Funds with exposure to Latin America have had a dire few years, with many down by more than 50% since 2011, says Attracta Mooney in the Financial Times. Unsurprisingly, many investors are now heading for the exits. Total assets managed by European-domiciled Latin America funds have fallen by more than 70% in Europe since 2010 (to €7.5bn), with US-domiciled equivalents dropping by 85% to just $1.4bn, according to investment research company Morningstar. What was briefly a fashionable sector is now shrinking: more than a quarter of US and European-based funds specialising in the region have been liquidated since 2010, according to data provider Lipper.
Weak performance throughout Latin America’s stockmarkets can be attributed to “the three Cs”, writes Patrick Gillespie for CNN Money – “China, commodities, and currency”. China invested heavily in Latin America’s commodities over the last decade, buying iron, copper and food. But China has cut down on infrastructure projects and is directing less cash towards Latin America. Furthermore, the dollar’s strong rise has made it “more expensive for Latin Americans to buy imports and, for some companies, more expensive to pay debt that’s in US dollars”, says Gillespie. The result is that Latin America officially fell into recession during 2015, shrinking by 0.2% overall, according to IMF data. Five years ago, it was growing at almost 5% per year.
Brazil, Latin America’s largest economy, is to blame for much of the downturn. Fears over the weak economy have been exacerbated by a corruption scandal involving its state-controlled oil company, which has entangled a large number of leading politicians and businessmen, and has led to impeachment proceedings against President Dilma Rousseff. Hence the commodity-heavy stockmarket has fallen by almost 40% in sterling terms this year and investors are retreating from Brazil in droves: the country has seen persistent capital outflows since the beginning of 2010.
Given its significance to the region – it accounts for more than 40% of regional GDP and more than 45% of the MSCI Latin America index – that’s holding back all regional funds. “For flows into Latin America funds to pick up, you need to see a performance improvement and that really hinges on Brazil,” says Simon Dorricott, senior analyst at Morningstar. “When that will happen is anyone’s guess.”
But despite the gloom, “there are ‘selected opportunities’ in [Brazil] among exporting companies, which have benefited from the depreciation of the real”, Claudia Calich, manager of the emerging markets bond fund at M&G, tells Attracta Mooney. And while a wider economic turnaround and a resolution to the political turmoil is likely to be some way in the future, MoneyWeek views Brazil as an attractive long-term bet
for those prepared to take the risk.
One way is to invest in the Aberdeen Latin American Equity Fund. This fund has struggled over three years (down 15% per year), but it “remains poised to benefit from rising consumerism across Latin America, with exposure to companies set to benefit from increased spending, such as banks and retail businesses”, says Kate Marshall of Hargreaves Lansdown. The fund has an ongoing charge fee of 1.29%.
In the news this week …
New EU rules will require asset managers to disclose how much of clients’ money goes towards paying for broker research, say Jim Brunsden and Philip Stafford in the Financial Times. UK asset managers currently spend an estimated £1.5bn per year on broker research, but most payments are bundled into the commissions they pay for executing trades – a practice that the Financial Conduct Authority (FCA), the industry regulator, describes as “opaque, and a hindrance to competition”. These changes are set to come into force in January 2017, although they may yet be delayed to 2018.
Twenty-six MPs across five UK political parties have urged their pension scheme to divest their funds of fossil-fuel investments, says Madison Marriage in the Financial Times. Caroline Lucas, the Green’s party’s only MP, put forward a motion in September encouraging trustees of the £500m Parliamentary Contributory Pension Fund to “evaluate the risk of its investments in high-carbon industries” and to “divest from fossil-fuel companies in areas such as coal and oil”. The divestment movement is already supported by investors controlling $2.6trn of assets, including French insurance group Axa and Norway’s state pension fund.
Fund group Threadneedle Asset Management has been fined £6m by the FCA for failings that left it vulnerable to a $150m fraud attempt, writes Daniel Grote for Citywire. Inadequate security procedures allowed Vladimir Gersamia, a former fund manager at the group who has since been dismissed, to attempt to execute a $150m trade for Argentinian warrants in August 2011, at four times their market value and on behalf of three Threadneedle debt funds that he did not manage. If the deal had been completed, investors in these funds would have faced a £70m loss. The only reason why it failed was that Threadneedle’s systems had not traded this type of warrant before. A spokeswoman for the group said that this weakness in its security processes had now been “fully addressed”.