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Latin Lovers

The volatility of Latin American mutual funds makes you love 'em - or leave 'em.

I have a cousin who has a love-hate relationship with Latin American funds: She loves them when they're hot, hates them when they're not--but likes to stay invested in them regardless of their instability because of the market exposure they provide her.

The first thing to consider before investing in any Latin American fund is that any change in a Latin American country's social, political or economic climate can impact a fund's performance. That may be difficult for novice investors to swallow, but pros know it's best to buy on bad news and sell on good.

So before taking the plunge, understand that the Latin American markets--and the mutual funds that invest in those markets--have a history of being both rewarding and volatile depending on the time frame you're investigating. For instance, look at the long-term performance of the Latin American markets, and you'll find compelling returns: From December 1987 through September 1997, the Morgan Stanley Capital International Latin American Index had a compounded annual return of 34.32 percent. The compounded annual return of the Standard & Poor's 500 index was up 18.17 percent for that same time period.

The short-term story, however, paints another picture. At year-end 1994, the average Latin American fund's total return was -14.24 percent, according to Lipper Analytical Services. In 1995, while the number of Latin American funds had grown, their performance was still ugly--down, on average, -20.56 percent.

In 1996, things turned around. By year-end, total returns for the average Latin American fund were up 25.91 percent. Last year, the story was even spicier. Through October 16, the average fund was up more than 45 percent. One month later, Latin American funds had lost plenty of ground--the average year-to-date return was 5.53 percent. By December 4, things had changed again: The average fund had a year-to-date total return of 23.65 percent.

Investing in Latin American funds, therefore, is done with the hope that any increases in a fund's net asset value will be sustained and the realization that these salsa funds will be anything but stable.

One of the better-performing funds in 1997 was the Federated Latin American Growth Fund. Alex de Bethmann, the fund's portfolio manager, says despite the fund's volatile fourth-quarter performance, he's still optimistic about investment opportunities in Latin America.

The currency turmoil that happened in Asia during 1997's last quarter impacted the macro-economic outlook for Latin America, says de Bethmann. Since the Latin American markets were not immune to the currency devaluations in Asia, they were basically forced to defend their currency by raising interest rates. The impact of those higher rates will be lower economic growth over the next few quarters.

There are typically 60 to 80 companies in the Federated Latin American fund's portfolio and seven countries represented: Argentina, Brazil, Chile, Columbia, Mexico, Peru and Venezuela, with the heaviest investment in Brazil. De Bethmann says inflation there has dropped from 50 percent per month a few years ago to 1 percent per month. This is the first time in a long time that Brazilians have had money in their pockets at the end of the month, says de Bethmann.

If you like the beat of Latin American funds, look at the history of the fund you're interested in. While past performance is no indication of future returns, it may help you decide whether to say "sí " or "no" to Latin American funds.


Dian Vujovich is a nationally syndicated mutual fund columnist and author of Straight Talk About Mutual Funds (McGraw-Hill); Straight Talk About Investing for Your Retirement (McGraw-Hill); and 10-minute Guide to Stocks (Macmillan).

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This article was originally published in the March 1998 print edition of Entrepreneur with the headline: Latin Lovers.

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