Fund briefing: Latin America funds
The showpiece event, held every four years, is taking place this month in glamorous Rio de Janeiro and promises to be a spectacular affair.
But while thousands of fans cheer for Team GB in the various track and field events, investors can take advantage of the spotlight being thrown on to the region to consider whether it’s worth putting money into Latin America.
It won’t be an easy decision. A look at the performance statistics of specialist Latin American funds reveals that investing in this area has been a volatile experience, with lots of ups and downs. Moneywise takes a closer look.
Take a long-term perspective
Just about every fund investing in Latin America has lost substantial amounts of money since 2011, and most are down over the past year, although they are comfortably in positive territory over the past 10 years, according to Morningstar data to 7 June 2016.
Also, the performance of individual funds has varied enormously – there’s a 14% difference between the best and worst performers.
Such statistics emphasise the need for a long-term investment horizon when it comes to this region. Adrian Lowcock, head of investing at AXA Wealth believes it’s best suited to adventurous investors with diversified portfolios.
“The funds that invest in this region tend to focus on the larger economies such as Brazil and Mexico,” he says.
“To a lesser extent, they will also have exposure to smaller economies such as Chile and Colombia.”
Prospects for the region
The region’s positives include a young, enthusiastic workforce, better education and improving infrastructure, with the negatives being corruption and political instability. Its reliance on commodities (raw materials and agricultural products that can be bought and sold, such as copper or coffee) meanwhile, is seen as a blessing and a curse.
“It has resulted in some issues for the region following the fall in commodity prices, which has increased the issues of political instability and corruption,” says Mr Lowcock. “High inflation also remains an ongoing risk in Latin America.”
The volatile nature of the region is a deterrent for Andrew Merricks, head of investments at Skerritts Consultants. Although he has made money from investing in Latin America in the past, he is currently giving it a wide berth.
“It’s had a fairly good recovery, but I’d be more inclined to sell the rally than try to get on its coat tails,” he says. “There are better places to put your money than just gambling on something we don’t really know a lot about.”
Mr Merricks says that not only is Latin American too correlated to the commodity story – Brazil did well in the commodity boom, but suffered when the situation reversed – but he is also nervous about instability in key countries.
“There are too many imponderables that for me warrant the risk of getting involved,” he says. “We’ve done well from it in the past and I’m sure we’ll do well from there again, but at the moment it’s not really for us.”
However, Jan Dehn, head of research at Ashmore Investment Management, is more optimistic about the region’s prospects. He believes the infrastructure changes taking place will help pave the way to a more sustainable future.
“Latin America looks especially interesting right now,” he says. “A number of populist regimes are on their way out and look set to be replaced by more sensible governments.”
He cites Argentina, Brazil and Venezuela as being large economies with influence across the entire region.
“These three populist regimes have either already fallen, are in the process of falling, or will likely do so in the foreseeable future,” he says. Due to better policies, he believes these economies’ long-term average growth rates can be expected to rise.
So what should you do if Latin America appeals?
The relatively small number of funds dedicated to this part of the world can be found within the IA Specialist fund sector. Generally, they will invest in companies from prominent countries in the region, such as Brazil, meaning you’ll benefit from any upside in this region.
However, you will need to examine the investment goals of the manager at the helm. Pay particular attention to where they invest, the types of companies they prefer and their outlook.
For example, the Invesco Perpetual Latin American fund prefers to concentrate its holdings in Brazil and Mexico, although it also has significant positions in companies hailing from Colombia, Chile and Peru.
An alternative is to consider a more broad-based emerging markets fund, of which Latin America will be one part. This diversified approach means you wont get the full benefit if the region does well, but you’ll be more protected from downturns.
Fans of tracker funds could try Fidelity Index Emerging Markets, which aims to match performance of the MSCI Emerging Markets Index of rapidly developing economies and has 13% exposure to Latin America. If you prefer an actively managed fund that aims to beat the index, Fidelity Emerging Markets has 17% exposure to the region. Both are members of Moneywise’s First 50 Funds.
Fund to watch:
This fund, which is run by Aberdeen’s experienced global emerging markets equity team led by Devan Kaloo (pictured above), aims to provide a mix of income and growth by investing mostly in Latin American companies.
Similarly to many portfolios covering the region, the bulk of this exposure is in Brazil (57%), Mexico (22%) and Chile (10%), although there are also holdings in Colombia, Peru and Argentina, according to the most recent fund fact sheet.
It is well diversified by industry sector with financials weighing in at 33% and consumer staples with 27%. Consumer discretionary and industrials are worth 9% and 13% respectively. This is followed by energy at 7% and materials at 5%. The rest are are worth 2% or less.
The fund has 39 holdings, with the top 10 accounting for 47% of assets under management. These names include energy company Ultrapar, Walmart de Mexico and financials companies such as Banco Bradesco and Itau Unibanco.
In terms of geographic exposure, 56% of the fund is situated in Brazil, followed by 24% in Mexico.
Mark Dampier, head of research at Hargreaves Lansdown, is a fan. “We hold Aberdeen in high regard for its emerging market expertise and its prudent long-term investment approach,” he says. “With an experienced team at its helm, we view the fund as a superior choice for investing in the exciting, but higher-risk Latin American sector.”
A stockmarket security (a form of derivative) issued by companies on their own ordinary shares to raise capital. A warrant has a quoted price of its own that can be converted into a specific share at a predetermined price (called the conversion price) and future date. The value of the warrant is determined by the premium of the share price over the conversion price of the warrant. Warrants give the same economic exposure to an underlying security without actually owning it, and cost a fraction of the price of the underlying security.
Also known as index funds, tracker funds replicate the performance of a stockmarket index (such as the FTSE All Share Index) so they go up when the index goes up and down when it goes down. They can never return more than the index they track, but nor will they lose more than the index. Also, with no fund manager or expansive research and analysis to pay, tracker funds benefit from having lower charges than actively managed funds, with no initial charge and an annual charge of 0.5%.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).