Fund manager commentary
28 February 2025
Comments from the Portfolio Managers
Please note that the commentary below includes historic information in respect of the performance of portfolio investments, index performance data and the Company’s NAV and share performance.
The figures shown relate to past performance. Past Performance is not a reliable indicator of current or future results.
The Company’s NAV fell by -4.6% in February, underperforming the benchmark, MSCI Emerging Markets Latin America Index, which returned -3.1% on a net basis over the same period. All performance figures are in sterling terms with dividends reinvested.1
While Emerging Markets (+0.5%) outperformed Developed Markets ( -0.7%) in February, Latin America lagged. Latin America's underperformance was driven by weakness in Brazil (-4.8%). Most other markets ended the month in positive territory but their relative size in the region was not enough to offset declines in Brazil; Colombia (+7.7%), Chile (+4.0%), Mexico (+3.2%).
At the portfolio level, an underweight position to Chile and security selection in Mexico were the largest detractors to performance during the month. On the other hand, security selection in Brazil helped on the margin.
From a security lens, an underweight to Brazilian digital banking platform provider, NU Holdings, was the biggest contributor to relative returns after releasing a disappointing set of earnings. No exposure to Brazilian electric equipment firm, WEG, was another relative contributor. The stock fell after their latest earnings report showed a deceleration in both year over year margins and returns on invested capital. Our overweight position to Mexican convenience store operator, FEMSA, also helped after the company reported an acceleration in same store sales growth at their core convenience store Oxxo. Fibra Uno, a Mexican real estate company, was another contributor. The company announced that they would be spinning off their industrial real estate assets, aiding the company's de-leveraging efforts.
On the flipside, our overweight position in Azzas 2154, the Brazilian footwear retailer, was the largest detractor. Lojas Renner, the Brazilian retailer, also hurt performance amidst broker downgrades and after their latest earnings showed a miss on margins versus consensus. Brazilian healthcare operator, Hapvida, also weighed on returns in February following a regulatory hearing about proposed changes by the National Regulatory Agency for Private Health Insurance and Plans (ANS), which could impact the entire healthcare sector.
We made few changes to the portfolio. During February we increased our exposure to copper by adding to Grupo Mexico, a Mexican mining and transport conglomerate. We also increased our exposure to Ero Copper, which is a Canadian listed miner with their main operations in Brazil. Copper stocks have lagged the copper price year to date, but we ultimately believe these stocks will catch up over time. Following a sharp sell-off we re-initiated a position in Globant, an IT services company. Elsewhere, we exited CCU, the Chilean brewer.
Mexico is the largest portfolio overweight as of February end, while the largest underweight is Peru.
Outlook
In Brazil and Mexico, many stocks trade on single-digit multiples while paying double-digit dividend yields This is true for companies as diverse as Mexican bank Banorte, Brazilian natural resource companies Vale and Petrobras as well as real estate developer, Cyrela. The latter, for example, trades on 4x price-to-earnings ratios and pays an 11% dividend yield (consensus estimates).
Meanwhile, at a macroeconomic level the Brazilian real, which declined by more than 20% in 2024, making Brazilian broad-range of exports much more competitive. This together with higher interest rates might lead to a decline in economic activity, less pressure on inflation and thus lower interest rates down the line. This in turn should lift the multiples of equities.
Due to the volatility that Mexico has faced in 2024, the Mexican central bank has been relatively more cautious in reducing rates, finishing the year with its benchmark rate still at 10%, even though inflation has receded to around 4%. We therefore see scope for rate cuts to accelerate in 2025 and support asset price performance. Furthermore, despite the claims of the media, we do not see a major change in the secular trend of nearshoring of supply chains, as Mexico will remain a much cheaper location to manufacture than the United States. Mexico therefore remains our biggest overweight in the fund.
The portfolio is underweight the rest of Latin America to fund these high conviction positions in Brazil and Mexico.
1Source: BlackRock as at 28 February 2025.
Source: Unless otherwise stated all data is sourced from BlackRock as at 28 February 2025.
Any opinions or forecasts represent an assessment of the market environment at a specific time and are not intended to be a forecast of future events or a guarantee of future results.
This information should not be relied upon by the reader as research, investment advice or a recommendation.
Risk: Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies.
