Lipper Research Analyst Jeff Tjornehoj on "Business for Breakfast" 1060 KRCN - Latin American Funds

Tuesday, July 26, 2005

Q: Jeff, we've heard quite a lot lately about certain sectors performingparticularly well--Real Estate Funds and Natural Resources (or energy)Funds come to mind--but there's another area that has been doing evenbetter?

A: That right. Latin American Funds have been hitting on all cylinders forthe past couple of years. Whether it's one-, two-, or three-yearperformance funds invested in Latin American stocks have been done betterthan anything else.

Q: Why is that?

A: I think it's several positive things coming together--a perfect equitystorm, if you will. Most significant, I think, has been the substantialimprovement in monetary policy. These countries were known for many, manyyears for their very high, even hyper, inflation. Improved monetaryconditions led to better credit terms and more reasonable economic goals.But we can't forget the surge in commodity prices over the last few years.Things like iron ore, copper, oil--all have been instrumental to LatinAmerican's turnaround.

Q: So this is sort of a commodity play then?

A: That's certainly part of. Another booming business in Latin America istelecom. Pick any Latin American fund and you'll see telecom companies allover the largest holdings.

Q: Speaking of, how many funds specialize in this corner of the world?

A: Not many. There are five actively managed portfolios plus three moreETFs. All told they have about $3 billion in assets so not very popular.

Q: But their performance has been "muy bueno," right?

A: Definitely. Over the past year the group average return was about 65%.For two years you'd have had a 46% annual return and over three years anaverage annual return of 34%. Any of those periods was well ahead of energyfunds.

Q: Great! So what's the catch?

A: You could lose a bunch of money quickly. Here's an example: the MerrillLynch Latin American Fund is one of the better performers in this group.But in the second quarter of 2002 it lost almost 30%. That's in onequarter! This area of the world is still prone to political disruptions,significant labor strikes, even currency crises. For the most part thesehaven't been an issue lately, which is why equities and bonds in thesecountries have generally done very well.

Q: So a lot of this recent success is just a reaction to a lack of badnews?

A: There's certainly been a good bounce-back since Argentina, in effect,declared bankruptcy. And that's the sort of issue that keeps even theboldest LatAm investor up at night. The turnaround in the region has beenremarkable and investors have done well, but the month-to-month gyrationsscare away many people. Probably for good reason.

Q: Thanks, Jeff.

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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).