How to diversify with ADRs

American Depositary Receipts, or ADRs, are a form of alternative investment that offer you diversification. It’s tempting to call them American Diversification Receipts. They give you access to global stocks and industries that Canada lacks or has in short supply. This can enable you to earn more while reducing your risk. ADR certificates also let you diversify by currency.

We think ADRs have a place in most portfolios (ADR shares and U.S. stocks should make up a quarter or so of your stock portfolio, depending upon your circumstances). On our ADR survey (see below) we list 38 ADRs. Of these, we rate 22 buys and 16 holds.

The ADR stocks include companies from Belgium, China, Denmark, Finland, France, Germany, Holland, Israel, India, Italy, Japan, South Korea, Mexico, Spain, Sweden, Switzerland, Taiwan and the U.K.

Some of the above are so-called ‘emerging markets’. Such markets hold the potential for faster growth. Most have younger populations than the industrial world. This adds to the demand for goods and services now. And in the future, they’ll add to the demand for financial assets.

You can buy funds diversified by country

Investing in emerging markets raises your risk. But they have low correlations with U.S. stocks and with each other. This can help offset the higher risk (see below). Particularly if you buy a mutual fund diversified by country. Even so, correlations tend to be closer when financial markets fall, which reduces the advantage of diversification.

ADR certificates let you buy into industries you can’t buy here. For instance, Japan’s Canon Corp. has no Canadian peers. This global manufacturer of photocopiers, printers, cameras and flat-panel display screens, among others, and many of the other ADRs operate in industries with few or no Canadian counterparts.

Even when you buy ADR stocks in the same industries as Canadian and U.S. companies, you can comparison shop and determine where you’ll get the better deal, at home or abroad. Compare Unilever PLC to U.S. Key stock Procter & Gamble, Sanofi to U.S. Key stock Pfizer Inc. and so on.

You could, of course, invest in the company’s local exchange. But keep in mind that ADRs protect you from weaker reporting rules in some overseas markets—because they must file their U.S. financial statements in English using U.S. accounting rules.

Our ADRs deliberately exclude natural resources, financial stocks and some utilities. After all, the Canadian market offers lots of resource companies, financial institutions and high-yield utilities (that face no withholding tax but instead benefit from the Canadian dividend tax credit). So our ADRs include more of the manufacturing and consumer companies that are harder to find in Canada.

One important thing is to consider all your portfolios (including your spouse’s) as one and strike a suitable overall balance. Use ADRs to add to the manufacturing and consumer sections of your portfolio and to get the benefits that ADRs can provide.

 

***************************************************************************************

Profit from low correlations

One way American Depositary Receipts, or ADRs, let you reduce risk is through low correlations (or dissimilar stock price movements) to each other and to U.S. stocks.

Canada is at the high end of the correlation range. Our stocks tend to closely follow U.S. stocks. With 1.0 equal to perfect correlation, one study found a correlation of 0.82 between Canadian and U.S. stocks.

Stocks on overseas exchanges—particularly those in emerging markets—have lower correlations with U.S. stocks. This can let you build a portfolio that protects you from wide market swings and lets you sleep better at night.

Stocks in South Korea, for instance, had a correlation of just 0.20 with the U.S. Or, to put it another way, the ups and downs of these nations’ stocks have relatively little to do with the direction of U.S. stocks and a lot more to do with domestic matters.

As well, each emerging market typically has low correlations with other emerging markets—further reducing the risk of all your ADRs falling at the same time.

Emerging markets individually pose higher risk. Then again, they also offer high potential growth. Any single emerging market is risky, but because as a group they have low correlations with each other, a basket diversified by country cuts your risk.

 

***************************************************************************************

ADRs

Here are 38 foreign companies based outside the U.S. but that trade in the U.S. as American Depositary Receipts, or ADRs. We include each company’s 2012 earnings per share and estimated earnings per share for 2013 or fiscal 2014, forward-looking price-to-earnings ratio, dividend per share, debt-to-equity ratio, quality rating and industry to help differentiate between stocks. The last column gives our buy, hold or sell advice.

Year 2013 or fiscal 2014 figures are estimates. Div.—Annual dividend per share. A—American Stock Exchange. EPS—Earnings per share. Net D/E—Debt-to-equity ratio. *—Over-the-counter. Q—NASDAQ Stock Exchange.

Company

Symbol

Price

2012 EPS ($)

2013E EPS
($)

P/E

Div. ($)

Net D/E

Quality Rating

Industry

Advice

AB InBev

BUD

$96.75

4.56

4.91

19.7

2.44

1.1

Very Cons.

Beverages (beers)

Buy

Alcatel-Lucent

ALU

$1.50

(0.22)

(0.25)

0.2

Conservative

Communication equipment

Hold

America Movil

AMX

$21.11

1.86

1.98

10.7

0.30

1.5

Very Cons.

Wireless Communications

Buy

British Amer. Tobacco

BTI-A

$114.60

6.61

6.99

16.4

2.72

1.2

Very Cons.

Tobacco

Buy

BT Group PLC

BT

$47.51

3.93

3.86

12.3

0.94

3.0

Conservative

Communication services

Hold

Canon Inc.

CAJ

$35.34

2.20

2.46

14.4

1.52

0.0

Conservative

Photography

Buy

Cemex S.A.S.

CX

$12.00

(0.77)

(0.15)

1.0

Conservative

Cement

Hold

Ctrip.com Int’l

CTRP-Q

$29.38

0.80

0.77

27.0

0.0

Average

Travel services for Chinese

Hold

Diageo PLC

DEO

$123.92

4.88

6.39

17.8

3.25

0.7

Very Cons.

Beverages (spirits)

Buy

Ericsson Telephone

ERIC-Q

$12.44

0.56

0.74

16.8

0.29

0.0

Conservative

Communication equipment

Buy

GlaxoSmithKline PLC

GSK

$51.62

3.58

3.66

14.1

2.20

2.0

Very Cons.

Major drug company

Buy

Honda Motor

HMC

$40.39

2.17

3.40

11.9

0.82

0.7

Conservative

Auto & truck manufacturing

Buy

Infosys Technologies

INFY-Q

$42.87

3.02

2.96

14.5

0.51

0.0

Conservative

Information technology

Hold

Konami Corp.

KNM

$22.76

2.14

1.50

15.2

0.61

0.0

Average

Makes video games

Hold

Korea Electric

KEP

$13.42

(2.25)

(0.88)

15.3

0.40

0.9

Very Cons.

Electricity utility

Buy

Kyocera Corp.

KYO

$100.99

3.85

5.46

18.5

1.46

0.0

Conservative

Semiconductors

Buy

Luxottica Group

LUX

$53.14

1.60

1.81

29.4

0.62

0.4

Conservative

Makes eyewear and frames

Hold

Melco Crown Entertainment

MPEL-Q

$24.82

0.77

0.99

25.1

0.2

Conservative

Operates casinos

Hold

Nestlé SA

NSRGY*

$69.81

3.53

3.70

18.9

2.11

0.4

Very Cons.

Food and drinks

Buy

New Oriental Ed.

EDU

$19.16

0.85

0.87

22.0

0.0

Higher Risk

Private education in China

Hold

News Corp.

NWS-Q

$33.40

1.41

1.64

20.4

0.17

0.3

Very Cons.

Printing & publishing

Hold

Nokia Corp.

NOK

$3.66

(0.23)

(0.01)

0.25

0.0

Conservative

Communication equipment

Hold

Novartis AG

NVS

$74.72

5.57

5.22

11.4

2.48

0.2

Very Cons.

Biotechnology & drugs

Buy

Novo-Nordisk

NVO

$173.62

5.32

6.48

23.8

2.51

0.0

Very Cons.

Biotechnology & drugs

Hold

Panasonic Corp.

PCRFY*

$7.94

(4.06)

(3.10)

0.06

4.8

Conservative

Consumer electronics

Hold

Philips Electronics

PHG

$27.96

1.65

1.77

15.8

0.98

0.1

Very Cons.

Conglomerate

Buy

Posco

PKX

$72.49

7.09

8.15

8.9

0.89

0.4

Conservative

Major steel producer

Buy

Sanofi-Aventis

SNY

$55.08

4.13

3.84

14.3

1.69

0.1

Very Cons.

Major drug company

Buy

Siemens AG

SI

$106.14

7.42

7.31

14.5

3.89

0.5

Very Cons.

Conglomerate

Buy

Sony Corp.

SNE

$18.98

0.11

0.35

54.2

0.31

0.3

Very Cons.

Audio & video equipment

Hold

Taiwan Semiconductor

TSM

$19.96

1.08

1.19

16.8

0.51

0.0

Conservative

Semiconductors and chips

Buy

Tata Motors

TTM

$28.86

4.28

2.75

10.5

0.44

0.9

Conservative

Auto & vehicle Manufacturing

Hold

Telefonica, S.A.

TEF

$14.17

1.16

1.38

10.3

2.17

2.1

Very Cons.

Communication services

Buy

Teva Pharmaceutical

TEVA-Q

$39.21

5.35

5.06

7.7

1.26

0.5

Very Cons.

Drug company

Hold

Toyota Motor Co.

TM

$124.72

2.26

6.26

19.9

1.46

0.9

Conservative

Auto & truck manufacturing

Buy

Unilever PLC

UL

$42.71

2.02

2.30

18.6

1.40

0.3

Very Cons.

Food processing

Buy

Vodafone Group PLC

VOD

$29.75

2.35

2.51

11.9

1.02

0.4

Very Cons.

Communications services

Buy

WPP Group PLC

WPPGY-Q

$86.36

4.08

6.32

11.2

1.39

0.4

Very Cons.

Advertising

 

 

Comments are closed.