Investing in Latin American stocks has been very lucrative the past few years. The continent offers immense commodities and natural resources, a cheap labor force, and an improving economic infrastructure.
Indeed, high energy prices and China’s inexhaustible appetite for raw materials has driven much of the growth of these nations. But as an emerging market, Latin America presents risks related to political instability, high debt profiles, and unattractive currency exchange rates, among others. Moreover, the strong returns recently enjoyed by these equity markets may compel some U.S. investors to opportunistically move their money to other global regions in 2006.
Among the best long-term performers in this sector, the $852.8 million T. Rowe Price Latin America Fund (PRLAX) seeks companies that can “achieve and sustain above-average, long-term earnings growth.” Reflecting the domination of Brazil and Mexico in Latin economies, about 90% of the fund’s assets are invested in these two countries alone.
The T. Rowe portfolio is also rather top heavy. As of October 31, its 10 largest holdings accounted for 63.9% of total assets. However, the fund is highly diversified by sector. Materials and energy, which tend to dominate most Latin portfolios, combined represent 36.6% of assets, followed by healthy exposures to financials (17.4%), consumer staples (12.1%), and telecommunications services (11.9%).
Another top Latin American fund, the $1.2 billion iShares S&P Latin America 40 Index Fund (ILF), is an exchange-traded fund that invests in Standard & Poor’s Latin America 40 Index. Almost half of the ETF is represented by materials and telecommunications services stocks, and the bulk of assets (nearly 87%) are parked in either Brazil or Mexico. Top holdings currently include Mexican wireless giant America Movil SA de CV (AMX); Brazilian oil company Petroleo Brasileiro SA (PBR); and Cemex SA de CV (CX), the Mexico-based construction firm.