Investing abroad

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11. American Depository Receipts

If a large foreign company is not quoted on the London exchange, it is always worth checking next whether you can find it on the American markets. Shares in nearly 2,000 such companies are traded in the US in the form of American Depository Receipts (ADRs). You can find more information at Global-Investor.com.

ADRs are tradeable certificates that substitute for the underlying shares of foreign companies. The companies choose a 'depository', such as a US bank, to issue certificates that represent a claim on their shares. But beware - one ADR does not necessarily equal one foreign share. The ADR price is set to suit the American market, where the face value of share prices is typically higher - perhaps $20-100 or more. At these levels, each ADR usually represents several foreign shares, rather than just one.

ADRs are either 'sponsored' or 'unsponsored':

• Sponsored ADRs are divided into three groups called Levels I, II and III. These correspond to the differing degrees of financial disclosure that they require.
  Level I demands relatively little disclosure. These certificates are traded 'over the counter' rather than on the main markets, in a similar way to Ofex ('off exchange') stocks in the UK.
  Levels II and III require companies to translate accounts into English and reconcile them with US accounting practices.
• Unsponsored ADRs, as their name suggests, do not enjoy the same degree of backing from the companies concerned. They require even less disclosure than Level I ADRs.

Of course, more stringent requirements are no guarantee of better returns. But clearly, the better informed you are about a given company, the better equipped you will be to judge its merits as an investment. It should help you limit your risk if you confine yourself to foreign companies that make as much information available to shareholders as possible, i.e. those with ADRs on Levels II and III.

The main advantages of ADRs are:

• they are generally easier to trade than the equivalent foreign shares
• American share purchases carry no stamp duty, unlike British ones

The main disadvantage of ADRs is that they expose you to a double currency risk. They are quoted in dollars. But their price ultimately hinges on the strength of the relevant foreign currency against the dollar. You could lose heavily if either currency weakens.

You can trade ADRs just like any other American shares, via a broker either in the US or the UK.

1. Why invest abroad? 2. Risk and reward in foreign investment 3. Custody risk 4. Currency risk 5. UK companies are foreigners too 6. Foreign unit and investment trusts 7. Picking foreign trusts 8. How to make the most of trusts 9. Tracker funds for foreign markets 10. Foreign companies on the London exchange 11. American Depository Receipts 12. Investing in American companies 13. Investing in European companies 14. Investing in Asian companies 15. Investing in other markets 16. Dividends and withholding taxes 17. Markets go global 18. Conclusion

• Mobius on Emerging Markets