If 1999 was a year of investing dangerously – anyone who got Brazil wrong stood to lose a lot of money – 2000 is promising to be a year of less risk and fewer rewards. The huge gains made in Brazil’s markets after it shook off the disastrous effects of its January currency crisis are unlikely to be seen again for some time. Moody’s Investors Services’ upgrade of Mexico’s debt rating to investment grade in March opened the floodgates for a new universe of US funds eager to buy Mexican assets, but forced specialized managers to look elsewhere in Latin America for attractive returns.
Yet with economic growth in the region picking up, interest rates falling and rating agencies looking more favorably on the main economies, the search for yield on the equity and fixed income markets has become much harder. Sovereign and corporate issuers began regaining access to world bond markets soon after Brazil’s recovery, and by the third quarter last year, Latin America’s bond rally took off and spreads tightened appreciably. Success in fixed income took considerable courage: any of the eleven winning fixed income categories in LatinFinance’s annual fund management review did well by taking boldly contrarian views on credits such as Venezuela and Brazil.
The only sectors that seems to be offering substantial upside this year – and which outperformed strongly in 1999 – are the booming telecoms and Internet industries. Most of the 26 winning equity and asset allocation funds did well by focusing on telecoms, media and other new technology assets.
Last year also saw some encouraging trends in the battle for minority shareholder rights. Brazil and Chile are in the forefront of this battle. Brazil in particular made considerable strides towards improving accountability of management to shareholders. Market regulators have realized that without such safeguards, foreign portfolio investors are unlikely to commit substantial resources to Brazil.
This leads to another, more troubling, theme in the markets last year. Turnover and liquidity in most of the region’s equity markets is continuing to decline, making it all the harder for dedicated country fund and even regional fund managers to run their portfolios properly.
This drama is now being played out at the regional level, as investors veer away from country and regional funds to broader vehicles investing in markets and sectors at a global level. This process is likely to accelerate the loss of liquidity of the smaller local markets, to the benefit of São Paulo and Mexico City, but above all to the benefit of the New York Stock Exchange and the Nasdaq.
The success of the ADR program – the NYSE lists over 100 of the best and biggest Latin companies – has prompted imitation from Madrid with its Latibex offshore market for Latin American stocks (see page 64). The ease and low cost of trading in New York and Madrid, not to mention the rise of electronic Internet-based markets, bodes ill for the financial system of many countries in Latin America. The good news is that issuers and investors are learning to turn these new platforms to their advantage.
Standard&Poor’s provides LatinFinance with fund performance data used to judge the winners of the magazine’s annual fund management competition. The equity winners, regional and county, are presented first. They are followed by a new category, asset allocation-funds that invest in both equities and bonds. Finally, the winning fixed income funds are presented. S&P calculated winners in each category for one-, three- and five years, and where applicable, for the seven- and ten-year time periods ending Dec. 31, 1999. Please see page 40 for S&P’s methodology.
The calculation of the LatinFinance awards, in association with Standard&Poor’s, is designed to identify the funds the with the best short- and long-term performances. The awards are calculated by peer group. This means that a Brazil country fund, for example, is only compared to other Brazil country funds and that specialized or sector funds, such as funds wholly focused on smaller companies over the life of the fund or investing in only one particular sector, are excluded. To the extent possible, this ensures that funds are being compared to those that pursue the same objectives and are therefore likely to be selecting their investments from the same pool of securities, even if their choices actually differ.
Recently, Standard&Poor’s Fund Services has revised its peer groups of all funds investing into emerging markets to bring them in line with the way S&P classifies funds globally. For Latin American targeted funds there is a new category this year. The asset allocation category includes funds that invest in a mix of equities, bonds, convertibles and other securities.
The calculation used is the same as last year. For periods of three or more years, an annualized Sharpe Ratio is used (annual return, less the risk-free rate, over the annualized standard deviation). For the risk-free rate – the level of return on a “risk-free” investment – we used the annualized return on 3-month US Treasury Bills over the relative period. The exception to this methodology is for calculating winners in the one-year time period. For these results, we rely simply on absolute return with dividends and capital gains reinvested. Any fund that didn’t respond to requests for information within the required time was excluded from the survey.