Saturday, September 20, 2008

Value Investing Today: Chp 9: How To Invest in Companies Worldwide

In this chapter, Brandes explains options on how to purchase shares in a foreign company. Investor's wanting to buy foreign stocks can purchase ordinary foreign shares (ORDs), depositary receipts, foreign shares listed directly on a local exchange (typically only large multinationals do this) and/or packaged investments such as mutual funds or exchange traded funds ETFs.

Purchasing foreign stock exchange ORDs direct from a foreign broker is an option, although somewhat complicated. There are issues of which broker to deal with, currency conversion, custodianship, and where to accrue the foreign currency dividends. A simpler option is to look for over the counter (OTC) ORDs trading on e.g. the Nasdaq. Another option is to find a local brokerages that can custody, price, and payout ORD dividends (for a fee) in a local currency.

Brandes suggests an easier and more transparent way of buying foreign stocks is to purchase depositary receipts. There are American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs). These are similar structures except that the ADRs have been geared towards U.S. investors.

ADRs are listed on U.S. exchanges (e.g. NYSE), are priced and pay dividends in U.S. dollars. Unsponsored ADRs (created by banks without the consent of the underlying company) are not very popular with investors since company information and performance reports are not always readily available. Sponsored ADRs (most of the ADRs) are generally listed on the OTC market. Exchange-listed ADRs are also sponsored, listed on a major exchange and have the added benefit of requiring the companies to adhere to the exchanges reporting requirements.

ETFs represent a basket of securities and and trade like a single stock. ETFs are passivley managed. Some ETF strengths include ample liquidity, low expense ratios and tax benefits. Brandes lists some ETF weaknesses as the associated trading costs and the fact that many simply track indices, which can be heavily weighted towards larger cap stocks and stocks that have had undergone a tremendous increase in market cap.


Anonymous said...

There's more motivation for international investing in the Templeton book for value investing.. some good chapters that outline why its near-sighted to focus on just the U.S.

Is there a morningstar equivalent for Europe, or Asia, in English? How does one trade in a foreign market if a stock isn't listed in an accessible market via scottrade?

Reyer Barel said...

Hi Amit,

thanks for the comments.

I am not sure about a morningstar equivalent in Europe or Asia in English (I don't really follow mutual funds). I don't know if this will be of interest for you, but Brandes does mention as a source of information for international securities listed as account depositary receipts.

If you want to trade in a foreign market and the stock is not available in Scottrade, my guess is you would need to find a full service broker to transact for you. Full service retail brokerages will likely be able to get access through their institional trading arm and they can contact their overseas division and be able to custody the stock and handle the currency exchanges for you (for a fee of course). That is the advice Brandes gives in this chapter.