15.10.2012

Fernando X. Donayre

Portfolio Manager

INCA Investments, LLC

With regional markets set for continued outperformance and local economies proving resilient in the face of global economic headwinds, Latin America is ripe with investment opportunity. Investing in Latin American equity and bond markets, the WIOF Latin American Performance Fund offers investors access to a region where demographics, economic strength and a burgeoning middle class are combining to produce rapid consumer growth and an attractive investment environment.

 

GROWTH AND OPPORTUNITY

Latin America’s attractiveness for investors has grown enormously in recent years. Political stability and orthodox economic policies have ushered in a boom that is creating new opportunities for regional companies and increasing the size and affluence of the middle class. More than 50% of the population in major Latin American countries is middle class and consumption-oriented companies are set to be among the biggest beneficiaries as per capita incomes and middle income groups’ purchasing power continues to rise. The increased buying power of Latin Americans has also boosted domestic consumer demand and expanded demand for credit, creating expansion and investment opportunities in financial services. Another advantage for investors is the region’s resilience compared to other more export-driven economies which are suffering in the global turndown.

Latin America is not dependent on Europe to absorb its exports – its exports are diversified geographically – and its main economies are also more domestic market-driven than export-driven. This means that the health of the region’s economies is relatively protected from external factors. But it also presents the opportunity to add value as investments can be made focusing on what are actually the largest portions of countries’ economies i.e. their domestic markets, rather than simply following Latin American indices dominated by commodity companies whose movements are influenced mainly by external, rather than regional, factors.

 

Latin America is also an attractive investment proposition because of its relative economic strength compared to the developed world.

  • It has considerably lower public and private debt levels, a highly-capitalized banking sector which holds very little European debt, and, most importantly, regional growth rates which are considerably stronger than the developed world.
  • GDP growth rates in the region of Latin America’s main economies are expected to outstrip those of the EU and the US this year, according to the International Monetary Fund (IMF).
  • Favourable demographics are also set to keep driving the region’s economic growth story forward. A regional baby boom during the 1990’s also guarantees that in the coming decades a high percentage of its population will be working-age consumers with above-average spending power.

 

Latin American Population Breakdown

POSITIVE FUNDAMENTALS

Individually, all the Fund’s key investment countries also have good fundamentals and investment potential:

  • Brazil recently became the world’s sixth largest economy.
  • Mexico has an improving economy and the most undervalued currency in Latin America. Its proximity and close economic ties to the US are a long term competitive advantage for Mexico. Its companies are attractive for their favourable long term outlooks and reasonable valuations.
  • Peru’s projected economic growth rates of more than 5% to 2015 make it one of the most promising economies in Latin America.
  • Chile is expected to be the best managed economy in Latin America for some time to come.

 

TAKING ADVANTAGE

The Fund is managed to take maximum advantage of the opportunities on offer in the region. The Fund portfolio manager’s investment decisions are based on bottom-up, fundamental research with a focus on companies rather than countries. Stocks are picked from companies with strong business franchises while a long-term investment horizon is used to gain an advantage over short-term oriented investors, who are prevalent in the Latin American investment sphere. Companies with below average and reasonable valuations are favoured to give the optimum probability of positive risk/reward scenarios.

 

OUTLOOK

The outlook for the region’s economies and markets is a bright one in the long-term. The financial balance sheets of Latin American countries, companies and individuals remain on a solid footing and favourable demographics buttress a strong growth outlook. Recent underperformance of Latin American markets in 2Q2012 has created an opportunity to build upon and initiate positions in companies that will benefit from ongoing economic development and domestically-led growth. The Fund portfolio manager plans to increase allocations toward Mexico given its defensive nature, links to the US and positive earnings prospects for Mexican companies. Meanwhile, a trend of growth in Mexican manufacturing exports is expected to continue, especially as Mexico’s cost of manufacturing moves closer to that of China. This export trend will increase the purchasing power of Mexican consumers and result in very good investment opportunities in consumption-oriented Mexican companies. While Latin American markets are likely to be driven by global risk perceptions in the short-term, but over longer-term periods the region’s favourable economic environment will provide a solid platform to allow companies to perform well.

 

INVESTMENT ADVISOR

The Fund’s investment advisor is Latin American investment specialists INCA Investments. INCA is comprised of a group of dedicated Latin American investment professionals including senior investment staff who have been investing in Latin American markets since the early 1990’s as well as a team of seasoned analysts who are specialists in the most important sectors of the region. As of May 2012 INCA’s assets under management stood at approximately USD294mn.

 

IMPORTANT NOTE: This report has been prepared for information only, and it does not represent an offer to purchase or subscribe to shares. World Investment Opportunities Funds (“WIOF”) is registered on the official list of collective investment undertakings pursuant to part I of the Luxembourg law of 17 December 2010 on collective investment undertakings as an open-ended investment company. WIOF believes that the information is correct at the date of production while obtained from carefully selected sources considered to be reliable. No warranty or representation is given to this effect and no liability can be assumed for the correctness or accuracy of the given information which may be subject to change at any time, without notice. Past performance provides neither a guarantee, nor an indication of future performance. Value of the shares and return they generate can fall as well as rise. Currency fluctuations, either up or down, may also affect value of the investment. Due to continuing market volatility and exchange rate fluctuations, the performance may be subject to significant changes over a short-term period. Investors should be aware that shares in the financial instruments entail investment risks, including the possible loss of the invested capital. Performance is usually calculated on the basis of the relevant NAV unless stated otherwise. Performance shown does not take account of any fees and costs associated with subscribing or redeeming shares. It is assumed that all dividends were reinvested. WIOF prospectus is available and may be obtained through www.1cornhill.com. Before investing in any WIOF Sub-fund(s) investors should contact their financial adviser / legal adviser / tax adviser and refer to all relevant documents relating to the WIOF and its particular Sub-fund(s), such as the latest annual report and prospectus that specify the particular risks associated with the Sub-fund, together with any specific restrictions applying, and the basis of dealing. In the event investors choose not to seek advice from a financial adviser / legal adviser / tax adviser, they should consider whether the WIOF is a suitable investment for them.