abrdn Latin American Equity Fund: May 2023 update

• This specialist fund offers direct exposure to Latin American stock markets
• It’s run by a team with a long record of investing in Latin American companies, who are willing to be flexible and change the fund in the hunt for the best opportunities
• A combination of difficult market conditions and weaker stock selection has meant the fund has been under pressure to perform more recently
• This fund is not on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

abrdn Latin American Equity is a specialist fund focused on investing in the main markets of Latin America, including Brazil, Mexico, Chile and Peru. The fund’s main aim is long-term growth and could provide a way to diversify a portfolio invested in broader global or emerging markets funds. It could also be considered for specific exposure to Latin American markets.

Higher volatility and risk should be expected from a fund like this, given it focuses on a small group of emerging economies. It should therefore only be considered to form a small part of a wider investment portfolio, focused on long-term growth.

Manager

abrdn is home to one of the most experienced teams investing in emerging markets companies. The Global Emerging Markets Equities team has invested in the region for more than three decades and is currently headed by Devan Kaloo, who joined the group in 2000.

Over the years, a team of analysts and portfolio managers has been built. They're based across seven global locations, including London, Singapore and Sao Paulo, which means they have excellent access to companies as well as insight into what's going on across each market.

The team looks for ideas across the emerging markets, including Latin America, and each team member has responsibility for certain sectors. This means the entire team supports the fund through contributions to research and investment ideas. Their overall experience is valuable when it comes to investing across this diverse range of economies.

A group of six investment managers and analysts also form abrdn’s Latin American Equity ‘pod’, led by Eduardo Figueiredo, Head of Brazilian Equities. Most members of the pod are based in Sao Paulo, Brazil and, in addition to carrying out research, they’re responsible for ensuring the wider team’s best ideas make it into this fund. It’s very much a team-based approach. Each team member has been working closely together for many years, highlighting the strong team dynamic.

Process

The team's investment philosophy is based on 'long-term quality'. They believe most investors underestimate the sustainability of returns that many high-quality companies can make. They aim to find those that can generate steady rates of growth, which have been overlooked by others, and hold onto them for many years.

Companies in good financial health, run by robust and trustworthy management teams are favoured by the team. They often look for a change that could help boost profits in future, such as a new product or change in technology. They sometimes invest in out-of-favour companies because they're often undervalued and can be bought at a more attractive share price. Meeting company management is important, and the team can do this regularly as they’re based throughout the emerging markets, including Latin America.

abrdn’s emerging markets funds typically have a bias towards businesses that could benefit from rising wealth and domestic consumer spending, though the team aims to have at least some exposure to most major sectors. This fund has more in real estate, technology and consumer sectors than the broader Latin American market, and less in areas such as financials and communication services. The fund can also be quite concentrated, which means each investment could have a big impact on performance, which increases risk.

Over the last 12 months, the team have made a number of changes to the portfolio, driven primarily by two factors. The first being market volatility. The team wanted to take advantage of this volatility by topping up investments in some high-quality companies at more attractive prices, including retail and wholesale food seller Assai and Itaúsa, a company operating mainly in financial and industrial markets.

The second driver of change is to do with risk. The portfolio has invested in some higher risk names over the last year or two, some of which have failed to meet the team's usual high-quality bar. As a result, Figueiredo wanted to increase the quality of the portfolio but also improve the defensive nature of the companies he invested in. The aim is to improve the portfolios downside protection in stressed or high-risk scenarios.

The team have therefore reduced their exposure to certain financial and industrials companies, like stock exchange group B3 and car rental company Localiza. To help improve the defensiveness of the portfolio they have increased investments in the consumer staple sector. The most notable investment has been FEMSA, which operates as a bottler of Coca-Cola trademark beverages. The team’s confidence rose following the announcement of a strategic review alongside its presence in Mexican convenience stores.

Culture

Aberdeen Asset Management was one of the UK's first asset managers to build a range of Asian and emerging markets funds. The group has remained committed to investing in these markets, including Latin America, ever since and we think this dedication is admirable.

Aberdeen Asset Management merged with Standard Life in 2017 to become Standard Life Aberdeen plc. This later became Aberdeen Standard Investments and in July 2021, the company changed name once again to abrdn to simplify and unite under one single brand. The Global Emerging Markets Equity team subsequently made some incremental changes to their investment process, though the core of their philosophy remains intact. We're pleased to see the team has settled since the merger and encouraged they're willing to learn and keep improving what they do.

There is a collaborative culture within the team. The broader team is responsible for a range of Asian and emerging markets funds. Each member provides input to the wider franchise, and they share their knowledge and experience to ensure their best ideas make it into the portfolios.

ESG Integration

abrdn is a firm well known for its commitment to Environment, Social and Governance (ESG). Responsible investing has been part of the business since it set up its Corporate Governance team in 1992. We’re pleased the firm’s commitment to ESG has filtered down to the fund level. abrdn fund managers generally see themselves as owners of businesses, not investors, and stewardship is an important part of their investment processes.

Similarly, the Global Emerging Markets Equities team takes stewardship and ESG issues seriously. These factors are considered as part of company analysis, and the team engages with companies to encourage best practice. All managers have access to a central ESG team, as well as specialist on-desk ESG analysts.

This fund isn’t an exclusions-based fund, which means it can invest in any sector. That said, even in sectors such as energy and materials, they only invest in what they believe to be ‘best-in-class’ companies. If there are any ESG concerns, the company must be aware of these and be willing to engage with the team to work on improving its ESG credentials.

Cost

The fund has an ongoing annual charge of 1.14%, but we’ve secured HL clients an ongoing saving of 0.54%. This means you’ll pay a net ongoing charge of 0.60%. This is a good price for a fund that invests in a specialist area of the market, particularly a specific region, where costs can be higher.

The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

The Global Emerging Markets Equity team has managed this fund since it launched in 2011, and have also run other portfolios focused on Latin American markets dating back to 2004. Over this time, the team has slightly underperformed the broader Latin American stock market. There have been certain periods of weaker performance which have hampered the fund, including the great financial crisis in 2007/08 and more recently, the COVID-19 pandemic.

Performance can be very volatile, especially when compared with funds focusing on a broader range of emerging economies or developed markets. We think this should be expected when investing in a specialist area, and from economies that continue to evolve and experience more political and economic uncertainty than developed markets. It’s also worth remembering past performance isn’t a guide to how the fund will perform in the future.

Latin American markets bounced back over the course of 2022 driven largely by reopening economies and stronger commodity prices. Markets have also held up relatively well going into 2023. However, the fund hasn’t managed to keep pace. Over the last 12 months, the fund has fallen 0.58% compared to the markets return of 5.25%*, owing mainly to the fund’s high quality growth investment style being out of favour but also weaker stock selection. 

Telefônica Brasil, a mobile telecommunications company in Brazil, was one of the fund's worst performers. This is largely a result of a difficult market backdrop but also lack of investment in parts of the continent which has put pressure on the telecommunications sector. Brazilian based fashion retailer Arezzo was also one the fund's worst performers. It’s not all doom and gloom though. Mexican airport operator OMA, real estate company Corporación Inmobiliaria Vesta and beverage company Arca Continental were the fund's top performers, delivering strong returns over the last 12 months.

Past performance is not a guide to the future. Source: *Lipper IM to 30/04/2023.

More about abrdn Latin American Equity Fund including charges

abrdn Latin American Equity Key Investor Information