Launched on the 2nd April 2014, Alquity’s Latin America Fund has outperformed 90% of its peers since inception.1 So what has been the secret of its success and what does the future hold for investors in Latin America?
Looking back over the past three years, and forward to the next three, in this blog Roberto Lampl (Head of Latin America Investments), evaluates his key country allocations in the Alquity Latin America Fund.
Over the last three years the fund’s success has been based upon our prescient macroeconomic forecasting. Three countries in particular stand-out for their contrasting fortunes.
In 2014 we anticipated that Brazil would go through a major macroeconomic adjustment due to its overvalued currency, weak terms of trade and rising indebtedness. At the launch of our fund in April that year our allocation to Brazil stood at 12.4% much lower than our benchmarked peers. This protected the fund from the huge draw-downs in 2015 (MSCI Brazil -43.4%, Alquity -13.5%).2
2015 also saw the corruption scandal involving Petrobras, which eventually led to the impeachment of the then President Dilma Roussef in August 2016. Unlike our peers we were not invested in this firm.
Again, we correctly forecasted that the likely impeachment would lead to a new government led by President Temer being more committed to implementing an economic reform agenda the country badly needed. As a consequence, by adding to our Brazilian positions from the end of 2015, we were able to participate in much of the 2016 market rally.
The future for Brazil is encouraging and alongside the economic reforms we see wider growth trends (see our next blog).
Much of our increased Brazilian exposure in 2016 came from reducing our positions in Mexico. Whilst Mexico enjoys a strong weighting in the index, we saw a country facing economic headwinds. Notwithstanding the likelihood of increased protectionism from the Trump administration, we saw the US economy in late cycle and anticipated a slowdown. In addition, we saw demanding valuations, which cautioned us about the prospects for future returns.
Looking forward we see continued challenges for the country over the coming year as pressure to increase interest rates and sustain the Mexican peso increases. However, we still own some excellent Mexican companies deriving revenues from across the region and in the case of Grupo Bimbo, who are the world’s largest producer of baked goods, across the world.
Change is constant and searching for misunderstood investments is a core part of our work as investment managers.
We evaluate government effectiveness and the strength of institutions in each country. We seek the right type of investment to reflect the risk/reward of a country going through positive transformation.
Argentina’s economy was notoriously mismanaged under the presidency of Christina Kirchner. However, we were confident that the change in leadership following elections in October 2015 would result in a significant alteration in economic policy. This has resoundingly proven to be the case with President Macri.
Ahead of all our peers we invested in Pampa Energia, Argentina’s largest electricity generation-distribution-transmission company at the start of 2015. We wanted to capture the normalisation in Argentina’s risk premia and a radical revaluation in the profitability of Pampa’s business. Since investing in the stock in January 2015, it has risen over 500%!3
1 Based upon Citywire Selector 3 year performance ranking 7/105 as at 31 March 2017
2 31 December 2014 to 31 December 2015. Alquity performance refers to USD M Class.
3 Return in USD since initial investment on 15 January 2015 to 24 April 2017.