Insight: Latin America

Even over one year, investors would have been disappointed. Pimco remains the highest-returning fund, but only three other funds have produced a positive return. The reason for Pimco’s performance may be that it invests in the continent’s debt, rather than in equities like many of the other funds. It largely invests in Central and Latin America, with almost 60 per cent of assets allocated to the region.

Chart 1 shows how the Pimco Global Emerging Markets Bond fund has performed against the Global Emerging Markets Bond sector over the year to 1 May. The chart indicates that, while the fund has underperformed at some points during the year, it has outperformed its peers and produced positive returns over the past few months.

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Its highest stock holding in the area is Petrobras, the Brazilian petrol company. Although it is a fund manager favourite, the company has some of the largest debt of any company, and low oil prices around the globe have only made it worse. Its debt currently stands at an estimated $130bn (£90n). The company has also been caught up in a scandal caused by allegations of corrupt directors collaborating with Petrobras contractors to make money for themselves.

Few funds are specific to Latin America, but many have indirect exposure through a focus on broader emerging markets. If investors do not want exposure to countries that are going through awkward times, fund allocation must be properly looked at.

The region may not look promising at present, but many fund managers and analysts have predicted that it will turn around, and that next year we could see the return of profits on investment.

Five questions to ask:

1. Is it a broader emerging markets fund?

Look into the fund allocation because many emerging markets funds will have exposure to countries across the globe, and Latin America may be just a small part of it.

2. What currency is it denominated in?

This could affect the cost of the fund, and many Latin America-specific funds may be based in the US and held in dollars. This could make the fund more expensive for UK investors, and any currency fluctuations could also affect your return.

3. What risk does the fund hold?

Investing in any emerging market has its risks. At the moment, many countries pose political risks. Check the fund’s fact sheet and prospectus to see how it manages risk.

4. What are the charges like?

Depending on where the fund is domiciled, the average fund will typically sit in a range between 1.5 and 1.75 per cent. Every fund will be different, and some may be more expensive.