Using Momentum to Invest in ADRs Proves Highly Effective Says Dorsey, Wright & Associates’ John Lewis
Editor’s note: This is an excerpt from a feature in HedgeWeek on Dorsey Wright & Associates investment process as well information about the ADR market.
Back in July 2014, the Sterling/US Dollar exchange rate was reached a high of USD1.71 but since then it has headed south, falling as low as USD1.29 following Brexit.
This downward trend has been a boon for US investors travelling to Europe on vacation. And whilst many have continued to focus their investment portfolios on US domestic stocks, the idea of actually owning international stocks has taken a back seat.
This is ill advised, however, given that there are already early signs that the US dollar might be softening; indeed, the sterling has just risen to USD1.327 on the back of strong manufacturing data.
Rather than overlook the vast array of opportunities that exist to hold securities in dynamic international companies, there is a viable solution: American Depositary Receipts (ADRs). These have long been used (since 1927) to allow US investors easy access to foreign companies without having to set up overseas brokerage accounts. Simply put, an ADR is a dollar-denominated certificate issued by a US depositary bank that represents a specific number of shares in a foreign company trading on a US stock exchange.
“You can buy a foreign company’s stocks in the US without having to deal with currency issues. Also, the depositary bank issuing the ADR will convert dividend payments into US dollars and take care of any foreign tax issues,” says John Lewis, Senior Portfolio Manager at Dorsey, Wright & Associates (DWA) a Nasdaq company that has been running a systematic momentum factor ADR strategy for the past decade.
ADRs represent an ideal opportunity today for US investors to gain access to international markets such as the UK, which has been enjoying a surprising market rebound since Brexit, the FTSE 100 having exceeded 6,800.
“There are a large number of developed and developing market companies that list ADRs across the capitalization spectrum; small cap through to large cap. It’s a wide dispersion of companies that do ADR listings.
“Investors in the US, as well as those in Europe and Asia, have a home country bias when it comes to investing so getting international exposure, in general, is a good thing for investors to consider. Also, the US dollar has stopped heading northwards – when it was rising, of course the US stock markets were the only game in town for US investors as international markets underperformed on a relative basis.
“But the US dollar has started to slow slightly and international markets to perform better. I think as the US dollar flattens out, international investments are going to look much more attractive to US investors,” remarks Lewis.