ASI Latin American Equity: May 2022 fund update

• This specialist fund offers direct exposure to Latin American stock markets
• The fund is run by a team with a long record of investing in Latin American companies
• The team takes a long-term view, but is willing to be flexible and change the fund in the hunt for the best opportunities
• This fund is not on the Wealth Shortlist of funds chosen by our analysts for their long-term potential

How it fits in a portfolio

ASI Latin American Equity is a specialist fund that focuses on the main markets of Latin America, including Brazil, Mexico, Chile and Peru. Long-term growth is the main aim, and the fund could provide a way to diversify a portfolio invested in broader global or emerging markets funds, or 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

Aberdeen Standard Investments, recently rebranded as 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. A team of analysts and portfolio managers has been built over the years, and they're based across seven global locations, including London, Singapore and Sao Paulo. This provides excellent access to companies, and insight into what's going on across these markets.

The team looks for ideas across the emerging markets, including Latin America, and each team member has responsibility for certain sectors. This means the whole team provides support on this fund and contributes research and stock 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 ASI’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. This means they have key input into its final construction.

While we have conviction in the team managing the fund, we removed the fund from the Wealth Shortlist earlier this year. This is a specialist fund and, for most investors who are happy with the associated risks of investing in emerging markets, we think a broad global emerging markets fund is likely to be a good starting point. This fund may be appropriate though for specific exposure to the Latin American region. You can find out more in our recent notification.

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.

ASI’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 technology and consumer sectors than the broader Latin American market, and less in areas such as utilities and telecoms.

Earlier in 2021, the team had increased investments in growth names that, in hindsight, did not meet their usual high-quality bar. To balance some of the risk in the fund, they have since reduced some exposure to growth companies in favour of value. Growth companies are typically expected to deliver greater earnings growth in future, while value companies have often been shunned by investors and their shares may look ‘cheap’ compared with the companies’ prospects.

Companies including GetNinjas, an online services marketplace, Mobly, an online furniture retailer, and Magazine Luiza, a Brazilian retailer, are examples of growth companies that have recently been sold. The team has added to energy companies, which could benefit from higher commodity prices, including Petrobras, as well as copper miner Grupo Mexico and paper producer and recycler Klabin Unit.

Culture

Aberdeen 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 merged with Standard Life in 2017 to become Aberdeen Standard Investments and more recently was rebranded as ‘abrdn’. 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 ESG (Environmental, Social and Governance). 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

This fund is available through Hargreaves Lansdown at an annual net ongoing charge of 0.65%, after a 0.54% discount. The standard ongoing charge is 1.19%. 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 launch in 2011, and run other portfolios focused on Latin American markets since 2004. Over this time, the team has performed better than the broader Latin American stock market. As always past performance isn't a guide to how the fund will perform in future.

There have been periods of weaker performance as well though, and performance will be volatile at times, especially compared with funds that focus 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.

Latin American markets had a tougher time in 2021, but so far this year they have rebounded and benefited from higher commodity prices. The fund has been weaker than the market over the past year, growing 3.95%* vs 12.90%* for the market. The growth style of investing didn’t do as well as value last year, and this hurt the fund given its quality growth focus. The team also invested in a few companies newly listed on the stock market at the start of 2021, which didn’t perform as expected and have since been sold from the fund.

Looking forward, Latin American markets may benefit from improved vaccination rates and the reopening of their economies. We recently met Tiago Rodrigues, a member of the Latin American team, who noted some companies could benefit from increased consumer spending, such as shopping malls.

Latin American central banks have also been ahead of the curve in terms of tackling inflation and started increasing interest rates rapidly last year. Rising rates have the potential to dampen economic activity, but they could help stop inflation spiralling. The region could benefit from higher commodity prices and a pickup in exports, though a number of elections could create some volatility this year.

Past performance is not a guide to the future. Source: *Lipper IM to 30/04/2022.

More on ASI Latin American Equity, including charges

ASI Latin American Equity Key Investor Information