Investing In Foreign Based Companies

As one of the Kenyan bloggers can attest, it is important to diversify one's financial equities portfolio across geographical regions. Doing so prevents finding yourself with all your eggs in one basket during market downturns like the one we are currently experiencing in the US. For investors in America there are two main ways of doing so. Either buying US multinationals with significant overseas exposure or investing in foreign companies that trade on the US equity markets.

ADR industries covered on the AMEX, NASDAQ & NYSE

Industry	# of ADRs
General Industries	1
Aerospace & Defense; Tobacco	2
Non-life Insurance	3
Forestry & Paper; Gas, H20 & Multiutility; General Finance; Household Goods; Life Insurance; Oil Equip, Serv & Dist; Personal Goods; Real Estate	4
Support Services	5
Automobiles & Parts; Chemicals; Construct & Materials; Food & Drug Retailers; General Retailers; Industrial Engineer	6
Industrial Transport	7
HealthCare Equip & Ser	8
Electricity; Food Producers	10
Beverages	11
Leisure Goods	12
Industrial Metals; Travel & Leisure	13
Media	14
Mining	15
Electron & Electric Eq	17
Oil & Gas Producers	19
Mobile Telecom	21
Software & Computer Svc	25
Pharma & Biotech	27
Fixed Line Telecom	36
Banks	50

The latter has played a large part in my investment strategy whereby I have always bought such companies who's shares are listed as American Deposit Receipts or commonly referred to as ADRs. In fact, the first stock that I owned here in the US was an ADR. I remember asking my full service broker to put in an order for an Israeli listed ADR. The trade went on to outperform all the shares that my broker had recommended despite his insistance that I stick to US based companies. I have since moved on to trading using discount brokers and until now, every 4 out 5 companies that I have owned have always been ADRs or Canadian based companies.

A quick look at the ADRs listed in the US shows that are a total of 428 companies to choose from. Of these, 3 are listed at the AMEX, 120 at the NASDAQ and the majority on the NYSE. These companies span across all the sub-continents and cover 37 industries. And if we head over to the OTC or Pink Sheet markets, there are another 1291 companies available for US investors that include such companies as UK's mega retailer Sainsbury's PLC (JSNSF.PK) in the midst of a multitude of penny stocks.

African companies are the most under-represented in the ADRs, with the majority of the listed companies consisting of South African miners like the well known AngloGold Ashanti Limited. However, in the OTC/Portals market, you will find another 47 sub-Saharan companies, the majority from South African again, with two companies from Nigeria and Zambia.

Buying foreign companies is not limited to ADRs as now there are numerous of Exchange Traded Funds that consists of companies from foreign lands. Once again, iShares MSCI South Africa Index (EZA) is the only ETF that I know of that covers an African country. This index consists of stocks traded on the Johannesburg Stock Exchange, the majority of which are in the materials, telecommunications and energy sectors. The fund which yields a dividend of 2.16% is down 17.22% YTD although it has outperformed the Standard & Poor's 600 Smallcap Index in the last 5 years.

And then there is the option of buying Mutual Funds, even though I am no longer a fan of Mutual Funds because of their high expense ratio and fees. One such fund that I have come across that covers the African sub-continent is T. Rowe Price Africa & Middle East fund (TRAMX). In the 7 month old fund, you will find 30 to 40 common stocks from Bahrain, Egypt, Jordan, Kenya, Lebanon, Morocco, Nigeria, Oman, Qatar, South Africa, and United Arab Emirates. The bulk of the companies are in the Financial sector. Despite claiming to covering Kenya, I could not find any Kenyan company in the fund's prospect.

Number of ADRs by region

Region	#'s
Aust & NZ	17
Cent & East Europe	6
Mainland Europe	84
Latin America	94
Middle East & N. Africa	8
Asia	146
Sub-Sahara	9
UK & Ireland	64

As the rest of the world opens up and globalization takes root in the most far flung places in the world, I expect to see more companies from Sub-Saharan Africa. One such company which would benefit from cross-listing overseas would be Kenya's Safaricom that IPO's in the coming weeks. With an expected market capitalization of over $3 billion, the company would benefit if it trades in Western markets as it would get access to the much sought after foreign investors.

As most individual investors have found out in the last few years, foreign based companies offer better returns than US based companies which have trailed the rest of the world despite of their strong financial positions. For this reason, the bulk of my portfolio will always consist of ADRs except those from China. Chinese companies seem to attract the greatest attention resulting in high trading volatility. I'm also not a fan of Japanese companies which tend to cross-sharehold among themselves thereby resulting lack of good governance.

My best investments have been companies from Brazil and Canada which also tend to pay good dividends and command lower valuations than their corresponding American counterparts.

As we head into a recession, it is worth noting that foreign based companies are not immune to the slowdown of the US economy. In addition, these companies are also sensitive to the strength of the US dollar. The weakening of the dollar, despite US Treasury's purported strong dollar policy, has contributed to some of the stock gains in these foreign companies. For this reason, it is important to keep an eye on the Forex markets when investing in foreign based companies.