- Aberdeen Latin American Equity remains positioned to benefit from rising domestic consumption across the region
- We favour the team's prudent investment approach, focusing on businesses with high standards of corporate governance run by good management teams
- Latin American markets have performed well in recent months following several volatile years
The past few years have been a rollercoaster ride for investors in Latin American markets. A combination of falling oil prices; moderating demand for the area's vast store of resources; concerns over the impact of a US interest rate rise; and ongoing political wrangling damaged investor sentiment. In the three years to the end of 2015, broader Latin American markets fell by almost 45% (source: Lipper IM to 04/01/2016).
The region has seen a reversal in its fortunes more recently, buoyed by an oil price rebound and the US Federal Reserve's lowered expectations for the number of interest rate rises this year. Investors also responded positively to the potential (and now confirmed) impeachment of Brazil's president, Dilma Rousseff, after being linked to a number of corruption scandals. Latin American stock markets have since risen 30.9%*, although this is not a guide to the future.
It is unsurprising that most funds investing in the region have experienced high levels of volatility. The Aberdeen Latin American Equity Fund, for example, has fallen in value since its launch in February 2011. That said, while market conditions have been testing, the Aberdeen team's conservative and flexible investment approach means the fund has outperformed its benchmark by 6.3%* over this time. Please remember past performance is not a guide to future returns.
|Annual percentage growth|
| May 11 -
| May 12 -
| May 13 -
| May 14 -
| May 15 -
|Aberdeen Latin American Equity||-8.3%||17.0%||-23.3%||-9.2%||-6.4%|
|MSCI EM Latin America 10/40||-8.0%||4.1%||-17.9%||-5.9%||-12.2%|
Past performance is not a guide to future returns. Source: Lipper IM to *03/05/2016.
The team at Aberdeen have long held the view that rising wealth will drive domestic consumption across Latin America and the fund has been positioned to benefit. Our research suggests the fund's exposure to consumer industries has continued to increase over time and currently accounts for 38% of the portfolio.
The fund currently invests in a number of mall operators and department stores. It recently benefited from an investment in Chilean mall operator Parque Arauco, which has seen a rise in occupancy rates and tenant sales. The company's costs have been well-contained, according to the team, while additional capital has also successfully been raised to finance projects in Chile, Peru and Colombia. Other similar investments include Lojas Renner and Multiplan, from which profits have recently been taken.
Financial firms, which could also see increasing demand for their products as incomes rise, comprise 34% of the fund. The team have recently taken profits from investments in Brazilian bank Banco Bradesco and stock exchange BM&F Bovespa, while Santander Mexico has been topped up on account of its attractive valuation.
Despite ongoing volatility, we believe the long-term potential for Latin America remains intact. The economy has previously centred on the export of natural resources, yet a combination of oversupply and falling demand has proven damaging in the shorter term. The economy is evolving, however. Industrialisation and an expanding middle class could drive growth in domestic demand, while a youthful and burgeoning workforce could enjoy greater earnings and spending power over the longer term.
While markets have rebounded in recent months, our analysis suggests the shares of Latin American companies continue to represent good value. That said, volatility is likely to persist and these markets could get cheaper still. A long-term horizon is therefore essential for investing in this higher-risk region, to which we would only suggest allocating a small portion of a portfolio.
We continue to favour the team's focus on well-run companies with competitive and sustainable business models, solid finances and regard for minority shareholders, which are trading on reasonable valuations. The fund remains our favoured choice for exposure to this area and retains its place on the Wealth 150+ list of our favourite funds with the lowest ongoing charges. Please note the charge to hold investments in the Vantage Service is 0.45% p.a.