The T. Rowe Price Latin America Fund (PRLAX) is beating comparable market indexes to give investors a way to diversify their portfolios, to boost returns and to tap expected economic growth in the region.
The fund has produced a total return of 21.87 percent during the past 12 months, as of March 5, compared to 18.37 percent for the MSCI Emerging Markets Latin America Index, 18.42 percent for the Dow Jones Industrial Average and 14.18 percent for the S&P 500. PRLAX is rising despite heightened political uncertainty in Latin America due to presidential elections scheduled this year in Brazil, Colombia, Costa Rica, Mexico, Paraguay and Venezuela.
“We were able to outperform our index last year due to strong stock selection at the sector level across a number of consumer-related holdings,” said Chuck Knudsen, a portfolio specialist in T. Rowe Price’s Equity Division, which supports Emerging Markets Equity strategies, including the Latin American Fund. “From a country perspective, our stock selection in Brazil was also strong, particularly within some of the retail and banking stocks. Our investments in Argentina, which is not in the index — it is classified as a Frontier Market — also helped, as that country’s stock market rallied strongly on the promise of continued reforms from the Macri government.”
Growth in Latin America is expected to climb 2 percent in 2018 and 2.6 percent in 2019, up from 0.9 percent in 2017 after contraction during the two previous years, according to the World Bank. The growth should be enhanced by strengthening private consumption and investment, particularly in the region’s commodity-exporting countries.
Latin America officially returned to growth in first-quarter 2017 as the region’s largest economies recovered and its macro backdrop became more conducive to corporate earnings gains, Knudsen added.
“Future growth rates may be lower than during the years of the commodity super-cycle, but they should also be more sustainable,” Knudsen said.
Latin America Benefits from Global Growth, Rising Commodity Prices
Bob Carlson, the editor of the Retirement Watch investment newsletter, is recommending PRLAX due to its prospect of benefitting from global growth and what he predicts will be a “steady rise in commodity prices.” The global economy outside the United States is not as far along in the business cycle, so the growth potential overseas, particularly in emerging markets, is higher than in America, which is experiencing increasing interest rates and wages.
“The Latin American companies also have lower valuations than U.S. companies,” Carlson said. “After the strong gains since early 2016, valuations in Latin America still are reasonable. Stock prices mostly have increased in line with earnings increases. So, unlike in the United States, the valuations haven’t changed much despite the stock rally.”
However, there are short-term political risks in Latin America, especially in Brazil, Carlson cautioned.
“In the last few years, the fund has had a couple of brief but steep declines triggered by political scandals,” Carlson said. “But the economic fundamentals and growth remain sound, so the stocks recover. Investors should expect similar incidents in the next few years.”
Another notable risk of investing in Latin America would be a decline in global growth, since the case for PRLAX depends on such economic gains, Carlson said.
Latin America Aided by Natural Resources and Affordable Labor
The fund seeks to tap the significant long-term growth potential of companies mainly in Argentina, Mexico, Brazil, Chile, Venezuela and Peru. The Latin America region offers proven production capabilities, a wealth of natural resources and affordable labor.
The fund’s portfolio held shares in 58 companies as of Feb. 28, with its top 10 holdings accounting for 51.83 percent of its total. At the end of January 2018, using the latest information available, PRLAX had 56.4 percent of its assets in Brazil, 20.0 percent in Mexico, 6.1 percent in Argentina, 5.8 percent in Chile, 5.8 percent in Peru and 1.2 percent in Columbia.
Conspicuously absent from the top holdings is Venezuela, which once was Latin America’s richest nation before dictators turned the country into an economic wasteland. Reports indicate 53 percent of Venezuelans ages 15-29 want to move abroad, amid projections for the economy to shrink 15 percent and inflation to reach 13,000 percent this year.
Even though PRLAX is steering clear of the economic collapse in Venezuela, investing in the fund involves significant risk due to its concentration in emerging economies of a single region. The fund’s share price also faces market risk, as well as risk from currency exchange rates and political leadership in the nations where it invests.
Other than Venezuela, Latin American countries enjoy relatively low geopolitical risk and are no longer just a bet on commodities.
“Many Latin America countries have implemented sound macroeconomic policies over the last decade — resulting in greater fiscal discipline, manageable inflation and stronger financial systems,” Knudsen said.
The increased political risk this year due to presidential elections in six Latin American countries should not scare off investors.
“Despite some nearer-term risk as we head into a year of important elections, particularly in Brazil and Mexico, we believe that the medium and long-term outlook for Latin America remains hugely attractive,” Knudson said. “Growing middle classes and political reform are creating opportunities for competent management teams that are nimble enough to seize them. These companies should benefit from underpenetrated markets for a variety of goods and services. In fact, we believe that Latin America is home to some of the best management teams in emerging markets. Many firms have successfully navigated different cycles and, in many instances, one or more crises, which makes for experienced teams that are careful with leverage and foster a culture of self-improvement.”
The strategy of PRLAX is to invest at least 80% of its assets in companies located in Latin America that are projected to achieve and sustain above-average long-term earnings growth. The fund is “non-diversified,” which means it may take on additional risk by investing a higher portion of its assets in a single company or region than a diversified fund.
Despite the risks, the T. Rowe Price Latin America Fund is outperforming many other alternatives and shows no signs of slowing.
Paul Dykewicz is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is the editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of a daily newspaper in Baltimore. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz.