Investing in Non-U.S. Listed Companies

By Nancy Zambell, BrokerAdviser.com | Oct 22, 2007 | comment

The buzzword for the last few years has been international investing. Investors have finally discovered that the world of investing is not just comprised of the 2,764 companies listed on the NYSE, 3,200 on the Nasdaq and the 1,621 on the Amex. 

In fact, more than one-half of the largest public companies in the world reside outside the United States and U.S.-listed stocks account for just 28% of global equities. I think most investors will be amazed to see just how many stock exchanges exist around the world. To see a comprehensive list, go to: http://www.tdd.lt/slnews/Stock_Exchanges/Stock.Exchanges.htm. 

The Investment Company Institute reports that last year, the average amount of money that flowed into domestic funds was $2.04 billion per month while foreign funds received an average of $12.31 billion per month.  

The reason is simple: according to http://www.smartmoney.com, in 2006, world equity funds almost doubled U.S. returns-averaging gains of 24.2%. Last year alone, every one of the top ten mutual funds had heavy foreign investment exposure and posted gains of 65% to 86%-for one year! 

Financial Research states that five of the 10 best-selling mutual funds in 2006 were world funds: American Funds Capital World Growth & Income (Nasdaq: CWGIX), a large-cap value fund; American's EuroPacific Growth Fund (Nasdaq: AEGPX), large-cap blend; Dodge & Cox International Stock (Nasdaq: DODFX), large-cap value; MSCI EAFE (NYSE: EFA) a large-cap blend exchange-traded fund (ETF) and Fidelity Diversified International (Nasdaq: FDIVX), large-cap growth.  

Besides the potential for boosting your portfolio returns, global investments have additional advantages: 

1)      They add diversification to your portfolio.

2)      They benefit from the weak U.S. dollar. 

Mutual funds and exchange-traded funds have been the vehicles of choice for international investing and have received the lion's share of investors' globally-targeted money. But there are additional avenues that U.S. investors can take to invest in companies outside the United States. 

1) American Depositary Receipts (ADRs) are shares of foreign companies denominated in U.S. dollars but traded on the major U.S. exchanges. Currently, the Bank of New York's website lists more than 2,250 ADRs from more than 70 countries. They are subject to U.S. accounting rules and offer familiar trade, clearance and settlement procedures. For more information, go to (http://www.adrbny.com/dr_directory.jsp) 

Some of the most widely-held ADRs include: Toyota Motor Corporation (NYSE: TM), Honda Motor Co. Ltd. (NYSE: HMC), Sony Corporation (NYSE: SNE), Nokia Corporation (NYSE: NOK), Ryanair Holdings (Nasdaq: RYAAY) and InterContinental Hotels Group (NYSE: IHG). 

Investors can also purchase an ETF of ADRs, such as BLDRS Europe 100 ADR Index fund (Nasdaq: ADRU), which tracks the performance of a basket of 100 European-based companies; BLDRS Asia 50 ADR Index fund (Nasdaq: ADRA), comprised of 50 leading Asian firms; BLDRS Developed Markets 100 ADR Index fund; (Nasdaq: ADRD), 100 large companies in Europe and Asia; or the BLDRS Emerging Markets 50 ADR Index fund (Nasdaq: ADRE), comprised of equities in 11 nations, including Brazil, China, Indonesia, Russia and Taiwan. 

2) Shares on Foreign Exchanges. Although true global trading is years off,

Americans now have unprecedented access to many locally-denominated shares of foreign companies.  

The New York Stock Exchange (NYSE) merged with Euronext last April, and they recently created a platform for investors to trade on six cash equities exchanges in five countries and six derivative exchanges, including the NYSE, NYSE Arca (formerly the Pacific Exchange), and exchanges in Belgium, France, the Netherlands, Portugal and the United Kingdom. For more information, go to:http://www.nyse.com/. 

The Nasdaq website includes a comprehensive listing of non-U.S. companies:

http://www.nasdaq.com/asp/NonUsOutput.asp. 

The Wall Street Journal's website offers research on more than 20,000 non-U.S. listed stocks: http://online.wsj.com/public/page/companyresearch.html. 

A couple more sites for trading non-U.S. listed equities: 

Charles Schwab's Global Investment Services

Interactive Brokers

E*Trade 

This list is by no means exhaustive, but should give you a good starting point. Before you dive willy-nilly into international markets, though, let's talk about some of the unique risks involved in buying non-U.S. listed companies: 

Economic and political instability: Many foreign countries are at risk for political coups, adverse government maneuvers-such as the nationalization of businesses-and legislative and taxing actions that can significantly reduce the value of an investment. 

Currency: Currencies fluctuate and the value of investments in foreign dollars can change drastically in relation to the U.S. dollar, quickly evaporating any gains. Additionally, in the long-term, escalating inflation is a huge risk to an investment's value. 

Market: Foreign financial statements can be a challenge. Different languages plus unfamiliar, and often unregulated, accounting practices can become a landmine for naïve investors. Additionally, the lack of ability to easily trade shares in foreign markets can cause tremendous liquidity problems. 

These risks can add up to considerable volatility in the prices of your shares. Additionally, you can expect to pay higher commissions when purchasing the shares of non-U.S. listed companies. 

Investing has 'gone global' and investors who don't participate in international markets will miss out on a tremendous opportunity to diversify their portfolios and enhance their returns. However, remember that global investing does have unique risks-in addition to the normal risks of investing-so please perform your due diligence and exercise caution when buying international investments.

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