LatinFinance - May/June 2017 - 18

SERGIO TRIGO PAZ, BLACKROCK

"A LOT OF MONEY HAS COME
INTO EMERGING MARKETS AND
MORE WILL COME. SO THIS
MEANS THAT THE REWARD FOR
THE RISK YOU'RE TAKING,
EVENTUALLY, IS GOING TO BE
A BIT LESS EXCITING THAN
IT WAS"
we were analyzing the fears of Mexico exiting NAFTA."
With the Mexican peso the only currency that was able to be
traded overnight, BlackRock hedged the fund against a potential
sell-off. "The Mexican peso lost around 15% that day," says Trigo Paz.
"This allowed us to make a significant outperformance, thanks to
being short the Mexican peso."
After the US election, "Mexico just got hammered, because of all
the rhetoric," says Lou at NN Investment Partners. "In hindsight, it
was a screaming buy in November."
T. Rowe Price also highlights its Mexico strategy. The fund cut
its overweight by shorting the peso ahead of the election. Then
the firm dug into the details of likely policy changes by the new
US administration, weighing the rhetoric against what would be
politically feasible, before deciding to bet on Mexico after the
election, says Ben Robbins, emerging markets debt portfolio
specialist at the asset management firm.
"We felt that the election, or the Trump fears, became very
overblown," adds Conelius. "So we did add pretty substantially back
into Mexico after the election, mostly in Pemex."
Beyond the US election, some found great value in the ultra-long
end of Mexico's curve. D'hooge at Vontobel and Vandersteel at GMO
cite the country's ultra-long dated century bonds as their preferred
instruments. Mexico's 5.75% October 2110 bond is the single biggest
holding of GMO's Emerging Country Debt Fund.
Calculated on spread duration - that is, the measure of the bond's
sensitivity to changes in its yield over US Treasuries - the bond is by
far and away the most compelling, says Vandersteel, who takes an
acutely analytical approach to security selection.
Plotting the spread duration of each Mexican sovereign or quasisovereign bond in the index against their spreads, it becomes "very,
very clear that there is one mispriced bond in the benchmark, that's
just way too cheap," says Vandersteel. "That's the 2110 bond."
Brazil's turmoil last year offered another opportunity for investors
confident of the country's long-term direction toward profits.
"Latin America was pretty cheap going into 2016," says T. Rowe
Price's Conelius. "In particular, we entered 2016 substantially
overweight Brazil, particularly Petrobras. I was a believer in their
deleveraging story, their governance improvement, and that strategy
has come through very solidly for us."
Brazil's economy is finally moving out of recession and perhaps
putting the worst of its corruption scandals behind it. "Personally
I have a very positive view of Brazil," says MUKAM's Ikeda,
pointing especially to the sovereign's local currency paper. "The

18 L ATINFINA NCE.COM - May/June 2017

fundamentals are very solid and it has a very high carry. The
currency is stabilizing. Even though the Brazilian real fluctuates a
lot, if you're investing in the long term, the impact of the currency
fluctuations is limited. The high carry will cover the currency
fluctuations."
Others are also keen on Brazilian local currency paper. The 10%
January 2021 NTN-F Treasury bond is one of the 10 biggest holdings
in T. Rowe Price's Institutional EM Bond Fund, for example.
Valuations tight
The best fund managers have been able to find value in political
turmoil and economic routs over the past year, but they still have
concerns for the year ahead. Some of that comes simply from
the fact that the mood has already improved. "The biggest risk is
that there's less room for error in valuations," says T. Rowe Price's
Conelius. "The fundamentals were getting better and valuations
were really attractive 18 months ago, but technicals were bad. There
were outflows, there were fears. Now the technicals are good, there
are plenty of flows in month-to-month and week-to-week. But
valuations are pretty full."
Above all, fund managers cite commodity prices as offering
potential risks. "The thing about Latin America as a region is that it's
still very commodity intensive," says Lou, who points to a crash in oil
prices as an area of concern.
Vontobel's D'hooge says while he doesn't expect a commodity
implosion, lower prices remain a risk because of the difficulty
in predicting such things. He also points to a sharp reversal in
trade relations between the US and Mexico as another risk ahead,
although he says he does not expect it to happen.
From a technical point of view, as asset owners place more and
more cash into emerging market portfolios, the opportunities for
easy returns wane.
Of course, it's potential pitfalls like this that make investing in
the region fun. "You cannot be neutral on Latin America," says
BlackRock's Trigo Paz. "If you look at the next 10 years, you can't say
it's not interesting. There's always something exciting there." LF

How the funds are ranked
LatinFinance's 2017 Asset Manager Scorecards are based on
fund return data from Lipper and Economatica.
The Equity Investor Scorecard (page 17) considers funds with
at least $100 million under management, and at least 90% of
their assets in Latin America.
The Debt Investor Scorecard (page 16) evaluates funds with
at least 28% of their assets in Latin America and $250 million or
more under management.
In both cases, funds are ranked according to their
performance over the three years to March 31, 2017, from data
supplied by Lipper.
The Brazil Investor Scorecards (page 14) are based on one
and three-year returns to March 31, 2017, in reais provided by
Economatica. The longer-term performance is given twice the
weighting of the shorter term.
In all cases, where a manager has two funds in the top ten,
the lower performing one(s) are stripped out. Only actively
managed funds are included.

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