Fund Review: Neptune Latin America

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Fund Review: Latin America

The £7m Neptune Latin America fund was launched in 2007 and aims to provide capital growth by investing in Latin American securities. Manager Thomas Smith notes the focus of the fund is on “the higher quality companies in the region that have a track record of generating returns in excess of their cost of capital, and on companies who, we believe, will be able to generate returns in excess of their cost of capital in the future while the market valuation suggests otherwise”.

Mr Smith acknowledges that, particularly in recent years, macroeconomic factors have had a significant impact on the different returns seen in the in the region’s markets, particularly through foreign exchange movements. He points out that, as the US Federal Reserve raises interest rates, emerging market currencies have come under pressure and questions have been raised over the strength of their economies when global liquidity conditions tighten.

“The first layer of the investment process comes from our in-house economics team. Country-based reviews examine not only economic conditions but also the social, political and capital market situation. They are conducted twice yearly on all the main OECD countries and at least annually upon each of the major emerging market regions,” says Mr Smith. “This macroeconomic overlay is married with our in-house research – teams research global sectors and individual companies. The findings are presented to our investment team at two weekly research meetings.”

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The fund sits towards the higher end of the risk reward spectrum at a level of six out of seven while the ongoing charges for the C share class are 1.2 per cent.

The difficult period for emerging markets has meant the fund has not escaped unscathed, with the C accumulation share class posting losses across one, three and five years, although it has still outperformed its benchmark MSCI EM Latin America index, according to data from FE Analytics.

For the five years to March 29 2016, the fund recorded a loss of 28 per cent compared with the index’s loss of 38.3 per cent. The 12-month performance is slightly better with the fund down just 1.9 per cent against the index fall of 5.3 per cent.

Mr Smith explains: “The key drivers of outperformance were our overweight positions in Mexico and Chile, and being underweight in the materials and energy sectors.”

He points out that, while 2015 was a difficult year for emerging markets in general, Brazil was caught in the eye of the storm as the economy moved into recession and persistent inflation reached double digits. “The economic difficulties were exacerbated by the bribery scandal at Petrobras, which has caused a political crisis as more high-profile politicians have been arrested or implicated. The political gridlock prevented the finance minister from implementing the necessary fiscal adjustment, ultimately leading to his replacement in December, raising questions over the sustainability of the trajectory that government debt is currently on and leading to S&P removing Brazil’s investment grade rating,” he adds.

“These problems led to moderate weakness in the local market and significant weakness in the currency, with the Brazilian real falling by 29 per cent against sterling during 2015.”

EXPERT VIEW - Ben Willis, head of research and investment manager, Whitechurch Securities

I fear this fund is doomed. Neptune has spent time reducing its fund range and when you consider that this fund is less than £7m in size and levies an OCF well north of 1 per cent, then it is hard to see how it is ever going to attract new monies. Of course, the energy- and commodity-influenced LatAm region has long been out of favour with investors but, even if sentiment were to change, it is hard to see investors opting for this fund.

Charlie Parker, head of distribution at Neptune Investment Management, responds:

“We make decisions to pursue products at Neptune based upon what we believe can deliver long-term outperformance for our clients. Thomas has outperformed by nearly 1000 basis points during a historically difficult period for the region in which he invests. Outperformance like that will absolutely be recognised by investors when the region returns to favour.”