Finding Overseas Value at Home

In recent years, as many as three to six ADRs have been voted among the top 200 stock picks annually by the nation's investment clubs, according to Kevin Lamiman, associate editor of Better Investing, a magazine published by the Madison Heights, Mich.-based National Association of Investors, or NAIC. "ADRs increase diversification," he said. "It's a matter of choices and having alternatives."

Among the companies with ADRs exhibiting at this year's NAIC convention will be Mexican cement company Cemex(CX), the U.K.'s Scottish Power(SPI) and the Argentine energy company Petrobras Energia Participacoes(PZE).

At the American Association of Individual Investors, a Chicago nonprofit investor education group (www.aaii.org), president John Markese said that ADRs are a means of diversification. "If you're interested in foreign securities, this is the best way to go, for more sophisticated investors who want to do the work," he said.

He noted that ADRs are not for the casual investor. While they are denominated in dollars, each ADR is calibrated to its parent stock differently.

With some, one depository receipt equals one share of the foreign company stock. With others, the ratio could be 1 to 5, or even 1 to 5,000. The ratio can make following a company's performance confusing.

ADRs are, themselves, not stocks, but certificates created by U.S. banks to represent shares. Of the approximately 1,900 ADRs available in this country, more than 450 are traded on the three major exchanges with the rest available on the pink sheets, or over-the-counter market.

The banks do the back-office work, converting currencies at favorable rates because they are large institutions, and issue the receipts that represent the shares or portions of shares. They also convert the dividends of the foreign companies into dollars.

In today's global economy, financial advisers often recommend that individuals have anywhere from 10% to 20% of their investment assets in stocks outside the U.S. for diversity. But just as with owning individual domestic stocks, buying ADRs requires holding more than a handful for less risk and a lot of study on the part of the investor.

Investors who are looking to broaden their asset allocation internationally but don't have the time or the inclination should consider mutual funds or a generally less costly alternative known as exchange-traded funds, or ETFs. Barclays Global Investors, a division of London-based Barclays (BCS), offers ETFs known as iShares (www.ishares.com), and has some 30 index funds devoted to specific countries or regions of the world.

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