InvestmentsOct 12 2015

Fund Review: Neptune Latin America fund

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This Latin America fund is just above £10m in size, making it one of the smallest offerings investing in this asset class. It has been managed since mid-2011 by Neptune’s Thomas Smith, who claims the aim is “relatively simple” in that “we’re just trying to provide capital growth by investing in Latin American securities”.

Mr Smith explains: “Much like the other Neptune funds, the portfolio uses both the economics team and our pool of global sector analysts. The starting point is with the economics team on what’s happening in the regions of the world, but it also does specific work on emerging markets and on individual countries. This forms the first part of the process, which I then use to determine my regional and sector allocations.”

The manager says he likes to play specific themes across the portfolio, with the bottom-up work confirming the companies that provide the best exposure at the most attractive valuation. “An example would be the most recent work looking at how emerging markets are positioned going into the first US Federal Reserve rate hike,” he says.

The team is generally positive on the outlook for US growth and thinks an interest rate rise is imminent. He notes: “As a result, we’ve looked at which countries are most vulnerable and which should be most resilient to [the rate hike], and that involves looking at the current accounts and how they’ve evolved. We saw a taper tantrum in 2013 and you can take a look at how the different economies have evolved since then.”

The manager favours those countries that have made adjustments to their current account deficits since 2013, such as Chile. He points out: “[Chile was] never quite grouped in with the ‘fragile five’, but they were certainly mentioned around the same time, given they had large current account deficits. They have managed to clear these completely.

“We think Chile stands out as being well placed to weather the Fed’s rate hike, and that’s reflected in the fact it’s the largest overweight position in the portfolio.”

The other major change to the fund in the past year has been its allocation to Colombia. “Peru and Colombia have been big overweights for us in the past few years,” he says. “These were two of the fastest-growing economies in Latin America – there were huge infrastructure programmes and their outlooks were good.

“Oil is incredibly important for Colombia, and the collapse in the oil price will have a direct impact on economic growth. It also means the government has to look to raise taxes and find other ways to generate the revenues they’re losing from oil, so we’re now underweight Colombia.”

Investors in the clean C-accumulation retail share class will be subject to an ongoing charge of 1.1 per cent, while the fund is at the riskier end of the risk-reward scale at level six out of seven.

Very few funds investing in Latin America have been able to generate a positive performance in the past few years, and Mr Smith’s vehicle is no exception. However, the fund has remained ahead of its benchmark, the MSCI EM Latin America index, in terms of cumulative performance across one, three and five years. Data from FE Analytics shows the portfolio lost 40.8 per cent in the past five years to October 1, while the index was down 48.1 per cent.

The fund has generated some outperformance in the past, the manager notes. “During 2012-13, our overweight holdings in Peru and Colombia contributed hugely to that outperformance. At that time, those markets were generating positive returns versus a flattish benchmark.”

Being overweight Chile has contributed to performance recently as the economy has proven more resilient than much of Latin America. Fortunately, Mr Smith’s underweight position to Brazil has paid off as the country has been “very weak”. He says: “On a sector basis, we don’t own [Brazilian iron ore miner] Vale and we’ve been underweight mining firms throughout.

More generally, Mr Smith stands by his belief that those countries that have made an adjustment in the past two years will be better positioned to “ride out the storm” when the Fed increases its rate, citing India as an example.

EXPERT VIEW

Ben Willis, head of research and investment manager, Whitechurch Securities

Neptune has spent time reducing its fund range and you have to fear for this portfolio if it continues with this programme. The fund is only £10m in size. Even if investor demand for Latin America exposure changes, it is hard to see why investors would be attracted to this product over a low-cost, passive option, or an active alternative that has an established and experienced management team at the helm.