Historically, the average returns of investments placed internationally have greatly outperformed those in North America. Whether this is the result of a developing economy, a changing demographic, a currency or interest rate regime, or even the entrance of new companies into a market place, the opportunity to diversify internationally is an extremely lucrative one.
That being said, the opportunities for personal investors to access the products that provide direct exposure to international business are somewhat limited. As such, this article is going to go into detail to discuss how it is that an investor can gain exposure to international companies, without having to go through a mutual fund, personal loans funds or foreign stock exchange.
One of the simplest ways for an investor to become involved with the shares of a foreign company is to purchase an asset known as a Depositary Receipt. A DR is a kind of security which is held by a local bank, which has agreed to take the shares on as deposits, and distribute them to local investors. These shares can then be purchased in local currency by a domestic investor, but still expose the company to all of the foreign currency and operational risks associated with the foreign company. From there, these shares will sometimes even come with voting rights (known as sponsored DRs), or underlying rights that allow an investor a greater ability to participate in the issuance itself.
Similarly to how it is that an investor can buy into a Depository Receipt, American and British exchanges provide services that allow the purchase of international securities on their own respective exchanges. These products are called Global Depository Receipts (British), and American Depository Receipts (American).
While the main differences between these two kinds of issuance mainly refers to the kind of currency that is used to purchase these shares, it is important to note how it is that these shares are generally traded on an exchange, which might incrementally improve their overall liquidity. Lastly in this grouping, Global Registered Shares are Depository Receipts that are listed in other foreign exchanges, and in other foreign currencies (ie. French depository receipts traded in euros).
When evaluating the benefits of investing into Depository Receipts as opposed to the traditional options available through mutual funds, the biggest things to keep in mind are the differences in risks. With a depository receipt, an investor is taking on all of the risks and opportunities associated with that particular company. This is different from a mutual fund position, where the management team might choose to hedge out the risks of currency fluctuations, or even interest rate risks.
This means that the benefits and mitigation of professional management are removed from a depository receipt, but the investor then has more room to customize the kind of position that they want to take on. They can choose exactly how much they want to limit, or how much they want to leverage. However, because such limitations are expensive without the scale of a fund, taking on a sophisticated position through a depository receipt can prove to be expensive for an investor that is not willing to remain invested over the longer term, or who does not have the capacity to complete the amount of due diligence required to maintain such a position.