InvestmentsOct 12 2015

Fund Review: Fidelity Funds Latin America

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The vehicle aims to provide long-term capital growth by investing primarily in firms that have their head offices or a main part of their activities in Latin America. At least 70 per cent of the fund must be invested in the shares of Latin American companies, although the manager does have “the freedom to invest outside the fund’s principal geographies, market sectors, industries or asset classes”.

Mr Ortiz notes the Luxembourg-based Sicav has an investment process that follows a disciplined bottom-up approach to stock selection with a focus on identifying high-quality firms. He explains: “We follow a fundamental research philosophy to identify value that is underappreciated by the market. There is a distinct preference for companies that have dominant market positions, strong balance sheets and the potential to deliver and increase free cashflows.”

The manager points out the focus is much more on the bottom-up process, to capitalise on stock-specific factors that are not reflected in individual firms’ share prices, rather than on focusing on top-down sector or country factors.

He says: “The prospects for, and valuation of, individual companies can be predicted with a greater degree of accuracy than macroeconomic themes and factors. Subsequently, stock selection provides the best opportunity to capture added value.”

But he acknowledges the team constantly monitors the level and sources of residual sector and country exposures to ensure they are “prudent given the prevailing market conditions”.

“We pay careful attention to the relative strength or weakness of an economy, particularly where it may impact a company that we are interested in,” he adds. “In that respect, the broader emerging market team will engage in macroeconomic discussions, as these are considered important components when analysing the operating environment.”

The fund sits at the higher end of the risk-reward scale, at six out of seven, while the ongoing charge for the clean W-accumulation share class is 1.2 per cent, its key investor information document shows.

Most funds focused on the Latin American region, including Fidelity’s vehicle, have struggled in recent years. For the five years to October 5 2015, its US dollar A-share class lost 44.8 per cent compared with the 45.3 per cent decline in the MSCI Emerging Markets Latin America index, gross return, which is used for comparison purposes, according to Morningstar.

In the past 12 months, Mr Ortiz notes the team has increased the portfolio’s exposure to high-quality, more defensive names, particularly in the consumer space. Examples include AmBev, the world’s fourth-largest brewer, and consumer company Femsa. “We have also increased the fund’s exposure to exporters as these firms benefit from weakness in the Brazilian real,” he adds.

Overall, the manager notes the drivers of performance have been relatively broad based, with good contributions from the fund’s positioning in a number of sectors. He says: “Our overweight stance in consumer staples and positioning in the materials and energy space was particularly beneficial. Additionally, our cautious stance in Brazilian banks against the backdrop of a weaker macro environment contributed to performance.”

Looking ahead the manager acknowledges the team anticipates bouts of volatility and macro headwinds to continue in the area. “Expectations remain low in the region and emerging market equities will be impacted by governments’ reform measures and investors’ reactions to these efforts. In addition, markets will continue to be influenced by ‘global’ topics, such as the future pace of economic expansion in China and monetary policy in the developed world, as the developing and developed worlds are inextricably linked through global capital and trade flows.”

But he adds: “Domestic consumption is an engine of economic expansion in Brazil and Mexico, and is often overlooked by investors. In parallel with this, the appetite for change in the region is vital to the future prospects of these economies.”

EXPERT VIEW

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

It has been a baptism of fire for manager Angel Ortiz, as well as being a torrid time for Latin American funds in general. In relative terms, Mr Ortiz should be given some credit for having outperformed this fund’s peer group average. However, the portfolio has still lost around 30 per cent in the past 12 months. These equity markets may be of interest to the contrarian, but it is unknown how well Mr Ortiz will fare if they move back into favour. If you believe that Latin American markets are set to recover strongly, then it is hard to argue against the beta option of a low-cost, index tracker.