SAN FRANCISCO – Not so long ago, Latin America lurched from political turmoil to fiscal crisis. Now much of the region enjoys political stability and economic strength.
Investors have noticed. U.S. based mutual funds dedicated to Latin America soared 49% annualized on average for the three years through Oct. 20 - better than any other fund category, according to fund-tracker Lipper Inc.
Still, U.S. buyers aren't flocking to Latin America directly, preferring to invest through diversified emerging markets funds that limit exposure to any one region.
Most people would find that daring enough. But more aggressive types could find specialized Latin America funds to their liking, even after their runaway returns.
"If you're the kind of investor who may have active funds and passive funds, but also want to have some investment that is truly speculative, Latin America funds would definitely fit," said Andrew Clark, a Lipper senior research analyst.
There aren't many actively managed options. Clark recommends Merrill Lynch Latin America Fund (MDLTX) and Fidelity Latin America Fund (FLATX) , which he praises for combining top performance with solid risk control.
A third offering, T. Rowe Price Latin America Fund (PRLAX) , ranks high at investment research firm Morningstar Inc. for experienced management, below-average expenses and risk, and owning small- and mid-sized stocks.
"We have quite a bit of confidence in T. Rowe's emerging-market effort," said Morningstar analyst Arijit Dutta, who nonetheless is wary about investing in Latin America, given recent performance.
"Managers say these stocks are relatively attractively priced compared to other emerging markets, and certainly to developed markets," Dutta said. "Still, considering how well these stocks have done for some time, we'd advocate caution."
Much of Latin America's improved status is due to the dramatic rise of commodity and crude prices. The resource-rich region is an exporter of oil, minerals and agricultural products.
Even before energy prices spiked, however, many Latin American countries had been rebuilding their economies.
"Governments are following more prudent and more orthodox macroeconomic policy," said Michael Gomez, co-manager of the Pimco Developing Local Markets Fund (PLMAX) , which invests in emerging-market country debt.
Prudence has paid off. Brazil, Mexico and Chile, for example, are exercising greater control over interest rates, inflation and government spending. At the same time, these countries are paying down debt, diversifying their export base, and banking surplus cash from petrodollars and other resource-related profits.
"They're taking a prudent approach to managing these windfalls, and that leaves them much better positioned to weather a downturn," Gomez said.
"It has been at least 50 years since all of the external variables have been so favorable for Latin America," added Paulo Viera da Cunha, head of Latin American research at HSBC Securities in New York.
"The capacity of these economies to adjust is much greater today," he added. "Unless there is a major global disruption, in the process of gradual adjustment the region is generally healthy."
Fiscal and political difficulties still plague Argentina and Venezuela, but most investors focus on the actively traded and relatively transparent bourses of Brazil and Mexico.
"Investors have strong confidence in Brazil. That's also been true in Mexico," said Lipper's Clark. "The two countries tend to be a large portion of Latin American funds. A fund goes as both Brazil and Mexico go."
Brazil and Mexico have been going strong. Latin America's largest markets are less vulnerable to cyclical commodity prices than they once were, with an expanding consumer class that helps diversify economies across an array of retail and industrial sectors.
Still, a key growth engine in Brazil and Mexico is tied to natural resources - and the specter of rising global inflation and sluggish demand from both the U.S. and China, combined with routine profit-taking, factors in the sell-off that has roiled Latin American markets since late September, sending the average regional fund down 8%.
Fund managers are weathering the recent downturn in stride.
"Some profit taking was due, and that's what we're seeing," said Gonzalo Pangaro, manager of T. Rowe Price Latin America. "For long-term investors, it's a very good entry point. Latin America is a volatile region, but we are still confident of valuations at current levels."
Pangaro's recommendations include Mexican homebuilder Urbi Desarrollos Urbanos (URBI) , which he said benefits from the government's effort to promote home ownership, and banking company Grupo Financiero Banorte (GFNORTEO) , which is gaining from increased consumer lending.
In Brazil, Pangaro is especially bullish on Petroleo Brasileiro SA, or Petrobras (PBR) . About 15% of the fund's assets are committed to the state-owned oil giant, which comprises about 13% of the Brazilian market index.
Petrobras features strong production volume yet trades at a discount to major integrated oil companies, Pangaro said. "The market has doubts about production growth," he noted, "but they have delivered this year and I'm confident it's going to come through."
In addition to Petrobras, Pangaro said he also likes Natura Cosmeticos (NATURA) , a cosmetics company that uses local ingredients, with a dedicated sales force that competes with rival Avon Products Inc.
Demographic trends, including a larger number of women in Brazil's workforce, are helping Natura gain market share, Pangaro said. "It trades at a premium to other Brazilian consumer names," he added, "but we think the premium is well-deserved."
Will Landers, manager of the Merrill Lynch Latin America Fund, also is bullish about Brazil's prospects. He has allocated about 60% of the portfolio's assets to the country, with another 30% in Mexico.
In addition to Petrobras and Natura, Landers owns shares of Submarino SA (SBBMY) , an Internet retailer he likened to the "Amazon.com of Brazil." A stake in a more traditional retailer, discount store chain Lojas Americanas SA (LOJAY) , also forms part of the portfolio.
"Brazil is the key driver," Landers said. "We're halfway through the re-rating of the Latin America story. Valuations are still cheap; earnings growth is high. This is sustainable."
Source: Morningstar Inc. (Data through 10/20/05)