In international capital markets, American depositary receipts are often overlooked. Set up decades ago, these securities have long offered international companies a way of reaching US investors. After initially gaining in popularity, some ADR programmes have waned in recent years as large US fund managers concluded they could more efficiently buy shares on local exchanges around the world. At the same time, some European companies have cancelled their US listings in order to escape complying with Sarbanes-Oxley legislation.
The waning popularity of ADR programmes in Europe has been partly offset by companies in emerging markets with less well-developed stock markets using ADRs to reach US investors. The concept of depositary receipts has also been picked up by other exchanges, who have set up similar programmes in an effort to attract listings.
Either way, the trading patterns in ADRs offer an intriguing insight into the preferences of US investors when it comes to buying shares of non-US companies. New research by Thomson Reuters shows how ADR investors have in recent years favoured companies in the telecoms, oil and gas and basic resources sectors. It also shows how the most active buyers of ADRs tend to be long-only investors rather than absolute value ones.
Simon Tse, an analyst at Thomson Reuters, looked at the top 50 ADRs in terms of trading volume over the past year, and then used this data to identify the largest ADR investors.
He came up with some striking conclusions. First, it turns out that not all ADR investors are in the US. Though 80 per cent of the top 100 investors in ADRs are based in North America, 14 per cent are in Europe, with the rest spread between Asia, Australasia and Latin America.
This is surprising, not only because ADRs are aimed at US investors, but also because they are often less liquid than the underlying shares on the domestic exchange. One possible explanation is that European investors are buying ADRs to arbitrage the small price differences that sometimes exist between the receipts and the underlying securities. International investors may also prefer ADRs as a way of investing in non-US companies while remaining exposed to dollars.
Looking at investment styles, it seems purchases of ADRs are split almost evenly between the three main classes of long-only investments: growth funds, value funds, and those that classify themselves as pursuing growth at a reasonable price. Only one hedge fund appears in the 100 largest ADR investors. This is also reflected in the speed with which investors turn over their portfolios: 70 per cent of ADR investors have low turnover, with average holding periods of more than two years. This is probably also partly explained by the fact that ADRs tend to be more expensive to trade than the underlying shares.
The Thomson Reuters data also offers an insight into the investment preferences of ADR investors. Oil and gas companies are the favourite sector, followed by the telecoms sector with 21 per cent and basic resources with 18 per cent. Banks, which tend to account for a large proportion of most stock markets in the developed world, are of less interest. As the balance of companies issuing ADRs – and the interest of institutional investors – has shifted from Europe to emerging markets, it is hardly surprising that commodities producers have started to dominate.
According to Thomson Reuters, the most actively traded ADRs over the past 12 months include Vale, the Brazilian mining company, and Petrobras, the country’s oil group. Brazil accounts for more than 30 per cent of the stocks traded by volume, almost three times the volume of stocks from the next-largest country, China.