Forbes article on cheap Latin American assets (especially TSP)
global.forbes.com
January 25, 1999
The economies of Latin American countries have
been hit hard, the stocks harder and the
closed-end funds harder still. But good buys are
buried in the rubble.
Playing the Latin rebound
By Kerry A. Dolan
Latin American markets can tempt you and then
break your heart. Valuations are cheap, courtesy
of last summer's upheavals; many governments
and companies are finally instituting positive
reform. But then along comes another Carlos
Andrés Pérez. The former Venezuelan president
(1974-79, 1988-93) headed an administration
that was unusually corrupt, even by Venezuelan
standards, and was impeached and convicted of
misusing public funds. In November he sprang
himself from house arrest by winning election to
the senate, thereby acquiring congressional
immunity.
Richard Watt, 40, can only sigh when the Pérez
story comes up. Watt manages four Latin
closed-end funds ("investment trusts," to the
British) with $350 million in total assets for
Credit Suisse Asset Management (formerly BEA
Associates). Last year was a rough one. Russia's
default terrified investors. Asia's depression
undermined prices for commodities, including
copper, grains and oil, all crucial Latin American
exports. The net asset value for each of Watt's
funds declined between 25% and 51%. As the
fund's discounts from net asset values widened,
Watt's shareholders fared even worse than that.
Funds for the recovery
These five open-end offshore funds fared
better than their peers over the past year. All
are priced in dollars.
Fund
12-month
total
return
Sales
charge
Total net
assets
(US$mil)
ABN-Amro
Lat Am Eq
-35.5%
3.00%
$124
Fidelity
Funds Lat
Am
-32.5
5.25
58
Morgan
Stanley Lat
Am I
-28.2
none
52
Schroder Lat
Am
-33.8
5.00
440
Scudder GO
Lat Am
-26.5
none
29
Data as of Dec. 23, 1998. Source: Lipper Analytical
Services.
Their loss is your opportunity. Since bottoming in
mid-September, Latin American bourses have
rallied by 38%. Even with that rebound, equities
are reasonably priced. In Watt's Latin America
Equity fund, for example, you are getting shares
of YPF, an integrated oil company in Argentina
that trades at 6.5 times estimated cash flow
(expected 1998 earnings plus depreciation).
(The comparable ratio for Exxon is about twice
that.) Buy the fund and you are buying YPF even
cheaper, since the fund trades on the New York
Stock Exchange at a 29% discount to net asset
value.
Conditions are improving.
Inflation has been chopped;
productivity has increased;
fiscal deficits are small.
Venezuela may be on the wrong track, but
across the region conditions are improving.
Inflation has been chopped to single digits;
productivity has increased, as a host of formerly
state-run companies have been privatized; fiscal
deficits are small enough to qualify many Latin
American countries (notably excepting Brazil) to
join Europe's Maastricht Treaty.
Watt expects GDP for the region, on average, to
expand by 0.5% this year (less than the 2% or
so growth expected from the U.S. economy).
With a well-diversified portfolio, you can
withstand disasters afflicting single stocks or even
whole countries. (And you do get disasters. One
of the worst performers, Venezuelan paper
company Venepal, was down 91% in dollar
terms last year.)
A handful of Latin companies show strong
profits, growth and balance sheets—especially
compared with emerging Asia—and have
adopted the tough U.S. standards for accounting
and disclosure. Telecomunicacões de São Paulo
serves a market of 34 million people in the state
of São Paulo, which, if it were a nation, would
be the richest in Latin America in terms of GDP
per capita. Yet only 37% of homes and 68% of
businesses there have phones. Watt estimates
that the company could easily double in size in
five years. Yet its enterprise valuation (debt plus
market value of common) is only 3.8 times
operating income (earnings before depreciation,
interest and taxes). The comparable ratio for the
U.S.' BellSouth is 9.4.
Chile's Chilectra, the electric utility, has its
Chilean tariffs set for two more years and is
improving efficiency at its Peruvian, Argentine,
Colombian and Brazilian subsidiaries. Mexico's
largest retailer, Cifra, controlled by Wal-Mart
since September 1997, is debt-free and has
$600 million in cash. The stock slipped nearly
50% last year in dollar terms.
All else being equal, stick with closed-end funds
selling at discounts to net asset value. Several
such funds run by Credit Suisse's Watt are listed
in New York and are subject to U.S. disclosure
rules.For investors interested in open-ended
offshore funds, the five listed in the table above
are some of the best performers over the past
three years.
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By Kerry A. Dolan
Capital Markets & Investing
From January 25, 1999 Issue
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