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Fund Review: Latin America

Introduction

The MSCI Emerging Markets Latin America index was down 5.5 per cent in the year to March 22 2016. Unsurprisingly, funds investing in the region have taken a hit too, with most failing to produce a positive return in the period.

A search of FE Analytics brings up 18 funds and investment trusts offering exposure to Latin America. In spite of many having long track records, they have failed to protect on the downside in the short term. The fall in the price of oil has been a drag on the region, which is a net commodity exporter.

Dean Newman, manager of the Invesco Perpetual Latin American fund, says: “For several years now, Latin American economies have faced some challenging conditions. There are pockets of strength – the Mexican economy is still growing between 2 per cent and 2.5 per cent per annum – but the terms of trade for Latin America have weakened due to lower commodity and energy prices. Combined with an already prolonged domestic slowdown, the outlook for corporate earnings growth has been undermined, resulting in downgrades. However, this has been reflected to some extent in equity valuations which, based on a trailing price-to-book ratio, are currently at the low end of their historical range.”

THE PICKS

Templeton Latin America

Managed by veteran emerging market investor Mark Mobius, this $833m (£579m) fund has a long track record, having launched in February 1991. It notched up a 28 per cent return in the 10 years to March 23 2016, according to FE Analytics. The portfolio’s largest country weighting is to Brazil at 43 per cent, which may explain the fund’s recent underperformance, while Mexico accounts for 30.1 per cent. Financials make up 46.6 per cent of the portfolio, a sector breakdown reveals, followed by consumer staples at 23.9 per cent.

Charlemagne Magna Latin American

This fund is managed by Ian Simmons who runs a fairly concentrated portfolio of between 30 and 60 holdings. The most significant weighting in the portfolio currently is to financials at 33 per cent, with four of its top 10 holdings in this sector, including Peru’s Credicorp and Brazil’s Itaú Unibanco. The fund has struggled to deliver positive returns, down 15.9 per cent in the 12 months to March 23, but over 10 years to the same date it delivered a respectable 29.5 per cent to investors. The largest country allocation in the portfolio is to Mexico, which accounts for 47 per cent.

EDITOR’S PICK

Stewart Investors Latin America

This fund is managed by Ian Simmons who runs a fairly concentrated portfolio of between 30 and 60 holdings. The most significant weighting in the portfolio currently is to financials at 33 per cent, with four of its top 10 holdings in this sector, including Peru’s Credicorp and Brazil’s Itaú Unibanco. The fund has struggled to deliver positive returns, down 15.9 per cent in the 12 months to March 23, but over 10 years to the same date it delivered a respectable 29.5 per cent to investors. The largest country allocation in the portfolio is to Mexico, which accounts for 47 per cent.

The political crisis has been dominating headlines in Brazil. Jan Dehn, head of research at Ashmore, explains: “Brazil finds itself in a classic mid-term political crisis where a call on the capacity of the country’s institutions will be critical to future investment returns. Re-elected less than two years ago, president Dilma Rousseff finds herself on the verge of being removed from power by an electorate angry about government corruption and macroeconomic mismanagement.”

Mr Dehn believes the impeachment process could help the country, and its economy, recover. “Brazil’s political crisis will be resolved within the framework provided by the Brazilian constitution. Given our confidence that the process will be orderly, the bigger question is what happens afterwards. Impeachment will be a political trauma in Brazil. If, and when, president Rousseff becomes the lamb in this crisis, the rest of the political establishment will be keen to move on. Key to this will be measures to speed up the economic recovery.”

One bright spot in Latin America has been Argentina following the election of president Mauricio Macri last year. But Ivo Luiten, manager of the NN Latin American Equity fund, warns high inflation and soaring domestic prices remain issues for the country.

He notes: “A new government with the right reform agenda can be a powerful driver of positive equity returns in emerging markets. But reforms are never easy and markets are always impatient. We have seen several examples of ‘reform fatigue’, where markets rallied for three to six months after the appointment of a new president, only to adjust to more reasonable valuation levels afterwards.”

But Mr Newman believes the long-term strengths in Latin America are still in place, pointing to “entrepreneurial companies, fantastic resources and a growing middle class”.

Ellie Duncan is deputy features editor at Investment Adviser

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