Casson’s Latin American fund reports consistently strong returns over past 12 months
Launched in June 1997, the Scottish Widows Latin American fund has shown consistent strong performance.
According to Morningstar, Jeff Casson’s £64m vehicle, which sits in the IMA Specialist sector, has gained 91.4% over one year to 6 April compared to a sector average increase of 51.5%. On a three-year and five-year view the fund is up 74.5% and 280.7% respectively.
Casson, who has managed the fund since October 2006, says: “The region had a difficult year in 2008 but in 2009 there was a strong rebound in the market.
“A lot of this stems from the fact Latin America was perceived to be more risky than it really was by a large number of individuals after the collapse of Lehman in September 2008.”
Casson notes Latin America has been through a number of crises in the past from which both the governments and central banks have learnt material lessons.
“They have been able to put in place policies both at a government and regulatory level, which has protected the domestic economy but more importantly the financial sector,” he says.
“So we saw a very strong external crisis but this was not translated into an internal crisis in any of the Latin American countries.”
The fund structure is shaped by the manager’s high conviction best ideas with typically between 35 and 50 names in the portfolio.
Casson says: “This is based on the due diligence we do. We build a full operational model on each of the companies in which we invest.
“This means the portfolio’s performance has been driven by the research ideas we have been generating internally, and backing those ideas within the portfolio.”
Performance has been lifted by a number of the commodity names the manager owns, particularly in the steel sector.
The fund has also successfully exploited the domestic opportunity within each of the Latin America domestic markets, particularly In Brazil and Mexico, which accounted for 70.5% and 19.8% of the fund’s exposure respectively at 28 February.
“In Brazil there has been a significant expansion in the middle class,” Casson explains.
“Over the past 18 to 24 months about 20 million individuals have moved into the consuming class as defined by the Brazilian statistics agency. This is a very large captive number in which to sell into for those domestically focused companies.”
The other clear beneficiary for the fund has been Brazil’s commodity exposure.
“Brazil is resource rich, not only in oil and gas and iron ore but also in softer commodities such as beef, chicken, orange juice and soya,” Casson says.
He adds: “All of these are key commodities that have been sold to other emerging markets particularly China, which has been a key trading partner for Brazil. This has been one of the key drivers of the strength we have seen within the commodity complex in Brazil.”
A number of Brazilian stocks have performed particularly well over the last 12 months, including the IT company Totvs, which provides accounting software to companies.
Casson explains: “With the formalisation of the tax system companies have had to modify how they internally manage their accounting. Tovs provide the system which allows them to do this.”
A couple of Brazilian stocks that focus on the domestic economy have also been strong performers, including retailer CBD and the telco GVT, which Vivendi are in the process of acquiring.
Brazil has been the largest position within the fund over the last couple of years. However Casson has recently cut exposure due to concerns over the potentially unsettling impact of the forthcoming October general election.
President Lula, widely viewed as a very successful president, has been the incumbent for the past two terms but will be unable to stand for a third term.
“So there will be a change at a political level, and during election year politicians can make comments which can knock the markets,” Casson says.
As a result he is slightly more cautious on the outlook for Brazil in the medium term. By contrast he is more positive on the outlook for Mexico, driven by the US recovery.
The US is the destination for about 80% of Mexican exports, and Casson points out, this has fed through to employment statistics particularly in the north of the country.
In recent months he has bought more steel names in Brazil, which the manager believes are likely to benefit from an improving iron ore price.
“Vale, which is the Brazilian iron ore exporter, has managed to achieve very significant price increases with their major customers,” Casson explains.
“I think this will pass through to the steel companies, so we have added to some steel names in Brazil and also in Argentina.”
He has also recently added to some of the more domestically focused Brazilian stocks.
“The domestic stocks have underperformed somewhat in the first quarter of this year as the commodity names have been stronger, so we have taken advantage of the weaker consumer names to add to positions within this sector,” Casson says.
There are only four Latin America funds in the IMA Specialist sector but Casson believes they will all grow in size.
He thinks more country-specific funds will be launched, focused on Brazil or Mexico, for example, rather than an increase in the number of Latin American funds.
The manager believes investors in Latin American funds have seen the benefits brought about by political and economic stability working its way through the system across the region.
“One of the key attractions from a longer term investor’s standpoint is the emergence of a middle class, effectively a consumption market which has never been there in the past and which continues to grow,” he says.
“Brazil, for example, is rich in the resources which the emerging markets need to continue their development.”
He adds: “I remain optimistic about the region’s long-term prospects. Against a general backdrop of political and economic reform and comparatively low levels of debt, Latin America is well placed to offer further promising investment opportunities.”
