"Prices are already high for large caps but we are able to acquire small or illiquid companies that are less well known to the market and then sell on for a profit", explains Pedro Rudge, fund manager at Leblon Equities.
Funds investing in Latin America continue to provide investors with excellent returns, outperforming other emerging market funds. The MSCI Emerging Markets index has returned 77.61 per cent in the year to 23 February 2010, whereas the MSCI Latin America index has returned 92.87 per cent in the same period.
In most cases the funds investing in the region have higher levels of volatility than the MSCI Latin America index, and have therefore outperformed the index in recent months, but underperformed when the markets were falling. Keen to exploit the newly rising markets, First State launched their Latin America fund in April 2009.
Performance of funds vs indices over 1-yr
Source: Financial Express Analytics
The portfolios of these funds share many similarities, namely being focused on large caps and having a significant weighting allocated to commodities. This month's launch of the Advance Brazil Leblon Equities fund offers UK investors the opportunity to gain exposure to Brazilian small and mid caps. The fund is a joint venture between London based fund of funds manager Advance Emerging Capital and Rio based Leblon Equities.
Leblon Equities are value, bottom-up and absolute return investors seeking to invest in companies where management can make a real difference. For this reason they avoid commodities and focus on investments in industries linked to the local economy. The sectors usually most present in the portfolios are services, education, healthcare and financials.
Pedro Rudge explains the reason for the fund's focus: "Brazil has a strong economy with good diversification. It does not suffer from many of problems facing other countries such as leverage or the risk of rising interest rates. We believe that there are lots of macroeconomic explanations which make investing in Brazil very inviting.
"Valuations in Brazil are much more appealing than those of other countries in the region. We are value investors and believe the greatest value can be found in non-large caps. Small and mid caps will benefit the most from a decline in domestic interest rates because large caps already have access to lower rates through the international credit markets."
As the first of its kind, this small and mid cap fund is opening up an area that UK investors have previously not had access to.
The inevitable rise in valuations that comes with the growing popularity of investment in Brazilian equities means that others will be seeking to profit from the small and mid cap universe and this new fund is unlikely to stay unique for much longer.