Latin Finance - July/August 2009 - 10

fund performance Beaten by the Index by Ben Miller Exceptional volatility caused by the global financial crisis has wiped out much of the last five years of hefty fund gains. Managers struggle to position for recovery. F und managers focused on Latin America were caught with their pants down when global markets erupted in 2008. Though many will claim in hindsight to have had doubts about subprime mortgages or emerging markets valuations, few were prepared for the mayhem in even the region’s best equipped economies. Much of the last few years of bumper gains were erased by last year’s panicked selloff. As of late May, a Lipper average of US-domiciled EM debt funds – which typically have at least a third allocated to LatAm – posted a one-year annualized total decline of 8.66%, much more than the 1.32% lost by JPMorgan’s EMBI Global Diversified index, the sovereign debt standard. Five-year annualized returns were 8.10%, compared to an 8.23% gain for the EMBI. Those at the top of the list are beating the index, but not by much. The best performer, MFS’ $267 million – as of May 1 – Emerging Markets Debt Fund, eked out five-year returns of 9.47% as of June 1, or 10.95% if fees are extracted. The largest fund, Pimco’s $1.88 billion Emerging Markets Bond Fund, returned 8.49%, through June 1, or 9.54% without fees, over five years. LatAm equity funds boast a similarly tepid performance. Lipper-monitored LatAm equity funds average a one-year annualized loss of 46.90% through June 1, versus a 40.89% decline in the MSCI EM LatAm Index – the benchmark for that market – with five-year returns of 24.85%, just above the benchmark’s 24.21% gain. Use Only in Bull Markets Funds playing LatAm were not always such laggards. Lipper’s index of USdomiciled EM debt funds steadily outperformed the EMBI benchmarks in the years before Lehman collapsed, according to Lipper data, but it has trailed the recovery. LatAm equity funds show the same pattern versus the MSCI. “Even though we just went through a period of really strong returns for four out of five years, one bad year takes that away for everyone,” says Curtis Mewbourne, managing director and co-head of EM market investments at Pimco. He adds that EM debt is almost back where it was pre-Lehman, but that his flagship fund is outperforming the EMBI year-to-date. Lipper data shows the Pimco vehicle returning 14.21% through June 1, compared to the EMBI Global Diversified’s 14.06%. Many other funds also display strong gains this year, with the Lipper list up 18.69%, suggesting they are only good in bull markets. “In both the EM space and the broad fixed-income space, indices are extremely hard to beat over time, with a few rare exceptions,” says Lawrence Jones, senior mutual fund analyst at Morningstar. “Despite the promises of active management, I wouldn’t truly expect most managers to beat an index that I’d call a decently constructed and honest index.” However, he is sympathetic to their plight, noting that it is difficult to judge fund managers’ performance on last year’s events, given that crisis unfolded rapidly and in an unprecedented fashion. 10 LatinFinance July/August 2009

Latin Finance - July/August 2009

Table of Contents for the Digital Edition of Latin Finance - July/August 2009