The $617m (£435m) JPM Latin America Equity fund was launched in May 1992 and aims to provide long term capital growth through identifying high quality businesses which the team believes can deliver attractive US dollar returns through a combination of earnings growth, dividends, change in valuation and currency.
Managed by Luis Carrillo and Sophie Bosch de Hood the fund adopts a bottom up and fundamental investment approach.
Mr Carrillo explains: “The cornerstone of our fundamental research is company meetings. Over the last decade we have recorded 300 - 400 meetings per year with Latin American companies. Given our research edge in small and mid cap stocks, built up through frequent company contact over many years, the portfolio has had a persistent overweight to small and mid-caps, which we believe will be the best source of future returns over the next decade.”
The team adopt a long-term, high conviction strategy, although Mr Carrillo notes they consistently look for ways to improve what they do and therefore over the past 10 years they have “augmented the team and evolved our investment process”, which now includes focuses on the economics of the business, duration of future growth and governance and a comprehensive risk and governance checklist.
The manager adds that country and sector allocation is an output of the process, rather than an input, but acknowledges that when looking at the prospects for an individual stock the team has to consider the industry context and macroeconomic environment.
“But this is not the same as making decisions at a macro level,” he adds. “Industry factors are important because they bear on the company’s likely earnings power and future return on equity; in banking we have to think about regulation and capital standards; in commodity sectors, we have to be aware of Chinese economic policy. Country-specific risk factors have to be considered.”
Mr Carrillo adds: “While we are pragmatic in our investment strategy, we believe that domestic consumption is the strongest exploitable theme in the region. While this has become consensus to some degree, we believe we differentiate ourselves by a willingness to be build portfolio around our convictions and not the benchmark. We are generally underweight commodity cyclicals, because we do not believe we have an edge in forecasting commodity prices and these companies generally do not deliver returns above their cost of capital. This has worked well for the portfolio over the long term, and we remain confident that it is the right strategy to pursue in current market conditions, in which we need to find businesses that can grow independently of the economic backdrop.”
The fund’s risk reward level sits towards the higher end at a level six out of seven, while the ongoing charge for the C accumulation share class is 1.05 per cent, according to its key investor information document.
As with most vehicles focusing on the Latin America region performance has been difficult with the fund delivering a five year loss of 35.4 per cent, although this is slightly better than the MSCI Emerging Markets Latin America index fall of 39.7 per cent to April 1 2016.
Longer term performance is more positive, however, with the fund producing a 10 year return of 35.9 per cent, although this lags the index gain of 39.6 per cent, according to data from FE Analytics.
| EXPERT VIEW - Ben Willis, head of research and investment manager, Whitechurch Securities |
| Lead manager, Luis Carillo has been running this fund for over a decade and when it comes to investing in these equity markets, experience counts for a lot. However, the fund has only managed to be on par with benchmark indices over the mid to long-term. Given that these markets frequently fall out of favour with investors, you have to ask whether the management team have done enough to justify buying this fund over a low cost passive alternative. Unfortunately, the answer is no. |
Mr Carrillo notes: “2015 was a difficult year for Latin American markets driven by falling commodity prices, slowing growth in China, and a rate rise by the Federal Reserve. Despite the volatile conditions, the fund was able to outperform the index. Stock selection was strongest in the larger markets of Brazil and Mexico. In Brazil, it was our lack of exposure to Vale and Petrobras which added to relative returns. In Mexico, it was our exposure to industrials, particularly the airport operators which added to relative performance.”
He also highlights stock selection in the IT sector as a positive contributor, which he describes as a “small but important and growing piece of the opportunity set in Latin America”.
“Recently, we have reduced our underweight in the utilities sector as the price environment has improved in Brazil and we can find attractive yield plays. We have also added on the margin to Argentina, where the new administration is off to an excellent start,” says Mr Carrillo.
Looking ahead the manager notes that stocks in Latin America have enjoyed a powerful short-covering rally on the sharp rebound in commodity prices and the dollar’s pause.
“We have little visibility into the likely path for commodity prices, and our limited exposure to those sectors (Materials and Energy) reflects that. Across the region, our exposure is tilted toward strong franchises with secular growth opportunities and companies demonstrating resilience in the face of economic and currency weakness, often in the consumer sectors.”
