Managing Money : Tracking Investments in Japanese Firms Is Tricky
QUESTION: I would like to invest in a Japanese company, but I want to be able to follow my investment without resorting to an expensive reporting service. Do you have any ideas?
E. R.
ANSWER: Yes. There are several ways to invest in foreign markets, including Japan’s. Each offers its own set of pluses and minuses, so it will be up to you to decide which fits your investment style and risk threshold.
For starters, you can simply buy stock in Japanese companies directly from your brokerage firm. In the past three years, most large U.S. brokerage houses have bought seats on the Tokyo Stock Exchange and, as result, sell shares in Japanese companies. Smaller, regional brokerages also handle such business through the correspondent relationships they have with Japanese securities firms.
It is quite difficult, however, to track the performance of your shares on the Tokyo Exchange. Most U.S. newspapers do not carry listings for shares on the Tokyo exchange, and most brokers, even those from houses with seats on the exchange, do not have this information at their fingertips. Further, even when you get the share’s value, you must convert it from yen to dollars--and at the current trading value of the yen. Complicated, isn’t it?
A simpler method is buying an American Depository Receipt, or ADR, as they are more commonly known. These instruments are issued by American banks and brokerages, and represent shares held by the banks’ and brokerages’ foreign offices. ADRs trade on major exchanges in the United States.
For example, instead of buying shares directly in Sony Corp., you can buy a Sony ADR, which trades on the New York Stock Exchange. Prices of the Sony ADR and Sony shares on the Tokyo Exchange are very close and generally fluctuate in tandem. ADRs, experts say, offer individual investors the chance to monitor their stocks closely, because ADRs are listed on U.S. exchanges and are carried in local newspapers. Further, the value of ADRs are listed in dollars, not yen, so the individual investor does not have to compute currency conversions.
However, a drawback of ADRs is that they are available for only a small percentage of the stocks on the Tokyo Exchange. Although there are ADRs for most of the larger Japanese companies, if you are interested in a smaller, less known concern, you’ll probably have to buy directly or do without.
A third, and somewhat more risky, alternative involves purchasing shares in international mutual funds sponsored by large mutual fund companies. Among these funds are the Japan Fund, which has performed well in recent months. The risks of investing in these funds, however, can be significant.
The return on an investment depends heavily on the performance of the U.S. dollar. For example, investing in a stock traded in Tokyo or a fund devoted to Japan exposes the investor to the vagaries of international currency rates, which may have absolutely nothing whatsoever to do with the underlying performance of the mutual fund’s portfolio. Even if the portfolio performs well, the investor can lose if the currency of the foreign country in which the investment was made does poorly against the U.S. dollar. If the portfolio performs poorly and the currency dips against the dollar as well, you get a double whammy.
However, if you want to bet that the dollar will lose strength against a particular currency, investing in stocks in that country can give you a double lift. If the portfolio does well and the currency increases against the dollar, there is a double profit.
May I add a general word of caution about investing in foreign companies? With the exception of large blue chip companies such as Sony, this type of investing is not for amateurs, unless you have a high tolerance for risk and can afford to take some losses. The rewards can be great, but don’t bet next month’s mortgage on it.
Q:. What with all the recent temblors here in Southern California, I am thinking about getting earthquake insurance. Do I need it? What does it cost and what does it offer me?--H. R.
A: First, you should know that earthquake coverage is not included in the standard homeowner’s policy. If you want it, you must pay extra for it. And it is expensive. Most insurance companies charge from $2 to $3 per year for each $1,000 of protection. This means that for a house worth $300,000, you will have to spend $600 and $900 a year in addition to your homeowner’s insurance premium.
What kind of protection do you receive for this hefty outlay? Typically, earthquake policies have a 10% deductible, which means there is no pay out for the first $30,000 of damage to a $300,000 home.
Consumer advocates say earthquake insurance should be viewed as protection against a major financial disaster for your family. If you did not have earthquake insurance and your home were destroyed in a quake, you might face financial ruin. Earthquake insurance, like any other type of major catastrophic insurance, should spare you this. If fact, the insurance offers its greatest coverage the greater your problems are.
For example, if your $300,000 house were to sustain $50,000 damage from a quake, you would have coverage for $20,000. But if the damage were $100,000, $70,000 would be covered by insurance.
Until 1985, when the state Legislature required insurance companies in California to offer earthquake insurance with new homeowner policies, only a handful of homeowners had the coverage. More recently--and especially since last year’s Oct. 1 quake, estimates of coverage range as high as 20% of households.
You should also know that you do not need special earthquake insurance to have at least some coverage for damage caused by a quake. For instance, fires that occur as the result of a quake are generally covered under the normal fire insurance. A car damaged because a tree falls as a result of a temblor is covered by the comprehensive portion of car insurance.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.
