Hot prospects: the lure of Latin funds

They're more volatile than most US holdings, but can offer opportunity

Sometimes the kind of market crisis that makes investors wary can translate into an opportunity - a chance to buy low and hold stocks for long-term gains.

Such an opportunity exists now in Latin America. And for first-time investors, the best way to take advantage can be buying into a mutual fund.

Though not without risks, this is a region with proven potential. In the decade from 1987 to 1997, Latin American stock prices increased at an average annual rate of 27.8 percent, as measured by the Morgan Stanley Latin America equity index.

That compares to 17.7 percent for the Standard & Poor's 500 Index of large US stocks.

True, Latin American stocks lost big in 1998, declining 38 percent on the year as a result of back-to-back crises in Asia and Russia. That compares with a 27 percent gain by the S&P 500.

But that's no reason to disregard the region now.

"Everything in Latin America is cheap right now, and growth is going to come back next year," says John Welch, chief Latin America economist at the French bank Paribas.

Already in 1999, Latin American stocks are showing signs of recovery. On average, they were up 16 percent as of Aug. 23, according to the Morgan Stanley index, led by Mexico's bolsa index, up 39.4 percent.

Before buying a Latin American mutual fund, you should have one if not both of the following in your portfolio: an international fund and an emerging-markets fund.

Both of these types of funds will invest a percentage of their assets in Latin America, but will also invest in other regions.

Next, you should decide whether you want to invest in a regional Latin American fund or in one or more country-specific funds. For first-time investors, a regional fund is probably best because it's less risky and gives the benefit of added diversity.

As in US mutual funds, you should avoid falling into the trap of simply picking the fund with the best short-term return.

Look at long-term returns, and find out how long the fund's management team has been in place. If they're new, find out where they came from and how they performed there. Some managers are good in boom cycles, while others are better at paring losses during crises.

Looking back three to five years will give you a clearer picture of how they've fared.

Look also at how risky the fund is, based on its historical price volatility, and compare that risk to other funds and to your own tolerance for risk.

And look at its "correlation coefficient" with the S&P 500 - a measure of how closely it follows the price movements of the US market. If it's too closely correlated, it won't bring you the diversity you're looking for.

Also, look at the fund's expense ratio. This is the amount investors pay for the expenses incurred by the fund. All of these statistics can be found on a variety of financial Web sites.

One key difference between Latin American funds and US funds is that Latin funds generally have higher expense ratios - about 2.28 percent on average, versus about 1 percent for most good US funds.

Latin funds cost more to manage because, in addition to the normal transaction costs, salaries of fund managers, marketing, and other expenses, there are added expenses involved in researching companies and operating in Latin America.

Another big difference is that a number of the best Latin funds are "closed end," while most of the popular US funds are "open end." A closed-end fund has a fixed number of shareholders and is closed to new investors, meaning when you purchase shares of the fund on an exchange you're buying them from another investor who wanted to sell them, just like a stock.

Open-end funds are constantly adding (and losing) customers. Each new inflow of cash boosts the value of the fund's holdings.

In Latin America, probably the biggest advantage of closed-end funds is that many trade at a discount to their net-asset values. Also, their managers tend to have more flexibility than the managers of open-end funds.

Some of the leading closed-end funds in terms of performance are the regional Latin America Discovery Fund, managed by Morgan Stanley, and the country-specific Brazil Fund, Mexico Fund, Argentina Fund, and Chile Fund.

Don't pick a Latin America fund just because it's a big name and has a good overall reputation. Some of the smaller companies - Scudder Kemper, Van Kampen, Wright Investors Service - have consistently led the region.

Finally, keep in mind that Latin American mutual funds are generally riskier than US funds. The now-defunct Emerging Mexico Fund, for example, hit a high of 21 1/4 in August 1994, then lost two-thirds of its value after Mexico devalued its peso.

On the other hand, the Latin American Discovery Fund is up 28.8 percent so far this year.

(c) Copyright 1999. The Christian Science Publishing Society

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