Reuters: Rethinking foreign linked securities

August 13, 2023

Global Depositary Receipts (GDRs) and American Depository Receipts (ADRs)

Running Point and its chief investment officer, Michael Ashley Schulman, CFA, were quoted by Reuters in an article — by Sinead Cruise and Carolina Mandl, “Big losses in Russia-linked stocks have investors rethinking other depositary receipts” — regarding the risks associated with depositary receipts (DRs), equity securities created to simplify foreign investing.

The article was also picked up by Global banking & Finance Review, NASDAQ, U.S. News & World Report, MSN, Yahoo!, Zonebourse (France), Világ Gazdaság (Hungary), and Zawya (Dubai), amongst others.

Risk exposure of depository receipts

Where appropriate, we have reminded our high net worth families of potential political, legal, jurisdictional, and market risks of foreign investments and pointed to the turmoil in Moscow as an example. Quite frankly, global investors received a reminder of foreign-linked security hazards when both short and long bets on Russian ETFs—like iShares MSCI Russia ETF (ERUS), VanEck Russia ETF (RSX), Franklin FTSE Russia ETF (FLRU)—became uncollectible last year because of financial sanctions. People spoke to us about going either long or short Russian stocks as their prices fell, but we advised against either because of political and sanction type risks.

Most institutional investors probably do not underappreciate this risk, and see it as a lesser risk than direct ownership of stocks and accounts within a country; however, many individual investors may have missed or forgotten about the legal and jurisdictional exposure of Global Depositary Receipts (GDRs) and American Depository Receipts (ADRs).

GDRs and ADRs are fine structures

For the most part, GDRs and ADRs are fine structures with their own plusses and minuses, but as with any structure, one also has to observe and understand the geopolitical and market risks of the underlying investments. A stranded Russian investment is a stranded investment; right now, foreign direct ownership of a Russian business might not be any more advantageous.

The analogy of currency risk

Although very different in form and structure, the closest market analogy I’d use to describe the risk in terms that most people might understand is to parallel it to the danger of a sudden devaluation in foreign currency markets—which is something that investors have seen repeatedly.

Article excerpts are below:

Michael Ashley Schulman, partner, chief investment officer at Running Point Capital Advisors, said some individuals may have “missed or forgotten the legal and jurisdictional exposure of GDRs”, since thrown into sharp relief by turmoil in Russia.

“GDRs have always faced political and regulatory risk —this has always been a known hazard— but investors are just now getting another wakeup call or reminder of this possibility,” said Schulman, who advises wealthy families on capital allocation.

Depostary Receipts
Depositary Receipts — Photography and graphics by

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