Favorite ADRs from Around the World

Vivian Lewis, editor of Global Investing, looks at some her favorite international stocks, from such diverse locales as Scotland, Israel, India, and Australia.

Steven Halpern:  Joining us today is Vivian Lewis, editor of Global Investing and long one of my favorite newsletter advisors. How are you doing, Vivian?

Vivian Lewis:  Hot, but well.

Steven Halpern:  Very hot up in New York, right?

Vivian Lewis:  Hotter than Calcutta.

Steven Halpern:  For over 20 years, you’ve been focused on helping investors gain exposure to international markets, primarily through stocks that trade as ADRs. 

Could you explain your investing approach and why you prefer investing in ADRs rather than directly on foreign exchanges?

Vivian Lewis:  The easiest way for U.S retail investors to gain access to foreign stocks is through ADRs.  There are about 2,500 of them. 

Most of them are now unsponsored meaning that the company is not paying fees in order that they be quoted in the US; but all the same, this is a US stock trading with a US market maker through a US broker and you can track it and you can buy it and you can sell it.  It’s pretty easy. 

If you buy on a foreign market, you have to exchange money into the foreign currency and you have to pay commissions to people who do not charge low amounts like the US internet brokers do, and it’s much more difficult to keep up with what you’ve got. 

The only exception we make these days is for stocks from Hong Kong and Japan, which you can buy on the local markets, in my case, through my discount broker, eTrade. 

That’s merely because the US market is closed when these markets are open and these markets are closed when the US markets are open.  So, the ADRs don’t track very well. 

Steven Halpern:  Your long-standing recommendations, Israel’s Teva Pharmaceutical (TEVA) and India’s Dr. Reddy (RDY), are both leaders in the generic drug sector. Could you tell us about these companies?

Vivian Lewis:  Well, Teva is huge and Dr. Ready is considerably smaller.  Teva is from Israel and Dr. Ready is from India. 

Both of them are leaders in generic drugs—that’s to say copycat drugs of other pharmaceuticals that are off patent and are no longer protected from competition and people copying them.  However, both of them also do a certain amount of developing over their own patented drugs.  So, they’re not really pure generics leaders. 

The reason for generics is that in the US and almost any other country that you can think of, the price of drugs is a major concern for governments as more and more people become old and require some kind of insurance to cover their medical and drug needs. 

So, everybody is looking for a bargain and generics are the way to cut down on the cost of pharmaceuticals. 

Steven Halpern:  You went out on a limb during the financial crisis in Europe and you recommended preferred shares from Royal Bank of Scotland (RBS), which have done very well since your recommendation.  Are you still a buyer of these?

Vivian Lewis:  Yes, because they have fallen back a bit lately.  Mainly because the British government is trying to figure out how to sell its 82% ownership Royal Bank of Scotland. 

The British government before the present one which was the labor government for the Royal Bank of Scotland shares and incidentally, also another British bank called Nat West, which Royal Bank had bought a few years ago, and this huge pile of preferred shares were issued in the US for US retail investors at $25 a pop. 

During the global financial crisis, these were trading at $6 or $7 rather than $25 and they’re still below the actual value at which they came out-somewhere in the range of the high teens and some in the low 20s.  That means the preferreds are paying very high dividends.

Steven Halpern:  Is there a specific letter for the preferred that investors should be looking at?

Vivian Lewis:  There are different groups of letters.  By some definitions, the Nat West ones are higher rated than the Royal Bank of Scotland ones. So, that makes them the most safe and of course, therefore, the least yielding. 

Then there are a bunch of Royal Bank of Scotland last-minutes issues of preferreds that were to take over ABN Amorreau, a Dutch Bank, when the former management was desperate and they had higher protection. 

These are called the E and G and then I.  So, they could be counted as safer and then you have all the rest of the alphabet. 

There is a lot of this stuff out and what you kind of have to do is look at a couple of letters in the category you are in interested in within a given day because they do move independently and you can just do it by year.

Steven Halpern:  Now often you’ve been quite bullish on Aberdeen Asia Pacific Income Fund (FAX).  What’s the attraction there?

Vivian Lewis:  Well, it’s about 45% invested in Australia.  In fact, the Aberdeen Asia Pacific Income Fund used to be called First Australia Prime Income before Aberdeen took it over.  Its ticker symbol is FAX and it’s still heavily in Australia.

Australia is suffering from rumors that the Fed is going to taper/cut the amount of quantitative easing that our Central Bank is doing.  This will push up interest rates in the US.  In fact, they already have begun rising. 

People are not taking into full account the special situation in Australia which has its own independent Central Bank and which is a major raw materials exporter to China, which moreover is about to have a new government.

So, Australia is not going to paper in my opinion and, in fact, is more likely to lower interest rates.  That means existing bonds go up in price because the new bonds are producing a lower yield for the same amount of money. 

So, bonds move like scissors.  The price of the bond goes up and the yield goes down.  So, the old bonds, which are in my fund, Aberdeen Asia Pacific Fund, are actually going to be producing a lower yield and having a higher price. 

I particularly like FAX because in addition to everything else, they have managed to garner $600,000,000 of funding to cover their borrowing money from US institutions to invest it in Australia, which increases the amount of money that they’re investing and increases our yield. 

Since they nailed all this money before any move by the Fed to cut US bond prices and raise US bond interest, the results should be that they’re going to be rolling in more money than they actually have gotten from shareholders for another seven to eleven years, depending on which of the $600,000,000 we’re talking about at the moment. 

Steven Halpern:  So, what is the current yield on Aberdeen for a US investor?

Vivian Lewis:  It’s between 7% and 8%.  I can tell you that FAX went down today, so it’s pushing towards 8%.  It trades at a discount to its net value as many closed-in funds do, so you’re getting more money working for you than you put up.

Steven Halpern:  Well, thank you.  We appreciate your taking the time today and I look forward to talking to you again soon.

Vivian Lewis:  Well, thank you, Steven. 

Steven Halpern:  Thank you.