South American Treasure

Latin American funds can be volatile, but they appear ready for a strong performance in 2002

If you’ve been keeping track of the headlines, you might be surprised to find just how well mutual fund investing in Latin America has done lately. Remember in 2001 when there was news that Argentina’s currency was melting down, dragging that nation’s economy with it, and sending a good number of citizens out in the streets to protest? In spite of that, portfolios invested in Mexico have actually thrived since. As of March 31, Latin American stock funds averaged a 9.6% total return over the previous 12 months, compared to a negligible 0.2% gain for the Standard & Poor’s 500 index over the same period.

This year, even with the memory of riots in the Argentine capital of Buenos Aires still fresh, funds invested in the region below the Rio Grande certainly haven’t shown any damage. Latin funds started 2002 with an 8.8% charge on average, while the S&P 500 essentially stood still in the time leading up to the end of the first quarter.

The success of the funds can be chalked up to the past experiences of fund managers. Latin America, for all of its growth potential, is still one of the more volatile portions of the global stock market. The most successful portfolio managers have learned to spot troubles ahead of time. So when Latin American regional stock markets dropped during 2001 to a -4.5% total return on average, the top stock pickers in the group made adjustments. They shifted fund holdings out of Argentina, says Morningstar Analyst William Rocco, and into issues in Mexico and Brazil. Rocco notes that holdings from those two nations now make up about 80% of the average Latin stock fund’s mix.

“Brazil and Mexico are better-managed economies and have very strong trade links with the U.S.,” notes Todd J. Henry, a portfolio specialist with Baltimore mutual fund company T. Rowe Price. That’s particularly important in the case of Mexico since most economists believe the fortunes of our southern neighbor track the ups and downs of the U.S. market. So projections of a recovery at home probably point to a rise in the Mexican economy as well.

While Latin America may remain a roller-coaster, there is another reason you might consider putting some small portion of your portfolio to work there. Some of the region’s strongest companies are selling at bargain prices compared to their American counterparts. Henry says the typical Latin American stock grades at an average 11.6 times projected earnings for 2002, while shares in the U.S. fetch 25.6 times — more than twice that figure. The Mexican and Brazilian exchanges have even lower P/Es — 10.9 and 10.8 times, respectively.

With the help of Morningstar’s database of fund results, we’ve screened for a few candidates that should fare well in the months ahead. Analyst Rocco says the best bets in the region have a strong long-term track record relative to their peers. So, for our survey of the group, we looked at three-year average annual returns. The top performer on our list was the T.

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