The objective of HSBC Global Investment Funds’ Latin American Equity offering is to deliver performance in excess of its benchmark, the MSCI EM Latin America 10/40 index, by investing in the equity securities of companies that derive the majority of their results from Latin American countries.
Manager Natalia Kerkis explains: “The core belief within the investment philosophy pursued by the fund is that markets are inefficient, and through a disciplined and fundamentally driven investment process these inefficiencies can be exploited to achieve excess performance.”
Ms Kerkis says: “Our process involves a thorough, bottom-up research process, where potential investment candidates are carefully evaluated across several perspectives, and extensive diligence is applied to ensure we completely understand the risks and opportunities offered by each investment case. Our analysis is also referenced and cross-checked with each company’s stakeholders to ensure a comprehensive understanding of the forces that drive its financial results.”
Macroeconomic factors do come into the process, although the manager observes that the portfolio is not positioned on these alone. She notes: “Macroeconomic research conducted by our dedicated teams underpins and provides the reference scenarios in which we evaluate each company’s potential. We constantly monitor for changes in scenarios, and our disciplined valuation and portfolio construction framework ensure that we realise the excess performance when there is no longer evidence of a mispricing in assets.”
The fund has an ongoing charge of 1.39 per cent and is placed at the riskier end of a risk-reward profile, at level six out of seven.
Among the changes made to the portfolio this year are an increasing exposure to companies in consumer staples in Brazil and materials in Mexico on the basis of bottom-up attractiveness, Ms Kerkis says. “We have reduced our exposure on selected names in industrials in Panama and financials in Mexico on the back of high valuations and a lack of clear upside potential.”
Like most other funds that invest in Latin American equities, performance has suffered. According to FE Analytics, in the three years to November 12, the fund made a loss of 12.30 per cent in line with a shortfall of 12.69 per cent delivered by the MSCI EM Latin America 10/40 index. Across five years, the fund has not done much better, generating a loss of 11.49 per cent, underperforming its benchmark which recorded a loss of 4.13 per cent.
Ms Kerkis stands by the performance of the fund but she admits that infrastructure spending across the region this year fell short of what she had anticipated, hurting those holdings with more exposure to that revenue driver. But companies in the airline industry and several in the consumer staples sector have added to performance.
The manager believes the case for investing in Latin America is positive and highlights the economic situation in Brazil and Mexico. She notes: “In Brazil, we believe economic performance was below expectations, summarised by the divergence between high inflation and falling economic growth. With the election out of the way, the current government now faces challenges on monetary and fiscal policy. Fortunately, Brazil’s high level of international reserves remains an important cushion against the risks of a balance of payments crisis. Coupled with the fact that markets seem to anticipate a tougher scenario, we think there is more room for positive surprises on the economic front than the market is pricing in.”
On Mexico, Ms Kerkis believes the medium-term “bullish” view is “undisputed”. She says: “Since March, manufacturing sector trends and domestic demand dynamics are showing improvement. Consumer confidence has consistently recovered from January’s lows, together with the remittances. The outlook for construction is encouraging when we look at job creation in the sector, government spending and business confidence.”
The manager adds that bidding for new oil and gas areas and infrastructure investment will double foreign investment in a few years.
EXPERT VIEW
Martin Bamford, chartered financial planner and managing director, Informed Choice:
This fund is slightly less focused on Brazil, with a quarter invested in Mexico. There is also a good level of sector diversification among the 70 individual holdings, making it a better choice for an investor seeking a diversified strategy in this region. The fund has an eight-year track record and during the past three years has ranked about halfway in the table of Latin American funds, albeit with a very high level of maximum volatility. For the level of returns this fund has achieved, there are lower risk strategies available in the market, particularly First State Latin America.
