The Latin American fund industry is growing and making your mark in this competitive environment can be tough.
For Chilean fund selectors Miguel Angel Suarez and Sebastián Rodas of LarrainVial Asset Management, who head up the Santiago-based group’s international equity and multi-asset fund selection units, the way to get ahead is to offer something different.
Both investors have been working at LarrainVial for almost six years and despite occasionally disagreeing on what fund they should back, a point they’ve always agreed upon, and is a driving force behind both their processes, is the desire to break away from the crowd.
‘The Chilean industry has tended to invest in the same plain vanilla managers, the biggest funds, the best known etc,’ says Rodas, director of multi-asset fund selection. ‘In some cases the best known managers are not even the best in their field. We have tried to look for different fund managers that offer added value through other types of investments or styles to help differentiate ourselves from our rivals.’
‘The world in which we operate is evolving and funds are more sophisticated than before,’ adds Suárez, the group’s director of international equity fund selection. ‘Today managers are doing more interesting things and through our contact with international funds we aim to follow the advances taking place and how investments are changing.’
The Chilean fund industry has been following this evolution with keen interest and one of its local success stories is LarrainVial. Currently the largest independent financial services group in the Andean region, the firm runs over $19 billion in assets and has operations in Chile, Colombia, Peru and the US, with its asset management division accounting for around $4 billion of assets.
Break the habit
Back in 2011, Rodas and Suárez’s appetite to find new and interesting funds for their clients led their group to be among the first in Chile to include the Carmignac Patrimoine fund in their multi-asset portfolio, says Rodas.
He has since sold it, having found more appropriate vehicles for their current needs, but that is just one example.
‘Another is the Matthews Asia group, no one in Chile held them and we’ve been investing with them for a number of years. First State is another good example,’ says Rodas.
On the topic of Asia, Suárez has it as one of his main overweights within his equity portfolio and his approach to picking funds for this region is a good illustration of his selection philosophy.
‘With Asia-focused funds you have to study the environment and you can end up with conclusions that weren’t initially obvious to you,’ says Suárez.
‘The idea is to have a manager who invests directly in the market and has local knowledge. I prefer going for this type of fund than a more global Asian equity fund, where, for example, exposure to Korea is more like the benchmark.’
For his Korea exposure, Suárez goes through the Invesco Korean Equity, managed by Simon Jeong, and Matthews Korea, run by J. Michael Oh and Michael Han from Matthews Asia. While still underweighting Korea, Suárez says lately he has been increasing his exposure to the country.
Along the same principle, he currently holds the Goldman Sachs India Equity, run by Citywire AAA-rated Prashant Khemka, and the PineBridge Global Funds India, run by fellow Citywire AAA Elizabeth Soon.
However, there is a market where even Suárez and Rodas’s in-depth knowledge finds them struggling to find solid opportunities – Latin America.
‘There are various issues of corruption, not just in Brazil and Argentina,’ says Rodas. ‘Commodities are declining, there are fiscal problems and questionable management at a corporate and government level.
‘Because of all this we can’t reproduce the approach we use in Asia, like with Korea, in Latin America.’
Mexico is the only Latin American country they are willing to put their money behind, the pair says.
‘We’ll have to endure a few years of pain in Latin America,’ says Rodas. ‘We’ll surely reach a stage where markets reach new lows and opportunities are created, but for now we must be patient.’
Over the last two years Rodas says the main change he has made to his process is to seek out managers that are able to produce consistent returns rather than look for ‘beta’ funds.
‘It may not always be the top fund every year, but it will be in the first decile or quartile every year,’ he stresses.
Within his multi-asset portfolio, Rodas’s view of equity is very similar to that of Suárez, with the latter focusing his US exposure on ETFs, with these vehicles accounting for around 20% of his overall portfolio.
‘In the case of the US, the probability that there is a boutique that will be able to beat the market is lower, as it is hard to beat the S&P,’ says Suárez.
‘I believe there is still room for returns in the US, but a lot less than we saw during the S&P highs of 2012-2013. There’s not as much opportunity here than in other parts of the world.’
For this reason, over the past couple of years Suárez has been reducing his allocation to the US, while still maintaining an overweight position, to focus more on Europe and Asia. These two regions are the pair’s largest equity overweights today, with Europe a particular point of focus.
The euro’s low valuation against the dollar has played an important role in how they are shaping their portfolios, with both opting predominantly for US dollar hedged share classes in recent times.
However, until one year ago Rodas’s multi-asset portfolios were 100% hedged against the US dollar, but over the last couple of months he has been opening up his portfolio to the euro.
‘With the euro now closer to €1.05 we have opened up our currency range and lowered our US dollar hedge to around 70%. It will be difficult for the euro to drop any further and we feel it won’t maintain the rate of descent we have seen over the past year.’
Among the European equity funds the pair is using in their equity and multi-asset portfolios are the MFS European Value, Invesco Pan European Equity, JPM Europe Equity Plus, Allianz European Equity and the Threadneedle European Select funds.
‘I think that if the euro maintains its current level many European companies will see strong profits in their results over the next quarters,’ adds Suárez.
The hedged share classes are not used solely for their European equity exposure, says Suárez, as around 80% of his international equity funds are currently hedged against the US dollar.
Within Rodas’s fixed income allocation, which is entirely focused on hard currency funds, he is maintaining his exposure to emerging market debt, while making some internal adjustments.
‘In terms of emerging, we have been lowering our exposure to corporate bond funds to go more towards Asian investment grade,’ says Rodas, naming ING Asian Debt – now known as the NN Asian Debt – and the BGF Asian Tiger Bond funds as his vehicles of choice.
He has also been returning to US and global high yield through funds like the Nomura US High Yield, AXA Global High Yield Bond and Henderson Global High Yield funds. However, his approach to high yield has been amended since the start of this year.
‘We reduced duration hedged or short-term high yield funds from our portfolios at the end of last year. We, like most of the market, feared a rise in interest rates but this risk has since been declining. The protection that these types of funds offer doesn’t really tally up with the yields they are offering and they won’t pay much in the slowly rising rates environment the Fed is promising.’
The good – Miguel Angel
‘There was a manager that invested in the Asian market that I had met a few times. Once when I met him in New York he was being criticised for having too much exposure to India. This was back in 2012-2013 when India was not doing well and many groups were cutting their exposure to the country.
‘He felt that the companies he had in his portfolio, which were mainly consumer names, were very cheap and the drop of the Indian market made them even cheaper. This was an excellent entry point for holding India and especially these companies, and instead of reducing it, which was what many investors were telling people to do, he had increased it.
‘The truth was that it made complete sense when he explained it, so we followed suit and 2014 and 2015 came along when these companies rose and the fund added a lot of value. He’d had the companies in his portfolio since 2012-2013, so he really benefited. He had a very deep understanding of the market and how the corporate world worked over there. But for me what was most valuable wasn’t just that he ended up being right, it was that he had the conviction as a fund manager to stick to his guns.’
The bad – Sebastián
‘There was one very well-known manager whose fund was the AFP’s biggest Latin American fund position for many years. Whenever we met him we always asked what his outlook for Latin America was and after some time we realised that he had become very benchmark dependent. At the start he was a manager that was very off-benchmark and was beating the market for many years, that’s the reason the AFPs had allocated so much to him. But he had one bad year and instead of sticking to his approach he changed it and became completely benchmark-driven.
‘We asked him why he had so much exposure to Petrobras, to Vale, to America Movil and he was saying that they were the biggest companies in Latin America and were really cheap. That’s just easy analysis that you can hear from other managers, like with Russian equities – it’s cheap but it’s for a reason and has been for many years.
‘He was being obtuse in that he was benchmark investing, there were a lot of names from the benchmark in the fund which didn’t make any sense. The fund began to show a clear negative performance and today the fund and the manager no longer exist.’
This article was originally published in the May issue of Citywire Americas. To sign up to receive our free magazine, follow this link.