Two funds to consider for Latin America’s future growth

Latin America has outperformed wider the Emerging Markets over the past year as the region’s equity join the recovery from the pandemic.

Some Latin American countries were slow to implement, or opted to avoid, lockdown restrictions meaning their economies lagged other emerging markets in the recovery from the pandemic, or had deeper economic impacts. The region is now rebounding from pandemic at a time many other markets have already priced in a recovery.

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This has been reflected in the broad movements of Latin American equites that are now outpacing other regions. The MSCI Latin American Index was up 14.7% in the year to February 2022, where as the MSCI Emerging Markets index fell 10.4%.

In addition, Latin America equities are heavily weighted towards commodities which have staged a rally while technology shares have sunk.

Vale is the largest constituent in the MSCI Latin America with a 12% weighting whilst the largest companies in the MSCI Emerging Markets index included Tencent, Samsung and Alibaba.

The funds included here provide two options; one to gain exposure to the commodities rally, and another to harness broader consumer trends in the region.

Invesco Latin American

If you’re looking to invest in oil and mining in a market during current geopolitical conflict in Ukraine, then perhaps you might consider Invesco Latin America.

The fund broadly tracks the MSCI Latin American index with large holdings in commodity shares such a Vale and Petrobas. It is slightly underweight consumer staples.

Invesco Latin American Portfolio

Invesco Latin America aims to achieve capital growth by investing in Latin American companies and uses derivatives to minimise risk and generate additional profits. The £80.2 million fund provides a respectable yield of 2.5%.

Invesco Latin America has remained ahead of the benchmark with a 19% return over the last year compared to the IA Latin America return of 10.1% and has returned 20.2% to investors over the last three months against the benchmark of 19.3%.

Invesco Latin America is split between the major South American markets, with a 60.6% holding in Brazilian equities, 24.2% stake in Mexican equities and a 7% holding in Chilean equities.

The fund holds its remaining investments in 2.6% Peruvian equities, 1.8% in Money Market, 1.7% in American emerging equities and 1.6% in Canadian equities.

Invesco Latin America’s largest holding is a 9.9% investment in mining group Vale, which reported a gross profit of $6.6 billion in 2021 and followed some of their FTSE 100 mining peers in paying additional dividends after a strong year.

The fund also has a 9.8% stake in Petroleo Brasileiro, whose parent company Petrobas posted a gross profit of $24.4 billion in 2020 and a $1.3 billion dividend, alongside a 5.7% holding in Banco Bradesco with an operating income of R$4 billion and a 5.3% dividend yield in 2021.

Stewart Investors Latin America Fund

Stewart Investors Latin America Fund has the highest yield of 3.25% amongst 13 OEIC equity funds invested in Latin America, according to data compiled by Trustnet.

Stewart Investors Latin America Fund has lagged behind its benchmark, IA Latin America in performance. The fund has seen returns of -5.1% compared to IA Latin America with 2% over 5 years.

Over the last year, the benchmark index has generated returns of 10.1%, outperforming Stewart Investors Latin America Fund with a return of 3.7%.

The recent underperformance of the Stewart Investors Latin America Fund can be attributed the high weighting towards consumer staples that have been left behind in a rally in commodities.

The commodities rally drove the MSCI Latin American index sharply higher but attention may now shift to those consumer companies included in the fund and see Stewart Investors Latin America Fund outperform.

Stewart Investors Latin America Portfolio

As well as deviating heavily from the benchmark on sector allocation, Stewart Investors Latin America Fund has decided to look further a field than the largest LATAM economies with 28.2% holdings in Brazil, 27.7% in Chile and 23.9% in Mexico. The MSCI Latin America has a 62% weighting towards Brazil.

The OEIC focuses heavily on consumer staples of 38.9%, a weight of 19.3% in financial shares and 12.2% in industrial stocks.

The top holdings in the fund include Quinenco S.A. with 8.7%, Fomento Economico Mexicano SAB de CV Sponsored ADR Class B at 8% and Compania de las Cervecerias Unidas (CCU) contributing 6.6%.

Chile-based investment company, Quinenco S.A reported a net income of £582m in 2021 as a result of strong performance in shipping investments.

Compania de las Cervecerias Unidas (CCU) is a beverage producer in Chile with a dividend cover of 689x and ROCE of 15.9x.

Amongst other assets that Stewart Investors Latin America Fund invests is, Porto Seguro S.A., a Brazilian insurance company with £3.2bn in revenues during 2021, growing £300m from 2020. The company had a dividend yield of 5.7% in 2020.

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