News - Emerging markets
Categories: Emerging Markets
The manager of the best performing fund over the last decade has revealed some of the stock picks which fuelled the 868% return it produced over that timeframe.
The £485m Invesco Perpetual Latin American fund has beaten 1,126 peers in the IMA universe that have 10-year track record to the top spot, returning 868%, according to Morningstar.
There are a number of other Latin American funds in the top slots, including funds from Henderson, JPM and Threadneedle, but the closest fund, Fidelity Latin American, still lagged behind the IP vehicle.
Head of emerging markets and manager of the IP Latin American fund, Dean Newman (pictured), said there have been a number of significant changes in the region which has supported the impressive return.
"Investing in Latin America has been a remunerative experience in general," he said.
"In the late 1990s and early 2000s you could argue Latin America had some of the same problems which are now facing the developed world. Governments had a lot of debt and poor finances, there was need for economic reform and companies and individuals had too much debt. It all ended unpleasantly and equity investors left the region in swathes.
"Governments began to tackle their debt problems by balancing books, making important decisions on tax reform and spending and also allowed their currencies to float freely. They set up independent central banks with inflation targets and corporates were encouraged to pay down debt, strengthen balance sheets and become more cashflow generative as the man on the street had to go through a period of austerity."
Conditions were tough, Newman added, but the actions were needed to "sow the seeds of success" we have seen today.
As inflation and interest rates began to decline, the markets began to reward and corporate earnings growth also picked up.
"This led to a decade of strong, stable economic growth," Newman said.
The changes at the political level also boosted investor sentiment as well as reinforced economies.
Another significant factor, said Newman, was the emergence of the middle class in Brazil which moved on to a level of income that allowed them to buy cars and houses. "This really super charged the domestic economy."
Foreign direct investment soared in Brazil, with inflows reaching $600bn between 2005 and 2010, equivalent to 30% of GDP.
"Companies were willing to build factories costing $500m in Brazil, giving a vote of confidence to the economic policies put in place and the ongoing outlook for the economic framework and growth."
Playing on the rise of the middle class, Newman said a lot of the fund's success is down to stockpicking within the mid-cap space where companies have been able to grow organically or through acquisitions right across the sectors.
One company he has supported for a number of years is JSL, a logistics business set up in the 1950s by one man and his truck and which is now a multi-billion dollar company.
"Penetration is very low in South America and this company carries out all kinds of logistics work for a number of other big companies, such as transporting raw materials, providing fleets of lorries or providing links between road and rail."
Copa, an airline based in Panama, is a company that has been in the fund since 2009.
"It has stable financial performance and a strong balance sheet. It fits into an interesting niche in that, as it is in Panama, it operates in the heart of South America serving flights to the rest of the region and North America. It is also south west of the hurricane zone, where a lot of its competitors are."
Another company he has held is Mexichem, a chemicals company which until recently, when it acquired Wavin in the Netherlands, was under the radar for many analysts.
"The management have an excellent understanding of finances and operational efficiency. It produces PVC products such as pipes and windows, so closely linked to homebuilders. Even though it is a Mexican multi-national business, nobody had heard of it until the Wavin acquisition. Then people realised that it is actually a serious player."
Newman also invested in Even, a homebuilder in Sau Paulo, a company which he said has "not fallen foul of the excess that some Brazilian housebuilders did and grew too fast."
"It has looked after customers and collected receivables. We have stuck with it when the share price has been weak, and even added to it, and that has paid off."
Newman added the extraordinary gains seen in Latin America do not need to end here and said the long-term outlook for the region is "bright".
"Economic growth and earnings growth is likely to be superior to those in the developed world, which is going through a healing process and period of slow growth. Latin America's government finances are sound, it has good economic policies, and strong demographic trends are supporting the domestic economy.
"Equity markets have broadened and deepened, they are bigger and easier to trade with a better selection of stocks.
"Even though the global backdrop is tough, which is never great news for emerging markets, the region is in good shape and holds attractive long-term opportunities."
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