Latin American funds have surged ahead of their competitors in the IMA universe
over the last 10 years, delivering stellar returns that have outshone even their high-growth emerging market rivals.
However, cheaper tracker funds have managed to keep pace and even outperform many of these standout portfolios – and at a much lower cost.
Rob Gleeson (pictured)
, head of FE Research, says passives are by far the best way to play niche high-growth areas such as Latin America.
"I think passive is a really good choice for Latin America – the asset class has so much growth potential that it is not really necessary to try and chase outperformance," he said.
"I strongly believe that emerging markets require local knowledge and we see that played out with the best emerging market groups; Aberdeen and First State having significant presence on the ground [in emerging markets]."
"With Asia being so popular, a lot of firms have been investing in teams in Hong Kong, Singapore and so on, but not many have been opening up offices in Sao Paulo or Buenos Aires," Gleeson added.
"The region is so diverse and the political situation in each country so varied I don’t think picking stocks from your desk in London is really going to cut it over the long-term; without a lot of good people on the ground gathering intelligence, I’m not sure you can really gain an advantage."
With this in mind, FE Trustnet
looks at two cheap alternatives to access the top-performing region:
iShares MSCI EM Latin America
Over the last five years, the ETF has beaten the majority of Latin America-focused funds and done so without the hit from high charges. The tracker has a total expense ratio (TER) of just 0.74 per cent.
Charges for actively managed Latin America funds in the IMA unit trust and OEIC universe range from 1.5 per cent to as much as 2.25 per cent.
The iShares MSCI EM Latin America ETF has made 36.4 per cent over its five-year history.
The best-performing Latin America fund over the period – FF Latin America – has returned 45.1 per cent. It was one of only four funds to beat the tracker over the period.
The MSCI EM Latin America index picked up 29.26 per cent over the period.
Performance of ETF vs index over 5yrs
Source: FE Analytics
Given that it has outperformed, it is unsurprising that the ETF has a relatively high tracking error, at 9.81 per cent.
While some industry experts – including Nutmeg’s Shaun Port – prefer trackers that do not use full replication, as it means they have scope to outperform, those who wish only to match the index may be put off by the performance of this particular ETF.
iShares MSCI Brazil Index
Investing in a single country is naturally more risky than investing in emerging markets in general; however, the iShares MSCI Brazil Index tracker has outperformed all but one Latin America-focused fund over its 10-year history.
The passive vehicle has made 778.81 per cent over the last 10 years. The only fund to do better is the four crown-rated Invesco Perpetual Latin America
fund, which picked up 902.96 per cent over the period.
However, the Invesco vehicle is significantly more expensive than the tracker, with a TER of 1.73 per cent.
The iShares tracker, on the other hand, has a TER of just 0.59 per cent.
The tracker is benchmarked against the MSCI Brazil index, which it has underperformed over the last 10 years, with a tracking error of 11.68 per cent.
Performance of fund vs index over 10yrs
Source: FE Analytics
The tracker is slightly more volatile than the majority of Latin American funds, with a score of 32.55 per cent.
It has taken a hit recently – losing money over one, three and five years. It is down 16 per cent over three years, for example.
Gleeson holds the iShares MSCI All Capped Peru Index
tracker because he is confident of the country’s growth potential.
"I chose a Peru tracker because I thought Brazil was a bit overdone and most Latin American funds were very Brazil heavy," he said.
"There isn’t demand for a pure-play Peru fund, or even Latin America ex Brazil; it’s far too niche for the retail market. ETFs offer the only real choice."
While Gleeson does believe that a tracker is a good option when investing in Latin America, he points to the Aberdeen Latin America Equity
fund as a good option for those who like actively managed funds, as it has significant resources behind it.
"As the region attracts more money, I’m sure the standard of funds will improve," he said.