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The funds and trusts to take advantage of the Latin America fever

24 June 2014

With the spotlight on Brazil as it hosts the World Cup, FE Trustnet asks whether investors should consider funds that focus on it and the rest of Latin America.

By Daniel Lanyon,

Reporter, FE Trustnet

There is a buying a opportunity in Latin American equities, according to Julie Dickson, head of global equities at Ashmore, who says small caps in particular are looking attractive after several years of cyclical decline.

In the 10 years to January 2011, Latin America was one of the best places investors could have invested with the MSCI EM Latin America index up more than 550 per cent over the period. This compared to a gain of 317.37 per cent from the MSCI EM index, and just 30.72 per cent from the MSCI AC World index.

Performance of indices since Jan 2001

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Source: FE Analytics

The tables have turned completely on their heads of late however, with emerging markets vastly underperforming developed markets over three years, and Latin America one of the worst performers within the asset class, with losses of 15.98 per cent over the period.

Investors in South America have had a better time of it year-to-date, and Dickson thinks markets have reached an inflection point after such a period difficult. She highlights Brazil as a particularly interesting area for stockpickers, though doesn’t believe the ongoing World Cup and 2016 Olympics will have any material benefit on performance.

“We expect earnings to improve and whilst it has been disappointing recently, as the cycle turns, even a small change in earnings will have a dramaticly positive effect on markets. We are currently at a buying opportunity,” she said.

“We expect to see this across markets, in both large and small cap stocks. Mexico and Columbia are a little expensive on valuation terms but Brazil and Peru are looking attractive.”

“In Brazil the cheapest stocks are not necessarily good value due to greater currency risks, so investors should be wary of that. Domestically focused businesses are less at risk than those with an international focus.”

Senior investment manager on Aberdeen’s emerging market team Fiona Manning also says she has an optimistic outlook for Latin America and Brazil in particular, believing that in the long-term the region is underpinned by a growing middle class.

She thinks the reaction to tapering in the US last year was over the top, and expects markets to bounce back in the shorter-term as a result.

“Latin America benefits from encouraging demographics, young and growing populations, and continued urbanisation and industrialisation, which is driving the development of the middle classes,” she said.

“Economies could improve even more as concerns about tapering ease and rates start to come down since these should feed through to an increase in domestic demand.”


There is clearly still a lot of interest in Latin America, with almost a third of 1,500 FE Trustnet readers in a recent poll of saying they hold a fund focused on this very specialised area.

ALT_TAG The results of a recent FE Trustnet survey, in partnership with Dianomi, further support our readers’ interest. It found that 26 per cent of our private investors wanted to see more studies and stories on Latin America, with the figure jumping to 31 per cent for advisers.

With this in mind, we look at ways of getting exposure to Latin America.


Funds

There are 16 funds in IMA universe that focus specifically on Latin America. The two largest are BlackRock Global Funds Latin America and Templeton Latin America, which have £1.6bn and £1bn in assets under management (AUM) respectively.

The fund with the strongest record in recent years and arguably the highest rated team is the £122m First State Latin America portfolio, which has five FE crowns and headed up by FE Alpha Manager Millar Mathieson.

It has lost 10 percentage points less than the MSCI EM Latin America index over three years, and since its launch has outperformed by an even greater extent.

Performance of fund and index since launch

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Source: FE Analytics

The First State fund is soft-closed, but is still available on certain platforms if you’re willing to pay an initial charge.

Other options that remain open to new money without any extra charges include the £150m Aberdeen Latin America Equity fund and the £715m JPM Latin America Equity fund. The latter is up against the index over one, three, five and 10 year periods.

Investors more specifically interested in Brazil have four specialised funds to choose from, run by Allianz, HSBC, BNY and JPM. All have lost more than 20 per cent over three years. HSBC GIF Brazil Equity is the largest with assets of more than £400m, but all but the BNY fund have underperformed their benchmarks since launch.

There are another 12 funds with more than 20 per cent exposed to Latin America, almost all sitting in IMA Global Emerging Markets or IMA Global Emerging Markets Bond.

Some of the best known include AXA Framlington Emerging Markets, First State Emerging Markets Bond, Lazard Developing Markets and McInroy & Wood Emerging Markets.

Only three of the seven funds in the IMA Global Emerging Markets sector have beaten their peer groups or the MSCI EM index since last May’s taper tantrum sell-off, and all of those have lost money.



Trusts


There is much less choice on offer in the AIC universe, with only three trusts focused on Latin America. All are on discounts of around 10 per cent, making them potential targets for bargain hunters.

The Aberdeen Latin American Income trust is most suited for those who invest for dividends, and is currently yielding 5.3 per cent. The team has a significant portion of its assets in fixed income, which helps to keep volatility down.

FE data shows that the fund has outperformed the index since its launch in August 2010, losing around 3 percentage points less. It’s been less volatile as well, though does have a higher max drawdown.

Performance of trust and index since launch

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Source: FE Analytics

Luis Carrillo’s JPM Brazil IT has lost 32.28 per cent since its launch in April 2010 – around 10 percentage points than the MSCI Brazil 10/40 index. BlackRock Latin America IT had a stellar period in the early 2000s, but has underperformed its benchmark since Will Landers took over in 2006.

There are another five trusts with more than 10 per cent in Latin America, including Bruce Stout’s Murray International trust, which has 23.8 per cent exposure. Stout sees Latin America and Brazil in particular as a mature and underrated dividend market.

Advance Developing Markets, BlackRock World Mining, Genesis Emerging Market and Premier Energy & Water complete the group.


ETFs

Whilst it is difficult to buy and sell Latin American stocks from the UK, investors can gain general exposure to the region via an exchange traded fund.

One of the most established is the iShares S&P Latin America 40 Index which tracks the largest companies across Latin American markets; mainly Brazil, Chile, Colombia, Mexico and Peru.

Over 10 years it has returned 362.93 per cent. Only one fund – JPM Latin America Equity – has returned more.

Two other iShares ETFs – MSCI Brazil and MSCI Brazilian Smaller Cap – are also options, particularly the latter if you agree with Dickson’s views outlined earlier.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.