For investors who want the local flavor of investing in a region outside the U.S., it is necessary to have a sophisticated guide who understands local customs, politics, and, not least, the nuances of the language. One such guide is Gonzalo Pangaro, portfolio manager of the $2.3 billion T. Rowe Price Latin America Fund (PRLAX). Based in London, but originally hailing from Argentina, Pagaro spends much time in Latin America, and is fluent in both Spanish and Portuguese. “When I travel in the region,” he notes, “I have meetings with companies in management’s native language.”
This fund ranks number one of 16 Latin America equity funds for the one- and three-year periods, and number three for the five years ended January 31, according to Standard & Poor’s. It has received an overall five-star ranking from Standard & Poor’s, as well as five stars for the one-and three-year time periods; and four stars for the five- and 10-year periods. The fund has had a total return of 29.39% versus 27.87% for the S&P/IFCI Latin America Index for one year; average annual total returns of 49.88% compared with 45.61% for three years; and 34.24% versus 34.26% for five years. Kate McBride spoke to P??ngaro by telephone from London in early February.
What are you doing differently than managers of other Latin America funds?
That is very difficult to tell. I can tell you how we do things: I have three very good analysts working with me, based in the region. We travel to the region regularly. I am off to Brazil next week; I go there several times a year and we travel together and discuss ideas. We like to think we know these companies well. We’re very bottom up, we build models on all of them; the analysts write notes. When we have convictions on a name we like to be contrarians, we’re patient, and we have a long-term investment horizon. I think our turnover is by far the lowest, or one of the lowest, aamong Latin America funds. We sit on our positions because we think we know the companies well, and we have confidence in what we do.
Is there an average time you aim to hold a company?
It depends on how that holding does, and valuations. We pay a lot of attention to valuations. When companies reach our target price, if the fundamental case hasn’t changed we like being disciplined and start trimming. In some cases when companies are growing at steady rates for several years, we just hold them for many years, and other times we get things wrong. When that happens we sell out of positions–we don’t wait–or when we’re disappointed by management we sell out. When we have convictions, we have strong bets, and when we don’t have convictions we sell out regardless of the company’s percentage in the index. We are very sensitive to corporate governance as well. At times during bull markets, the market is very forgiving; we like to think that we are very cautious with that, and less forgiving–we only invest with companies where we trust management and what they are doing.
What is your investment process for the fund?
It’s very bottom up. We have a growth-at-a-reasonable-price [GARP] investment style. We like growth stories, and we have a long-term investment horizon, so we value companies using DCFs (discounted cash flows) and we look at forward multiples, so we don’t really care much about this year’s multiples or quarterly results. We want companies, which, over cycles, have a return on capital in excess of their cost of capital. Sometimes growth can destroy value, so we’re very mindful of that as well.
Has recent volatility in natural resources–oil, for example–affected the fund?
We are underweight materials and very cyclical names versus the index, and I think versus our competitors as well, so it has affected [the fund] less than other funds. Regarding oil, we have a big position in PetroBras [Petroleo Brasileiro, ADR on NYSE: PBR] not because we like oil prices–we try not to predict where commodity prices are going–but because we like the growth story in PetroBras. It’s increasing volumes close to 10% this year and at between 8% and 9% for the next five years, and that’s very powerful. But we also have a big position in Brazilian airlines, which have been very good for us last year, and those stocks have done well on the back of oil price weakness. So, though we’ve suffered through our PetroBras holdings, we’ve benefited through our holdings of Gol [Gol-Linhas Aereas Inteligentes, ADR on NYSE: GOL] and TAM [ADR on NYSE: TAM], the two Brazilian airlines.
Do interest rate or currency fluctuations affect the fund?
They are very meaningful. The two key countries in Latin America are Brazil and Mexico. Mexico has been investment grade for many years now, interest rates have been very stable, and so has inflation. Last year, inflation in Mexico was, I think for the first time ever, lower than it was in the U.S. Currency movements in Mexico are not that meaningful. In Brazil it’s been an important part of the story. Interest rates have come down from close to 20% in 1975 to 13% now, and that has been a boost for consumption, for people’s willingness to get credit, and some sectors are doing very well on the back of that. Our portfolio is geared toward the domestic consumer. Interest rates are still very high so the Brazilian real has been appreciating very steadily against the U.S. dollar for some years–two or three years.
Getting back to your question, we are underweight cyclicals and materials, and we’re more exposed to the local consumer. We think with interest rates and inflation coming down, real wages go up, and that is a very powerful pull for consumer stories in Latin America.
What holdings surprised you on the upside?
Lojas Renner in Brazil is an example. It’s a mid-cap stock which came to market a year-and-a-half ago. We knew the story well, we went through the prospectus, and we met with management several times, and we built a big position in it, and it’s up I think three times since the IPO. That’s [an example of] when we have the convictions and it’s still our largest bet in Brazil–it’s close to 3% of the portfolio. It’s a retailer, department stores that sell clothes. It used to be owned by J.C. Penney; Penney restructured and sold its activities in Chile, and decided to get out of Brazil. Before that, management of Lojas Renner wanted to grow but J.C. Penney didn’t want to invest in the country, so Penney left; now it’s 100% float, and management has been investing very aggressively, and they have been growing, boasting very strong results, so they have surprised on the upside. We bought it at close to $10 and now it’s at $33 [as of January 25]; it’s been a great stock for us. It’s a clear example of what we can do, bottom up, and when we have the convictions we do build positions.
It’s important to mention that this is a non-diversified fund, and Latin America is a very concentrated area, so our portfolio tends to be more volatile and riskier than other investment opportunities.
What is your sell discipline?
When things change: [with] many of these companies I’ve met management for many years so I know who to trust, and who not to trust. In [one] case [there] was a new company, new management; it disappoints, we’re not convinced about what they’re saying, and we sell. Again, we’re valuation focused; if companies reach our target price we revisit the investment case, if things look better we may hold on and review our target price, but otherwise, we start trimming. When fundamentals change we don’t sit around waiting for the stars to align, we realize the new reality and we sell, we recognize our mistakes, or the company’s loss of focus, and we move on to new stories. Every single company we hold in the portfolio is there not because it’s in the index, but just because we like the company, and the business model, and the stock at this level. I like to think that we have a good sell discipline. I think that at least half of the job in emerging markets and Latin America is avoiding the bombs, which there always are, and I think we are good at doing that.
Is there anything special you look for in Latin America that is different from what you might look for in the U.S., Europe, or Asia?
One thing is corporate governance, which I mentioned. I think minority shareholders, though it has improved a long way in the last few years, are still, in some cases, less protected than in other markets, so you have to really know who to trust–most companies have a strong controlling shareholder. You have to be more aware of the macro as it plays in Brazil in particular, and other Latin American countries [including] non-investment-grade countries with more volatile economies, so those are two relevant differences.
What about political risk–does that affect your evaluation of a company?
It does. We take into account politics, we keep abreast of political developments; we’re bottom up so we end up with country bets based on the companies we like, or not, in a country. But we monitor those country bets and we check them out with our view on the political front. Politics are important, not only in Latin America, but in most countries.
Where would this fund fit in a U.S. investor’s equity portfolio?
I would say what I always say, and I’ve been looking at Latin America equities for 15 years now. I think the economies and markets have come a long way and I think there are still very attractive opportunities, but the region is very volatile, subject to shocks, so anyone investing in Latin America should have a long-term view, try to buy on dips–there are always buying opportunities–and should not have a meaningful portion of their assets in this asset class, so say 5%, depending on their risk tolerance. For that sort of investor, I think Latin America has paid for their patience; the region had very good performance over the last several years.
Do you own this fund in your personal portfolio?
I do, yes.