How the allure of Mexican oil turned sour for investors
New York — Remember the Brazil Fund?
Unfortunately, few investors did when the Mexico Fund, a closed-end mututal fund was launched in June l98l by three brokerage firms, Merrill Lynch, Salomon Brothers, and Bache, in conjunction with Mexican securities firms.
At the time, the allure of the nouveau riche oil capital, with an annual gross national product (GNP) growth of 8 percent, was such that Americans clamored for the chance to get into the opportunities the Mexico Fund offered on the Bolsa de Valores - the Mexico City Stock Exchange. In fact demand was so great that the underwriters managed to sell $120 million worth of shares in the fund - some $48 million more than they had originally planned on.
The price per share was $12. And, as a closed-end fund, the sponsors offer neither to buy back shares or sell more. Once the offering is complete the fund is offered on the New York Stock Exchange and shares trade up and down with demand.
After just a bit more than a year, the much ballyhooed issue dropped in price to as low as $2 1/4 per share. And in early September, trading was halted at the request of the fund's sponsors.
According to David Bodenberg, vice-president for international research at Merrill Lynch, one of the Mexico Fund's underwriters, the Fund's trading was halted for two equally cogent reasons. First of all, trading had been halted on the Bolsa, which made the Fund's sponsors unable to evaluate the net asset value of the Fund and make any recommendations. Further, since one of the measures the Mexican Government had taken to counteract the panic run on the peso was to nationalize the country's private banks, and the Mexico Fund had 7.6 percent of its asset value in bank stock as of last May, there was no way the fund could establish what value, if any, they could attribute to their bank stocks.
Beyond the immediate problem lay the currency dilemma. Explains Mr. Bodenberg , ''The last net asset value before the Bolsa closed down and the fund stopped trading was $2.10 a share. That was estimated at 108 pesos per dollar. A few days before that, net value had been estimated at roughly $2.80 - $2.90. That had been under the first phase of exchange controls when Mexico had switched to a two-tier currency market.''
Currency is an important factor in the Mexico Fund, since all stocks the Fund invests in trade in pesos. Those peso values have to be converted into dollars when the stock is quoted on the New York Stock Exchange. But as the Mexican Government switched the official conversion rates several times, and forced some peso conversion onto the illegal black market, the Mexico Fund found its share price in US dollars on the Big Boardswitched from a 50 percent premium over the estimated net asset value in pesos to a 30 percent discount at the blink of an eye. Such enormous fluctuations result in uncertainty, to put it mildly. And uncertainty is the chief antagonist of investment.
But even before the apparently temporary closing of the Bolsa, the Mexico Fund appeared to be faltering. As of late August shares sold at $27/8 bid, $31/8 asked, reflecting the break in world oil prices, the free-fall of the Mexican peso after two massive devaluations, and the disintegration of Mexico's financial credibility throughout the world as it nearly defaulted on $80 billion in bank loans. In short, the dream built on Mexican oil was fading away.
Imitation, they say, is the sincerest form of flattery. And Wall Street, like most of us, prefers to remember its successes rather than its failures. So when the glimmer of an idea about the Mexico Fund hit, Wall Street glowed with the memory of the Japan Fund and forgot the Brazil Fund.
The Japan Fund, a prosperous mutual fund launched in the 1960s, enabled investors to multiply their asset value twelvefold within 18 years by hitching their wagons to the star of the unrelenting industrialization of Japan.
But investors would probably have been more savvy had they remembered the fate of the Brazil Fund and used that other single-market investment fund as a role model.
Issued in 1973 by a British Securities firm called Vickers Da Costa, the Brazil Fund aimed at taking advantage of Brazil's ''economic miracle'' in which the Latin American country was posting impressive 8 percent growth in GNP year in and year out. The problem, however, according to Geoffrey Collier, president of the New York office of Vickers Da Costa, was that the Brazil Fund backfired in 1974 when oil prices quadrupled and oil-poor Brazil became mired in debt and runaway inflation.
''It took a lot longer for the Brazil Fund to fall than for the Mexico Fund, '' muses Collier about the precipitous plunge in Mexico. The Brazilian stock market index rose from 60 to 450. But because of currency translation problems, the Brazil Fund shares, issued at $10, dropped to less than $6. It has since recovered slightly.
The Mexican Bolsa, on the other hand, has been a disappointment since the Mexico Fund began. When the fund was first issued the Bolsa index stood at about 1,000, down somewhat from its all-time high of 1,720 in 1979. But since the issuance of the fund the index has fallen steadily, until before Mexico's most recent devaluation, the Bolsa index hit a low of 480. And when the Bolsa closed on Sept. 1, it was at about 570. Its average price-to-earnings ratio for the entire Bolsa was two times earnings.
While rumors about the reopening of the Bolsa circulate daily, the consequences of the Government's actions on the Mexican stock market remain an enigma. Some believe the Bolsa was closed to allow the Mexican Government to decide on compensation for the assets the Government nationalized.
Rumors about possible settlements are flying, meanwhile, and will probably grow more panicky the longer the Bolsa is closed. Some believe the Government is extending the period until it finds a just compensation package, as was the case in France. But a less innocent interpretation suggests that the new Government of Mexico's central bank is more adamantly socialist and would prefer dumping shareholdings at whatever price can be gotten - no matter how low. And that would result in rock-bottom share prices once the Bolsa reopens.
For the Mexico Fund, the longer the Bolsa stays closed, the worse things look.
Even if the Government takes the best posture and bails out private investors , things will not be simple. Currency complications are bound to harm the funds. The Mexico Fund is scheduled to pay a dividend in early 1983. The Fund set aside dollar deposits in Mexican institutions to pay that dividend. But government rules indicate all such deposits must be turned into pesos, and only removed with specific government permission.
Unfortunately for the Fund's sponsors, such crises do not discriminate between good investors and bad ones. ''The Fund has outperformed the market,'' says Mr. Bodenberg. But he admits that in such situations, stock picking is secondary to the market. ''Basically,'' he says, ''individual stocks are not the game to play. The question is whether to buy Mexico or not to buy Mexico.''
And the answer? Mr. Bodenberg answers, ''this is bombshelter stuff. I think that if an investor buys Mexico and then goes to sleep for a year, he will wake up a lot richer. But for someone who doesn't sleep quite so well, Mexico during the next few months will endure some problems that could keep him awake many nights.''