This is a summary of “Chinese and Global ADRs: The US Investor Experience,” by Hendrik Bessembinder, Te-Feng Chen, Goeun Choi, and K. C. John Wei, published in the Third Quarter 2021 issue of the Financial Analysts Journal.
Listen to an audio version of this summary.
American Depositary Receipts (ADRs) have outperformed US stocks, with ADRs of Chinese companies doing particularly well.
What’s the Investment Issue?
American Depositary Receipts (ADRs) help non-US companies access the deep US capital markets. Recent events have prompted US regulatory responses that may limit the ability of non-US firms—Chinese firms in particular—to list ADR shares in the United States. The authors provide perspective by examining the long-run performance of ADR investments in the United States, with particular emphasis on Chinese firms.
How Do the Authors Tackle the Issue?
The authors study the returns of 1,162 ADRs over the period August 1954 through September 2020. The data, taken from the CRSP database, identify the home market of 1,105 companies across 49 markets.
The authors calculate the monthly buy-and-hold returns for each ADR. They create value-weighted portfolios of the ADRs and value-weighted portfolios of non-ADR US-listed stocks and compute monthly returns for each.
The authors also look at how much wealth was created by each ADR in US dollar terms. Specifically, they measure the increase/decrease in wealth over a period when invested in an ADR compared with what would have been earned by investing the capital in a 30-day Treasury bill. The researchers used a wealth ratio metric to compare the returns of the ADRs as a whole and as subgroups with that of the non-ADR US stock market.
The authors calculate performance results for all the ADRs and create subsamples that include developed economies and developing economies, as well as regional subgroups. And the authors analyze the performance of ADRs during different subperiods.
What Are the Findings?
The returns are highly positively skewed: Only 43.4% of ADRs have returns that exceed that of the 30-day US Treasury bill. Still, the value-weighted portfolio of ADRs performs well, with annualized geometric mean returns of 11.2% versus 10.7% for non-ADR US stocks.
A total of $1.03 trillion was created for investors in ADRs, with $547 billion and $476 billion attributable to developed and emerging markets, respectively.
The largest wealth created comes from ADRs of Chinese companies, which added $373 billion, or 36.1% of the total wealth across all ADRs. The Netherlands comes in second, at $171 billion, and UK firms, in third place, added $125 billion.
A small subset of companies added a disproportionate amount of value to the ADR investing mix. Alibaba added $222 billion, which is 21.5% of the total amount added by all ADRs across the globe and is a larger amount than that of any single market except China. Royal Dutch Petroleum ADRs added $116 billion in wealth, putting it in second place.
Although as a whole ADRs did well, the ADRs of relatively few countries had an outsized influence. The wealth ratio for ADRs of Chinese companies is a spectacular 2.71, and that of ADRs from Dutch companies is 1.46. “The only other markets in which ADRs outperformed the US market on a value-weighted basis were Israel, with a wealth ratio of 1.16, and Chile, with a wealth ratio of 1.11,” the authors state.
The authors find that including ADRs in a global portfolio improves risk-adjusted performance. “The Sharpe ratio improved from 0.48 when ADRs were excluded to 0.5 when the weight on the global ADR was either 30% or 40%,” the authors state.
What Are the Implications for Investors and Investment Managers?
Investing in ADRs has provided US investors with better returns and lower risk than investing solely in the US markets. This is particularly so when it comes to Chinese company ADRs.
“It would be ironic if the US regulatory reaction to the Luckin Coffee event harmed US investors by preventing other promising Chinese companies from listing in the United States,” the authors state.