Source: Financial Express Analytics
In keeping with their volatile nature, the markets in the Latin American region have rallied in the last few months. As can be seen from the chart, far from being decoupled from the global economy, these markets move in line with the global trends albeit in an exaggerated manner.
Funds
There are just five IMA Unit Trusts and OEICs with an investment focus of Latin America. All members of the diverse IMA Specialist sector, these funds struggled in 2008.
| Name | 2009 | 2008 | 2007 | 2006 | 2005 | 2004 | 2003 | 2002 |
| F&C - Latin American Equity |
-4.67 | -40.51 | 44.14 | 25.23 | 61.6 | 31.01 | 58.61 | -30.49 |
| Invesco Perp - Latin American |
-4.73 | -39.37 | 36.82 | 25.95 | 67.93 | 31.32 | 80.43 | -34.27 |
| Neptune Latin America |
-0.54 | -42.68 | - | - | - | - | - | - |
| Scot Wid - Latin American |
-6.66 | -34.87 | 43.94 | 27.47 | 67.15 | 29.11 | 50.88 | -28.13 |
| Threadneedle - Latin American |
-5.91 | -36.49 | 37.84 | 27.22 | 65.75 | 29.36 | 50.72 | -29.03 |
| MSCI EM Latin America |
-3.96 | -32.92 | 47.88 | 25.27 | 67.75 | 30.02 | 56.04 | -29.04 |
When comparing the performance of these funds we see a great deal of uniformity which suggests the fund managers are following similar investment strategies. The funds share similar sector allocation, with large holdings in financials, basic materials and consumer products. In contrast, the funds have minute holdings in defensive sectors such as healthcare. With an aggressive sector allocation such as this it is not hard to see why these funds perform badly in an economic downturn.
Furthermore, the ratios for these funds show just how much the funds’ performance have suffered as a result of the choices made by the fund manager. Not one of the funds listed above had a positive alpha score for 2008. Alpha is a measure of the fund’s over or under performance in comparison to its benchmark, in this case the MSCI EM Latin America Index. Moreover, only F&C’s offering posted a positive alpha in the period 2003 to 2007, the years of plenty.
In addition, each of the managers had a negative Information Ratio (IR) for 2008 and all but the Invesco Perpetual Latin America fund also had a negative IR for the period 2003-2007. This shows poor stock-picking on the part of the fund managers. Data from Financial Express shows that had the managers taken a passive approach and simply followed the index, their funds would have performed better in the rising market of 2007 and the falling market of 2008.
Felix Wintle fund manager of Neptune Latin America fund says: “Into 2009, we are increasingly positioning the Fund in more defensive regions and sectors in order to better withstand market volatility”. Our data suggests that such a move is a little late in being initiated. Wintle’s persistent aggressive stance led to losses of 42.68 per cent in 2008, underperforming the MSCI EM Latin America Index by 10 per cent.
Beyond simply following the index, where could fund managers have turned to see better returns? In 2008 the best performing country in the region was Chile, losing just six per cent. Neptune’s fund had three per cent of its portfolio in Chilean stocks and the Threadneedle Latin America fund had just 2.1 per cent. In contrast, the index had 8.2 per cent in Chile.
Similarly, the MSCI Columbia index lost less than ten per cent in 2008. Neptune had none of its portfolio in Columbia and Threadneedle just 0.7 per cent. The index had 3.3 per cent. Funds focused on Latin America allocate most of their portfolio to Brazil, a country that lost nearly 40 per cent last year. Whilst the index is also focused on Brazil, the funds are holding a greater proportion of their portfolio in Brazilian stocks than the index.
By operating a Brazil-centric portfolio, fund managers have exposed investors to greater losses than could have been achieved had the funds been more diversified and managers had manoeuvred their portfolios to include a greater weighting of stocks from Chile and Columbia.
Outlook
The fortunes of the stock markets of Latin America are very closely tied to the demand for commodities – as such, the recessions in the developed world and declining growth in China pose a great risk for the markets of Latin America. That said, however, the region does have large reserves of natural resources which puts them in a strong position to supply the developed world when demand increases.
As we have seen, investors have slim-pickings when it comes to Latin American funds. None of the fund managers operating in this region set themselves apart as a talented stock-picker and market reader. Therefore, whilst the region may have potential, the funds investing in the region are not well placed to fully profit from any future recovery or indeed protect investors’ money should the downturn continue.
Investors wishing to include Latin America in their portfolio would be well placed to consider the BGI iShares MSCI Latin America ETF. Launched in October 2007, it outperformed Neptune’s Latin America fund by over 12 per cent in 2008.