Published:
June 30, 2008
While India and China have
been the big headline-makers over the past few years, stocks in
many countries throughout Central and South America have also
been salting away impressive gains.
Thanks in part to strong global demand for steel, Brazilian iron
ore producer Companhia Vale Do Rio Doce (NYSE: RIO) has dug up
gains of +465% over the past three years. Meanwhile, Petroleo
Brasileiro (NYSE: PBR), which controls 95% of Brazil's oil
production, has racked up a massive return of +550%.
And the gains haven't been limited to the commodity boom either.
Mexican wireless provider America Movil (NYSE: AMX), Colombian
financial giant BanColombia (NYSE: CIB) and many others have
also enjoyed healthy triple-digit gains.
And all of these companies are well represented in the Latin American
Discovery Fund's (NYSE: LDF, $26.65) $300
million portfolio. But that's not all you'll have access to.
While the firms above are all ADRs that can conveniently be
picked up on the New York Stock Exchange, LDF also has a direct
stake in companies like Colombian food retailer Almacenes Exito
and Brazilian power producer Cia Energetica de Sao Paulo --
which only trade on foreign exchanges and would otherwise be
difficult for U.S. investors to tap into.
Not surprisingly, given the rich natural resources of Latin
America, LDF is heavily weighted in the metals/mining and
oil/gas sectors, representing a combined weighting of 40%.
However, shareholders will also have a stake in banking,
telecom, software, media, consumer staples and other industries.
Notably, the fund was also sitting on about $38 million (about 15% of
the portfolio) in
money market assets at year-end -- cash that can be quickly
deployed to take advantage of falling prices.
Having the flexibility to hold cash during an uncertain market
is just one of the benefits of this actively managed fund. Not
only can its management team cherry-pick whatever stocks in the
region they see fit, but they can also overweight, underweight
or even avoid certain countries depending on market conditions.
Commentary from the latest annual report suggests the
portfolio has little exposure to Chile, where stock valuations
are becoming stretched and interest rates are on the rise. By
contrast, management is making a bold bet on Brazil, arguably
the region's most explosive country, and on Mexico -- which is
benefiting from lowered inflation, fiscal reform, and the lowest
consumer debt levels in all of Latin America.
Of course, having the flexibility to deviate from traditional
benchmarks only helps when managers can consistently make the
right calls. Fortunately, they have done exactly that for more
than a decade. In fact, LDF has scored in the top 1% of all
Latin American equity funds over the past one, three, five, and
ten-year periods.
Since 2003 alone, the fund has turned in annualized gains of
better than +53%, outpacing the MSCI EM Latin America Index by
more than eight percentage points per year -- and turning a
$10,000 investment into approximately $83,000.
The downside to all those winning trades is that the fund
typically distributes hefty capital gains payments each
December and isn't particularly tax efficient -- but even on an
after-tax basis, shareholder have had reason to smile. Also on the
plus side, LDF trades at an attractive discount of -7.5% to NAV.
All things considered, LDF is a
great way to participate in the continued prosperity of Latin
America, which could well see its sixth-straight year of
double-digit gains in 2008, as measured by the MSCI EM Latin
America Index. Companies throughout the region are
seeing improved balance sheets, expanding profit margins and
stronger cash flow generation.
While a pullback in commodity prices remains a risk, investors
willing to withstand the volatility of an emerging-markets fund
should continue to be rewarded here.
Nathan Slaughter
Editor
The ETF Authority
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Several years ago Nathan switched gears and decided to devote
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Nathan's educational background includes NASD series 6, 7, 63,
& 65 certifications, as well as a degree in Finance/Investment Management.
He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley.
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