| * data as of 12/21/04 | | Source: Thomson/Baseline |
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NEW YORK (CNN/Money) – Pop quiz time: What is the best performing mutual fund category this year?
If you guessed real estate, natural resources or communications sector funds, you'd be close...but wrong. Those three groups have been strong: Communications funds are up 20 percent this year, and real estate and natural resources funds have surged almost 30 percent.
But the fund champs heading into the year's final few days are Latin American equity funds, up 33 percent, according to Morningstar.
The explanation lies in good economic performances throughout the region. Brazil, Latin America's largest nation, is booming. And so are Mexico, Venezuela and Argentina.
The World Bank predicted last month that overall gross domestic product (GDP) growth for the region would be a healthy 4.7 percent in 2004.
What's behind the surge?
Of course, rising energy prices have been a boon to oil and gas companies headquartered in the region. But taking a look at the best American Depositary Receipts (ADRs) from Latin America, there really is no discernible trend.
The top five Latin American ADRs with a market value of at least $1 billion are a Colombian bank, Brazilian oil company, Mexican wireless firm, Chilean airline and Mexican electronics retailer.
So clearly, the economic good fortune is not tied exclusively to oil.
Good times should continue in '05
Federico Kaune, an emerging markets economist with Morgan Stanley Investment Management, said that the region has also benefited from rising prices of other commodities that several Latin American nations export, including soy beans and copper. He adds that these prices should remain fairly stable in 2005.
Kaune said that relatively low interest rates globally also bodes well for Latin American nations because it keeps their debt servicing costs down. He added that even if the Federal Reserve raises rates in 2005, which most economists expect, that should not have a major impact on Latin American economies.
"Even if you take a pessimistic view about interest rates, they are still going to be near historically low levels and that will continue to help the balance sheets of Latin American nations," Kaune said.
With all that in mind, Kaune thinks that GDP growth for the region should be about 4 percent in 2005, well above historical averages.
So should investors go rushing into Latin American stocks and funds?
Play it safe
It might be safer to go with more diversified international funds. Fresh in many investors' minds are the currency collapse in Argentina in 2001 and Brazil's economic woes in 1999.
Rajiv Jain, portfolio manager with Vontobel Asset Management, concedes that volatility in the region is very high. So rather than make a bold bet on Latin America, he is looking for well-run companies that should be able to withstand any turmoil.
His top picks are Brazilian bank Banco Itau (Research) and Souza Cruz, a Brazilian maker of cigarettes. (Souza Cruz does not have an ADR.)
Jain adds though that because Latin American stocks have done so well this year, few of them are bargains anymore. "Valuations are kind of rich so one has to be careful," Jain said.
William Fries, manager of the Thornburg International Value fund, also thinks that investors should limit their exposure to Latin America and that they should focus more on solid companies with strong fundamentals instead of making bets on macroeconomic trends.
"We pay attention to what's going on with the economy and how that may play into risks but we pick the stocks on their individual merits," he said.
With that in mind, Fries said he owns four Latin American stocks in the fund: Brazilian oil company Petrobras (Research), Mexican wireless firm America Movil (Research), Brazilian aircraft maker Embraer (Research) and Wal-Mart de Mexico, which does not have an ADR.
But Fries said that investors don't have to restrict themselves to stocks based in Latin America in order to take part in the region's growth prospects.
As such, Fries said that in the Thornburg Value fund he owns NII Holdings (Research), a U.S. based company that operates a wireless service under the Nextel brand name in Argentina, Brazil, Mexico and Peru. He also owns consumer products giant Colgate-Palmolive (Research), which generated 21 percent of its sales from Latin America in the third quarter.
"There are ways of participating in Latin America without having to buy local stocks," he said.
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