Wednesday 2 February 2011

Invest in Aberdeen Latin American Equity fund?

Question
How would you rate Aberdeen's new Latin American fund, due to be launched on 9 February, and would you consider it too risky for a 65-year-old who already had exposure to Emerging Markets funds in a well-diversified portfolio but who intended to stay invested for at least the next 5 to 10 years?
Answer
Latin America is very fortunate in that it sits on a vast supply of natural resources, including energy and metals, while also having a good climate and plenty of space to grow crops. Political troubles and lack of demand have, at times, stifled economic growth in the region. But soaring demand for oil, metals and food in recent years has led to a Latin American boom, while more robust political systems have, to some extent, helped translate the commodities boom into more income for a growing proportion of the population.

This last point is a really important one moving forwards. As Latin American populations become more prosperous, then so will their demand for consumer items such as phones, bank accounts, credit cards, food, cars, white goods and other consumer goods and services. This growth in domestic consumer demand often gives emerging economies a 'second wind', helping to stimulate further economic growth in addition to their bread and butter industries.

But while the longer term argument is quite convincing, there's a lot that could go wrong meanwhile.

Much of the increased demand for commodities has come from other emerging countries, predominantly China. If a global slowdown causes these countries to reduce the pace of their infrastructure development then demand for commodities will fall. This would hurt Latin American revenues which in turn could slow the growth in domestic demand as the population will have less money to spend.

Latin American countries are also at the mercy of the US dollar exchange rate, as commodities are usually traded in dollars. For example, a weak dollar means these countries earn less when dollar revenues are exchanged into their local currency.

And while political stability has improved, it would naive to think Latin American countries are anywhere near as politically robust as developed countries in the West. There's still scope for corruption, poor management and civil unrest to derail their ascent from time to time.

Provided you're comfortable riding out shorter term storms, then I think an investment over 10+ years is very sensible - as even the above issues probably won't do much to affect long term growth potential in Latin America.

As you've already invested in emerging markets funds then check how much of that is invested in Latin America (Brazil, Mexico, Chile and Peru are the likely markets). If it's over one third of your emerging markets exposure then I wouldn't see a compelling reason to invest more unless you're particularly bullish about the region.

As for the fund itself, it's a unit trust that will primarily invest in Brazil and Mexico (estimated at 65% and 25% exposure respectively). It will be managed by Fiona Manning, who has not had direct responsibility for a fund before. But I'm not too concerned about this as Aberdeen runs funds on a team basis and is pretty successful at doing so in emerging markets. Their existing track record in Latin America is good based on a US listed fund, albeit the named manager on that fund is different.

As with other Aberdeen emerging markets funds, the focus will be on investing in high quality companies that are likely to weather storms better than others, which is re-assuring. But make no mistake, this is still a high risk fund in the scheme of things, so don't bet your shirt.

If you want to invest in Latin America I don't see a reason not to use this fund. Annual charges are steep at 1.75%, but then worthy alternatives such as First State Latin America charge the same so it sadly seems to go with the territory.

Aberdeen's own Latin American Income investment trust is also worth considering as an alternative, as the income yield of around 4.3% (and around 1/3rd fixed interest exposure) should help reduce volatility. Charges are still high (1.9% TER despite an annual charge of only 1%) and at the time of writing the trust's share price is trading at a premium of nearly 6% to its net asset value, but neither should be a big hindrance long term. You can read more about this investment trust in my earlier answer here.

Aberdeen is launching the Latin American Equity fund on 9 February, although Hargreaves Lansdown has an exclusive allowing you to invest before then. Unlike investment trusts it makes little difference whether you invest at launch or thereafter for unit trusts/oeics, so I wouldn't feel rushed into making up your mind.

Good luck whatever you decide!

Read this Q and A at http://www.candidmoney.com/questions/question374.aspx

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