The ‘Brazil Effect’
One issue with many Latin American funds is that they are often really just Brazil funds. It makes sense really. Brazil accounts for around 40% of Latin America’s GDP so all Latin American funds tend to have a heavy Brazil weighting. But in many funds, Brazil’s influence is even greater. That’s because, thanks to its sophisticated and expansive financial services industry, it offers most of the region’s equities. For example around 80% of the trades that take place in Latin American stock markets take place on Brazil’s Bovespa exchange, the biggest in Latin America.
In theory you can get around this by buying country-specific funds. But in practice small private investors can’t access UK-based actively managed, country-specific Latin American funds that aren’t Brazil focused. If you are not fussed about having a manager picking your stocks for you there are several country specific ETFs available to British investors. But these too have their downsides. They are often dominated by a few large companies or particular sectors. For example the iShares MSCI Chile UCITS ETF has over a quarter of its holdings in utilities.
The ‘Brazil effect’ also affects speciality funds. Take the BNY Mellon Latin America Infrastructure fund, for example. According to the marketing blurb, the fund will deliver “long-term capital growth by investing in… infrastructure development in Latin America”. It’s a nice idea. Indeed regular readers will know that LatAm INVESTOR has long been exploring ways to play the infrastructure theme. The trouble with a fund like this though is that almost 70% of its holdings are in Brazil. Again, there’s nothing wrong with this per se. After all, with the coming World Cup, Olympics and general infrastructure overhaul, that’s where most of the infrastructure action is. It’s just that’s not much use for investors like me who are interested by infrastructure projects taking place in the likes of Peru and Colombia.
In the good times, when Brazil was riding the wave of emerging market optimism, none of this mattered much. People who held these funds were happy to watch them rise and – understandably – probably weren’t too bothered about where the manager was sticking their money. But this year, Brazilian stocks have suffered and the ‘Brazil effect’ has turned sour. The Bovespa is down by around 20% so far in 2013 while the economy is growing at around 2%. And, because of the weight Brazil’s stock market and economy has in the region, the regional giant is pulling down a lot of Latin American funds with it.
Some of the best LatAm funds
The Brazil weighting hasn’t helped these Latin American funds but the recent falls have made them more attractive. It is always dangerous for investors to try to ‘catch a falling knife’. But the massive drop has made Brazil, and the Latin American funds it influences, suddenly look like a more interesting proposition. Moreover, the Brazil slump now means that its dominance has been diluted in some funds, especially those where managers have long positions in the region’s other economic giant – Mexico.
One of the most exciting is Neptune’s Latin America fund (NPLTABA:LN). This fund breaks the mould in lots of encouraging ways. For starters its largest allocation is actually Mexico, not Brazil. Those two countries make up roughly a third of assets each, with Peru, Chile and Colombia making up the rest. It’s also rewarded investors – it’s up around 70% since its 2008 launch. The other positive is that it’s low on ‘traditional Latin American sectors’, such as energy which makes up just 7% of the fund. Instead it has heavy weightings in emerging areas such as financials and consumer staples. You can stick the fund in an Isa, but be warned there is an annual management charge of 1.75%, which is not particularly cheap.
Another interesting option is Aberdeen’s Latin American Income fund (ALAS: LN). This investment trust holds a mix of bonds and shares with, as the name suggests, a focus on yield. It has a pretty heavy Brazil weighting – around 50% – but its mandate means it has a nice mix of holdings from Peruvian government bonds to shares in Argentinian engineering companies. One reason this fund should do well is that targeting income is a good way to play Latin America’s growing wealth. As I’ve highlighted before there are lots of Latin American companies paying decent dividends. Indeed, with an average yield of more than 3.5%, Latin American companies are more generous than those in America or Asia (ex Japan). And Aberdeen’s fund seems as good a way to play this as any. The negative sentiment on Latin America means that it currently trends at a slight discount to the net asset value of its holdings, while the yield stands at 4.6%.
This article first appeared in The New World, MoneyWeek’s FREE regular email of investment ideas and news from Asia and Latin America. Sign up to The New World here.