In no cents abroad.

• Author: Scheer, Lisa
• Position: Investing in American depository receipts

Because economic prophets are preaching that foreign businesses are among the most important economic forces in the state, common sense suggests that Tar Heel investors should look beyond the borders for profits.

It's a process made simple by American Depositary Receipts, dollar-denominated vouchers for shares in foreign companies. Many ADRs trade on U.S. markets, with investment and transaction costs automatically converted into dollars. During the past four years, the average dollar trading volume in ADRs on U.S. exchanges grew by 32.8% annually, compared with 13.2% for U.S. stocks. In 1992, the value of ADRs traded on U.S. stock exchanges rose to a record $125 billion.

Unfortunately, the popularity of foreign investing has coincided with a recession even more persistent abroad than in the United States. The Morgan Stanley stock index for Europe, Australia and the Far East has dropped 15.6% since the end of 1988, while the Standard & Poor's index of 500 U.S. stocks was up 79%.

What goes down sometimes comes back up, of course. The average international-stock fund rebounded with a 6% gain during the first quarter this year, Lipper Analytical Services reports. And Winston Way of Buckhorn Capital Management in Charlotte is among those who believe now is the time to buy ADRs of companies based in Europe, where easing of monetary policy and lower interest rates could boost profits and demand for stocks.

Investing in ADRs is undeniably more complex than buying American stocks. One of the most important considerations is the currency risk, says Paul Ehrsam, a vice president of Sterling Capital Management in Charlotte, which has 8% of its $300 million equity portfolio invested in ADRs.

A rising dollar can rapidly eat away at the value of a foreign stock, Ehrsam points out. Consider British Petroleum (BP-NYSE), which supplies numerous gas stations in North Carolina. In September, Ehrsam's fund bought BP's ADRs on the New York Stock Exchange. Since then, BP's London stock price has soared 30%, but in the United States the rise has been a less-spectacular TABULAR DATA OMITTED 15%. "That's all currency going the wrong way for us," he says. Since ADR prices are usually dollar translations of the stock's local-currency price, a stronger dollar means a lower value here.

Investors should also be alert to financial-disclosure rules that vary from country to country. Kenneth Lopian, head of the ADR division at Bank of New York, says most of the 210...