Bank of New York Mellon on the Joy of Depositary Receipts (part 2)
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Bank of New York Mellon (NYSE: BK) has over 2,700 depositary receipt programs (with a market value exceeding USD 770 billion) in 68 countries and is the world’s leading depositary bank. Anthony Moro, Managing Director and Head of Emerging Markets for BNY Mellon's DR business, discusses depositary receipts (foreign stocks traded on local exchanges) and the role they play in global investing.
[continued from part 1]
Nick Slepko: How significant is the DR business for BNY Mellon? Is it a priority because you have that USD 27.9 trillion asset base and that’s how DRs evolved for you?
Anthony Moro: We don’t break it out, but it’s reported as part of our issuer services business, which for the third quarter of 2012 represented just over 10% of our total fee revenue.
Still, DRs are an important and core product for us, and we were around when it was invented. DRs have been around in some form since the mid-1920s. It really began to take some prominence only when there were some companies outside the US worth investing in. That didn’t really happen until the 1980s. We caught the rise, and when I joined this business in 1992 the [DR] business was a fraction of what it is today. There are around 4,000 companies that have DR programs now, when I started there were maybe two or three hundred.
We are taking advantage of two trends: Globalization and the increasing pull of retirement money. I think over the rest of my career the world will become even more globalized and retirement assets will continue to build. It is always best to work in an environment where secular trends are in your favor.
The rest of the world is also contributing to these trends. By 2050, according to Goldman Sachs, in terms of GDP, the top six economies (in no particular order) will be the US, the EU, Brazil, China, India, and Russia. Taking part in all that growth is pretty exciting.
Slepko: How does BNY Mellon profit from DRs?
Moro: We make a few cents every time a depositary receipt is issued or cancelled. But those cents add up when you’re talking about billions of DRs traded over the course of a year. It’s a transaction-based fee model.
Slepko: In terms of growth, how do DRs rank compared to your other areas?
Moro: This year hasn’t been great for anybody, but our secular trends are pointing in the right direction and we are continuing to grow and add new countries and new products.
We have a whole series of indices at ADRindex.com that track global or individual sectors or various groups and regions. We track all the ADRs in these indices and compare them to our own ADRs. In the South Africa Index we have about 35 of the 40 ADRs, so our index is 5 short of the overall index, but usually does even better.
Moro: We have a lot of research on why this is, and there are a number of academic studies too, but the general belief is that the better managed, more Western-oriented companies are those that tend to have DRs, and if you don’t have a DR you are more insular, or maybe you aren’t as shareholder friendly, or maybe you have something to hide, or whatever…Any company that gets listed on an American exchange is meeting the gold standard of investing, but with over-the-counter and companies overseas you’d be surprised how many companies in emerging markets don’t even have English-language websites.
Slepko: Do you have success story related to a particular ADR?
Moro: A terrific example is how DRs allowed trading to continue in Egypt during the “Arab Spring” of 2011. While the local Egyptian exchange was closed, the shares of nearly a dozen Egyptian companies – including major financial services, telecommunication, and construction firms – continued trading undisrupted on the London Stock Exchange in the form of global depositary receipts (GDRs). That was an important stabilizing influence for [Egypt’s] markets and economy at a very volatile time.
Slepko: Is there any country in particular that has shown great improvement over recent years, in terms of being able to list DRs?
Moro: It’s an evolution. A lot of countries have low barriers to depositary receipts, and most of those are developed markets. In France and Germany for instance it is very easy to establish a depositary receipt, but they also compete with the local market where it is very easy for US investors to buy ordinary shares like Total or RWE in the local market, so they make it difficult on the product because the regulations are so open.
Emerging markets are still a bit protectionist. In markets where regulations constrain DRs like Brazil, China, India, or Russia they force investors to make a choice, and in many cases, they force investors to buy the DR for cost, convenience, and liquidity reasons.
Slepko: What about one that was a disaster?
Moro: I can’t say we’ve had any disasters – although in Mongolia, you’ve really got to dress warm if you plan on doing business with companies based there. It was 40 degrees below zero the day we signed our agreement in Ulan Bator. That’s not something you have to worry about when you’re working with Brazilian mining firms.
[continued in part 3]
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