One of the most common things that readers say to me about Latin American shares is that they're too risky. Interesting story and all, they say, but there's no way that I'm sticking my money into a company that I've never even heard of. "Why don't you just recommend a fund?" they ask. So today I'm going to bow to reader pressure and take a look at the Latin American funds available to British investors.
My first gripe with 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.
The Brazil effect'
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". Nice idea. Indeed regular readers will know that I've 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.
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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.
One of my favourite LatAm funds
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 my favourite funds isNeptune'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 thing that I like about it 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 isAberdeen'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. The main reason I like the look of this fund is that I think 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%.
Invest in companies that act like funds
Another good option can be well-run banks in a well-regulated financial system. They lend to everyone in the economy, which means they can often be more representative than the country-specific ETFs mentioned above. Though, as readers like to remind me, these companies can also be more risky.
That's it from me this week. I am off to Colombia tomorrow on a one-month investigative trip. I'll be interviewing government ministers, CEOs and no doubt chatting to a lot to taxi drivers, so I'll send back updates when I come across something interesting.
James graduated from Keele University with a BA (Hons) in English literature and history, and has a NCTJ certificate in journalism.
After working as a freelance journalist in various Latin American countries, and a spell at ITV, James wrote for Television Business International and covered the European equity markets for the Forbes.com London bureau.
James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report.
He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.
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