Although many Latin America funds have already regained a large portion of last year's losses, Simpson (pictured right) remains optimistic – particularly with regard to Brazil and Chile. The manager is looking to reduce the number of holdings in his Baring Latin American fund as a result, in order to make the most of his high-conviction plays. "Unlike the developed world where interest rates are at or close to zero, in Latin America interest rates remain comfortably above inflation, giving governments in the region ammunition to stimulate and maintain growth," explained Simpson.
"We continue to maintain the majority of our holdings in Brazilian stocks, which we have seen provide a strong rebound after market falls. The stocks are currently attractively valued, with central bank easing and pro-growth fiscal policies supporting the macro economy."
"Chile also presents a compelling case for investment, where the current price to earnings ratio (PE) is at a multi-year low of 15 times, compared with the 10-year average of 18 times. This has significantly narrowed the premium gap with Mexico, which is currently trading at a PE ratio of 14 times."
According to FE data, Baring Latin American has 65.7 per cent of its assets invested in Brazil, and a further 6.7 per cent in Chile. A recent FE Trustnet study looked at the best methods for investors to gain access to Brazil.
Simpson is also considering upping his exposure to Colombia, although he says he will remain neutral for the time being.
"We are keeping an eye on Colombia where, after a couple of years of underperformance, valuations are again becoming reasonable," he said. "Following a period of monetary tightening, inflation readings are stabilising and so we are looking to increase our holdings through the consumer discretionary sector."
Despite a testing 2011, the 15 Latin American portfolios in the IMA unit trust and OEIC universe are among the best-performing over a three-year period, with an average return exceeding 110 per cent. The $676m Baring Latin American fund has returned 104.38 per cent during this time, compared with 125.25 per cent from its MSCI Latin America 10/40 benchmark.
Performance of fund vs benchmark over 3-yrs
Source: FE Analytics
Simpson took over as lead manager of the portfolio in October last year. Since then, the fund has amassed returns of 21.23 per cent, meaning that it has almost recouped all of the losses it sustained in the first three quarters of 2011.
The fund’s biggest sector overweight is Brazilian financials, with Banco Bradesco and Banco Do Brasil both appearing in its top-10 holdings.
"We are expecting the sector to rebound once the macro prudential measures, which led to the sector underperforming in 2011, are unwound," Simpson continued. "Barings is also positive on Brazilian and Colombian energy companies and Brazilian utilities firms – the latter as a hedge against inflation."
Simpson is aiming to concentrate the portfolio down to around 45 holdings from previous levels of 64 before he took over.