by Will Ashworth | July 23, 2012 10:00 am
In the last year, I’ve become fascinated with Latin America. With the exception of Paraguay, every country in Latin America and the Caribbean is expected to achieve GDP growth in 2012. Previously, I’ve looked at both stocks and ETFs that investors can use to ride the region’s wave of success. Today, though, I thought I’d look at three closed-end funds that are investing down south.
According to the National Institute of Economic and Social Research — a leading UK economic research organization — Brazil overtook the United Kingdom in 2011 as the world’s sixth largest economy with a GDP of $2.52 trillion, beating the UK by approximately $40 billion.
As Brazil prepares to host the 2016 Summer Olympics, some in Latin America suggest economic gains made since the beginning of the global financial crisis have benefited the rich and powerful at the exclusion of everyone else. Further, the structural changes necessary to build a flourishing middle class have yet to appear, making these gains illusory at best.
While I do agree that investors should be cognizant of the continuing disconnect that exists between the wealth of these countries and the average citizen, the future remains brighter for Latin America than it’s ever been. Tread carefully, but don’t let the rhetoric spoil one of the best investment opportunities anywhere.
The first promising fund for the region is the Aberdeen Latin America Equity Fund (NYSE:LAQ), managed by the U.S. arm of Aberdeen Asset Management, a gigantic money manager based in Scotland with $295 billion in assets under management. Aberdeen has a total of 11 closed-end funds with this one and the Aberdeen Chile Fund (NYSE:CH) covering Latin America.
Brazil represents 63% of the $271 million in net assets, with Mexico next at 24% and Chile in third position at 7%. The top 10 holdings account for 51.1% of the portfolio with most available as ADRs on the NYSE. If you’re used to investing in ETFs, the annual expense ratio of 1.17% might seem high. However, the Fidelity Latin America (MUTF:FLATX) open-end fund, which has $2.6 billion in assets, charges 1.0%, so they are in the ball park.
One of the important differences with closed-end funds is they tend to trade at a discount or premium to net asset value. As of July 19 it traded at a discount of 10.14% which, according to Morningstar, is 112 basis points higher than its three-year average. Over the past three years, the LAQ’s total annual return was 16.8%, 709 basis points higher than the Fidelity fund and year-to-date is up 9.6% compared to 0.4% for the mutual fund. Pay the extra 18 basis points — it’s worth it.
Up next is the Morgan Stanley Latin American Discovery Fund (NYSE:LDF), which is slightly smaller than the Aberdeen fund in terms of assets ($129 million) and got its start about 23 months later in June 1992. It’s a little more expensive at 1.39% annually so it’s important that we first establish whether the extra 22 basis points are worth it.
For starters, Morningstar gives it a one-star rating compared to three stars for the LAQ. This by itself isn’t definitive, but it’s not a great sign.
In addition, Morgan Stanley’s website is poorly laid out making it next to impossible to find relevant information quickly. Aberdeen’s site on the other hand makes it very easy to get a quick snapshot. In today’s hyper-competitive financial marketplace you’d think Morgan Stanley would be able to market their funds properly. Even the top 10 holdings listed at their site are from April. Simply amazing.
Fortunately for Morgan Stanley, the performance of the fund over the 10-year and 15-year periods is first rate. In recent years, however, it’s failed miserably. I’d be hard-pressed to pick this over Aberdeen.
I’ll go easy on the final fund — the Herzfeld Caribbean Basin Fund (NASDAQ:CUBA) — for its poor investor communications because it’s a relatively small family run operation that seems to understand the world of closed-end funds.
Created in May 1994, it invests in companies benefiting from operations in the Caribbean Basin, many of which are U.S.-based. The fund’s specific focus on Cuba seeks to find companies that will benefit from a resumption in trade with the U.S. and who are currently doing well without the U.S. As a result, there’s a very diverse group of companies in the quarterly report ended March 30.
Its top three holdings are Seaboard Corporation (NYSE:SEB), Coca-Cola Femsa (NYSE:KOF) and Copa Holdings (NYSE:CPA) which represent slightly more than 25% of its $29 million in assets. I would have no problem owning all of three of these stocks. In terms of performance, it’s been stellar, averaging net asset growth of 14.2% annually over the past three years, 528 basis points better than Morgan Stanley’s fund and 254 basis points less than Aberdeen.
At an annual expense ratio of 2.65%, it’s definitely not cheap. However, with its market price currently trading at a 13.5% discount to net asset value compared to a three-year average of 6.2%, now’s as good a time as any to be buying.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
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