Can Latin funds keep rolling?
The Latin Beat Goes On
By TOM SULLIVAN | MORE ARTICLES BY AUTHOR
Can Latin funds keep rolling?
LATIN AMERICA have outperformed all others over the past half-decade. China, India, technology and energy funds have not been able to keep pace. The unprecedented global demand for commodities like iron, copper and oil has been the primary driver of recent gains. But items like airplanes, financial services, technology, wine and beer, and even Chilean sea-bass have added depth and diversity to the region's economy. Liberalized economic and political policies in many of the most successful countries have begun to create a middle class that's both making and consuming goods.
Latin America, of course, is notorious for losing its footing just as the dance gets interesting. Argentina fell into a mess under spendthrift populist Juan Peron, piling on debt under a deadly military dictatorship and defaulting in 2001, shortly after president Carlos Menem left office. Mexico had to get a $40 billion standby loan from the U.S. in 1995 to stave off default; Brazil defaulted on its sovereign debt in 1987.
Curtis Parker
Mutual-fund investors should realize that Latin countries today produce everything from airplanes to zinc.
Should mutual-fund investors start tip-toeing for the exits anticipating another big stumble? Can the regional economy keep its balance while its huge and influential neighbor to the north wobbles? It seems unlikely that any emerging market will sidestep the effect of a U.S. recession, but Latin American funds and the region's individual stocks still seem like a reasonable bet.
THE STOCK FUNDS HAVE CHALKED up an average annual total return in the last five years of 44.97%, far ahead of Asia, ex-Japan, at 22.62%, and Europe at 17.71%. It also beats stock funds dedicated to natural resources, up an average of 31.05% per year, and technology, up 7.71%.
Some of the Latin funds worth a look are T. Rowe Price Latin America (ticker: PRLAX), BlackRock Latin America (MDLTX), Fidelity Latin America (FLATX) and iShares S&P Latin America 40 Index (ILF).
Latin America "has changed dramatically in the last 10 years," says Giles Conway-Gordon, co-managing partner of Cogo Wolf Asset Management and the Cogo Wolf Global Strategy Fund, a multi-asset hedge fund of funds. "There's a tectonic shift" occurring there, he says, noting that it took the developed world some 75 to 100 years to move the bulk of its mostly poor people into the middle class.
After a series of debt crises -- most recently Argentina's -- Latin America's creditworthiness continues to improve. Fitch Ratings last week predicted regional growth would "remain relatively healthy at 4.1% in 2008," boosted by high commodity prices, with growth for 2009 targeted at 3.8% and 3.9% for 2010. Fitch expects international currency reserves, including gold, to rise to more than $500 billion this year from $441 billion in 2007, "underpinning the region's greater resilience to external shocks."
The credit-rating outfit adds that "the (credit) rating momentum in the region remains positive and Fitch has taken no negative rating actions in the region over the last six months, in contrast to other emerging market regions." Brazil was raised by Fitch to investment grade in May, following S&P by a month. Peru earned investment-grade status from Fitch in April.
Still, despite the incredible run-up in Latin stocks, price-to-earnings ratios remain competitive with their regional peers. According to the IBES 2008 forecast, the MSCI Latin America index trades at 13.4 times earnings compared with the MSCI Far East and MSCI North America at 15.3 times and MSCI Europe at 11.8 times.
And unlike China, most of Latin America is democratic -- free of the arbitrary diktats of some Communist Party functionary regarding supply and demand. Unlike Russia, most of Latin America has a thriving press and fairly transparent rule of law. And unlike India, most of Latin America has an abundance of natural resources, not just an abundance of people.
The top Latin fund performer for the past three years has been T. Rowe Price Latin American fund, up 54.9% and 13.92% this year through May 31. The top performing exchange-traded fund was iShares MSCI Brazil Index (EWZ), up 64.43% a year for the past three years, and 21.68% in 2008 through May this year.
GIVEN THE ROCKY HISTORY, however, there are plenty of skeptics. "The recent returns are not sustainable," says Bill Rocco, analyst at Morningstar. Emerging markets don't have sector breadth, with their heavy concentration in natural resources, telecommunications and banking. Investing in a dedicated Latin America fund offers "even less diversification" than an emerging-markets fund, he warns.
Rocco is probably right that the returns will be more modest, and looking for broad emerging markets exposure -- with a strong emphasis on Latin America -- is a safer bet for investors. Delaware Emerging Markets Fund (DEMAX), for example, has a slight overweight in Latin America. It's down 11.63% year-to-date through Thursday but that's after posting double-digit returns from 2003 through 2007
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