosneft|
|Saipem S.p.A.||Sampo Oyj|
|Sberbank of Russia OJSC||Standard Bank Group Ltd.|
|Schneider Electric S.A.||SoftBank Corp.|
|Shin-Etsu Chemical Co. Ltd.||Suncorp Group Ltd.|
|Seven & I Holdings Co. Ltd.||Swatch Group AG|
|Tencent Holdings Ltd.||Unibail-Rodamco S.A.|
|Woolworths Ltd.||Xstrata PLC|
International Companies Above $10B Market Cap without ADRs
Formosa Plastics Corp.
Hyundai Mobis Co. Ltd.
Hyundai Motor Co. Ltd.
Itausa-Investimentos Itau S.A.
Standard Chartered PLC
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