Not that you could have bought Chile’s stocks 15 years ago. Latin American mutual funds have been slow to develop. The Mexico Fund broke out of the gate in 1981 but it took until 1988 and 1989 for the Brazil and Chile funds to follow. When they finally did, norteamericanos barely noticed. Even Mexico’s dazzling performance of the past seven years - stocks up 1,034 percent in U.S. dollars, for an annual compound average return of 41.5 percent a year - has passed virtually unmarked by those who lazily link the country only to Margaritas and manana.
But you can’t shrug off Mexico anymore, nor the handful of other Latin countries that are recapitalizing themselves. The region’s notorious debt load is easing. In many countries, the endemic inflation has dropped from unspeakable to merely bad. The United States and Mexico are chewing over a free-trade pact. Brazil and Argentina have joined Mexico and Chile in selling some state monopolies to private investors.
Granted, Latin America has a lousy history for staying the course. One day there’s a president, the next day a coup. One leader fights inflation, the next one prints money. Stock investors turn into princes, then paupers, then princes again, as the Brazil Fund so ferociously shows (chart).
Nevertheless, I’m ready to trust Mexico - and Chile has definitely got my attention. To risk Brazil seems daft, in view of its struggling economy and yo-yo markets. Still, the respected chairman of Morgan Stanley Asset Management, Barton Biggs, has reportedly been touting Brazil to his clients as a prescient buy.
If you want to deal yourself a hand, your vehicle is a mutual fund. But none of the Latin American funds is of the type most familiar to investors.
The funds are “closed end.” Their sponsors sell shares in the fund only once, then invest the proceeds in a portfolio of securities. Once the offering is closed, no new money comes into the fund - nor can you cash out at the fund’s net asset value. Instead, its shares are traded through a stockbroker, like those of any other corporation.
The price of the shares in a closed-end fund does not directly reflect the value of the securities it owns. Investors might pay more or less than the net asset value, depending on whether the fund is hot. In early June, for example, the Brazil Fund held securities worth $13.75 a share, but eager investors were paying $14.50 for them. That fund was said to be selling “at a premium.” By contrast, the Mexico Fund, with securities worth $24.94 a share, was trading at only $22.88 - in the parlance, it was “at a discount.”
Closed-end investors hold two truths to be self-evident: (1) Never buy a fund when it first comes out. You pay high sales and organizational costs that don’t apply if you buy later. (2) Never buy a fund at a premium price; it will almost always drop to a discount. If you’re holding a fund that has gone to a premium, think about selling.
Investors in Latin American funds face one more complication. Relative to the dollar, the value of pesos and cruzeiros melts like cheese in a microwave oven. When a currency falls, that’s normally bad; it reduces the value of the profits you repatriate. But U.S. investors are still making money because, over the long term, stock prices have risen even faster than Latin currencies could collapse.
Stock prices have also risen faster than local inflation, according to Peter Wall, senior markets analyst at the International Finance Corp. in Washington, D.C. In any one year, stocks may go down and inflation up. But over recent five- and 10-year periods, he says, stock markets in five Latin countries have produced impressive real returns, even in the face of inflation as high as 3,079 percent.
Because of the sharp run-up in prices, T. Rowe Price’s mutual funds aren’t buying Latin stocks just now. But John Ford, Price’s foreign-markets analyst, remains a Mexico booster–“It’s showing signs of becoming a steadier, serious place,” he says. Chile rates the same encomium. But not Brazil - about which the best he can say is that its hyperinflation has eased. Last year Brazilians didn’t know if the money in their pockets would last until lunchtime. Now they’re pretty sure it will last until dinner.
Edmund Games, who runs the Brazil Fund, is wary of his fund’s high price but not of the country’s long-term growth. A suggestion: buy the Brazil Fund after its next crash.
Better yet, avoid the single-country funds. The Latin America Investment Fund invests throughout the region (major country: Mexico) and is selling at a discount price. No market rises forever, but lately Mexico has been giving a pretty good imitation.
Latin American mutual funds have been burning up the charts all year. But even if they cool it awhile, their future looks good.
Total annual return 1991* 1990 Brazil Fund 140% -63% Emerging Mexico Fund 59% n.a. Mexico Fund 55% 28% Latin America Investment 47% n.a. Chile Fund 46% 26% Mexico Equity & Income 28% n.a.
*TO 5/31/91. ALL GAINS SHOWN IN DOLLAR TERMS. SOURCE: LIPPER ANALYTICAL SERVICES
