Onshore
There are just five UK retail funds focusing on Latin America, but even the newer UK based funds are beginning to venture away from their benchmark.
The older onshore Latin American funds are from Invesco Perpetual, Scottish Widows and Threadneedle. These three funds have portfolios and risk levels broadly in line with MSCI Latin America index, which invests around 70 per cent in Brazil.
Performance of MSCI Brazil vs Latin America over 1-yr
Source: Financial Express Analytics
Performance of funds vs MSCI Latin America over 1-yr
Source: Financial Express Analytics
However, the newer UK retail funds appear to be more adventurous when it comes to investing elsewhere in the region.
The First State Latin America fund, launched in April 2009, has just 36 per cent of its portfolio allocated to Brazil, a minuscule amount given the size and dominance of Brazil within the Latin America region.
"Following a recent trip to the region we are even more convinced that good quality companies in Brazil are optimistically priced", explain fund managers, Jonathan Asante and Millar Mathieson.
They see greater promise elsewhere in the region, and particularly in Chile. "The Chilean market looks well supported by economic fundamentals and we continue to find some high quality names trading at reasonable prices", say the fund's managers.
The fund has 25 per cent of its portfolio allocated to Chile, significantly more than the index which has 6 per cent.
Launched in the midst of the economic crisis this fund takes a defensive position and is significantly underweight in energy, materials and financials, and overweight in consumer staples and utilities. The older funds are achieving better performances than the newer ones, but time will tell whether these newer funds succeed with their less orthodox portfolios.
Offshore
There is a great deal more choice available within the offshore universe. Firstly, there are around 60 Latin America focused funds rather than the five UK based funds. Secondly, these funds are more diverse than the oneshore ones, which are all long-only and large cap equity focused. Investors looking to the offshore universe for their Latin American investing have the option of small and mid cap funds, money market funds, bond funds and multi-strategy funds. This diversity is, of course, good for the investor but makes meaningful comparison more difficult.
Other than the obvious tax benefits of choosing an offshore fund rather than an onshore fund, what other reasons are there for investing in an offshore Latin America fund rather than a UK based fund?
It is not possible to make sweeping statements about the benefits of offshore Latin America focused funds. For example, the Total Expense Ratio (TER) of the funds is largely the same as, and in many cases a little higher, than their onshore equivalents.
Similarly, when it comes to performance it is not possible to conclude that offshore funds perform better than onshore.
However, data from Financial Express Analytics shows that the very fact that there are more collective investments to choose from means that it is possible to find offshore funds that are performing better than onshore ones. For example, 12 of the 60 offshore funds have performed better in the last 12 months than the best performing onshore fund.
Performance of funds over 1-yr
Source: Financial Express Analytics
Three of the top five funds are focused on small and mid caps, an area of investment not available through the onshore funds.
Pedro Rudge, fund manager at Leblon Equities, argues that funds with a small and mid cap focus in Latin America have the competitive advantage. He believes that big cap companies are priced too high and value can be found in companies less well known to the market. He seeks to exploit the opportunities to buy these stocks cheaply and then less on for a profit.
Fund managers Mirae Asset Management who have offices in Sao Paulo also believe that valuations are high in Brazil. Rather than focusing in small caps, they seek to find value elsewhere in the Latin America region.
"We have increased allocations in ex-Brazil, seeing relative value emerging in Mexico, Chile, Argentina and Colombia. Though Brazil remains the fundamental growth driver for the region, its significant outperformance in 2009 has resulted in areas of the market showing relatively high valuations within the region".
Whilst it is not possible to simply conclude that offshore funds focusing on Latin America are better than onshore funds, we can see that the greater number of funds within the offshore universe makes it an attractive option for investors and one that should not be ignored.