William M. Landers, CFA: "In 2006, contributions to positive performance came from stock selection in Brazil, an underweight position and stock selection in Chile, an underweight position and stock selection in Colombia and our allocation to and stock selection in Argentina. From a sector perspective, stock selection in industrials, our allocation to and stock selection in consumers, our allocation to and stock selection in financials and our allocation to materials were the main contributors to performance. Detracting from performance was an overweight position in Mexico. Our allocation to and stock selection in telecommunications and stock selection in utilities also detracted from performance."
Performance Review 2007
William M. Landers, CFA: "In 2007, positive contributions to performance came from underweight positions in Argentina and Colombia as well as from stock selection in industrials, telecom and utilities. Detracting from performance was stock selection in Brazil, Mexico and Chile as well as an overweight position in Panama. An underweight position and stock selection in energy and materials and an overweight position in consumer discretionary also detracted from performance."
Performance Review 2008
William M. Landers, CFA: "In 2008, positive contributions to performance came from stock selection in Brazil, from cash whose average weight for the year was approximately 60 bps, stock selection and an overweight position in consumer staples, underweight positions and stock selection in energy and materials and from an overweight position in financials. Detracting from performance was stock selection and underweight positions in Mexico, Chile and Peru, stock selection in consumer discretionary and industrials, overweight positions and stock selection in health care and underweight positions and stock selection in telecommunications and utilities."
Performance Review 2009
William M. Landers, CFA: "In 2009 the outperformance was almost equally attributable to country allocation as it was to stock selection.
At the country level, the Fund’s overweight in Brazil along with being underweight in virtually every other country in the region, provided positive country allocation versus the benchmark for the year. Brazil was the only country that outperformed Latin America as a region in 2009 – thus having an average 657 basis points overweight in the country during the year proved to be beneficial to the Fund’s performance. The approximate 245 basis points average underweight in Mexico proved to be as beneficial given that market’s large underperformance. Underweights in Chile, Colombia and Argentina, along with off benchmark positions in Argentine-based companies and Central America also had a positive effect on the year’s performance.
Interestingly, stock selection was even more important to the year’s outperformance, accounting for over half of the overall outperformance versus the benchmark. Brazil once again was the stand out, with the overweight position in financials, steel companies, Brazilian small capitalization stocks and real estate developers having the largest positive impact on returns. "
Performance Review 2010
William M. Landers, CFA: "In 2010, the outperformance was once again primarily attributable to stock selection.
Country allocation provided a small detraction from the year’s outperformance. The overweight in Brazil was a slight negative, as were the underweight positions in Chile, Colombia and Mexico (but was partially offset by stock selection there). Offsetting these were the overweight position in Peru as well as our positions in non-benchmark countries in the region.
A majority of the year’s alpha generation stemmed from stock selection, especially in Brazil; despite the fact that Brazil was the worst performing market in the region and our overweight position slightly weighed on performance at the country allocation level. Small and mid-cap stocks had another strong year in Brazil after strong returns in 2009.
Offsetting some of the negative allocation from the underweight in Chile was positive stock selection from the positions we did hold in the country. No other country provided significant attribution at the stock level."
Performance 2011 - Year-to-Date
William M. Landers, CFA: "Year to date through September 2011, the fund has seen positive contributions to performance from stock selection in Chile as well as an overweight position in Panama. Individual names contributing to performance include among others Brazilian beverage name Ambev and Mexican beverage name Femsa.
Stock selection in Brazil has been the primary detractor from performance so far this year. Also weighing on performance this year has been an underweight position in Colombia, an underweight position and stock selection in Mexico, our allocation to Peru, which has on average been approximately neutral for the year and an off-benchmark position in Colombia."
Performance since 2006
William M. Landers, CFA: "Since the end of 2005, there have been six major sell-offs in Latin American equity markets. In each case the sell-offs were primarily caused by concerns regarding the path of interest rates in the US, inflation and overall global growth. In each instance there were no significant changes made to the portfolio as a result of performance. We maintain a disciplined approach to investing and typically would not change our investment style based on either a long period of underperformance or a rapidly changing market environment. Will Landers has over 20 years of experience in Latin American markets. He has experienced several full market cycles and invests with a medium to long-term outlook. Given that our investment horizon is at least 12 months we do not react to short or long periods of either outperformance or underperformance but rather look to proactively change the portfolio based on changes in fundamentals and or valuations."
Investment Process and Strategy – How does the Fund Manager invest?
William M. Landers, CFA: "Our process is a combination of top-down and bottom-up analysis, based upon strong fundamental research. First, we use a liquidity screen to reduce the investible universe. We are typically looking for stocks trading between $3-$4 million per day. Next, we eliminate countries with capital controls or sectors we´re not happy to invest in. The next step is where we spend most of our time. The BlackRock Latin America team conducts rigorous fundamental analysis involving the use of a wide range of valuation techniques. Bottom-up company analysis is done using both technical measures (e.g. P/E, yield, P/BV, P/E to growth) and more cash flow based measures (e.g. P/CF, EV/EBIT, EV/EBITDA). The team also does a DCF sensitivity analysis using different growth rates and country risk parameters which helps evaluate the upside potential of a security and long-term viability of a company. Additional factors we focus on include:
- Franchise strength, pricing power
- Committed management teams with established track records
- Improving operational efficiency/cost control
- Sensible acquisition/consolidation strategies
- Balance sheet/free cash flow management
- Valuations reflect sensible earnings expectations
- Exploiting opportunities presented by market volatility
We don´t buy companies based on just one of these measures we look at a number of valuations in making our investment decision. The team then constructs a portfolio of 50-75 securities and typically has a time horizon of at least 12 months.
The BGF Latin American Fund relies on in-depth understanding of how events at both the macro and company level effect stock prices in Latin American markets. The team attempts to add value by investing in a diversified portfolio of mispriced/undervalued securities.
The fund does not have any particular investment biases that result from our investment philosophy and process. We adapt our stance as economic circumstances unfold. We identify stocks, which offer the prospect of long-term, above average price appreciation through a rigorous research process. This approach could best be described as ‘growth at a reasonable price’."
Investment Outlook
William M. Landers, CFA: "As of the end of September, the portfolio remains positioned to benefit from a more constructive market environment and a recovery in risk appetite. Latin America’s fundamentals from both a macro and micro perspective rank among the most attractive in the world in our opinion and we would expect to see the region rank among the best in the world in periods of market recovery. This combined with attractive valuations make for an attractive entry point into the region. Brazil remains our largest overweight with a continued focus on domestic sectors representing most of the overweight. We expect the Brazilian Central Bank to continue to ease rates at the remainder of their meetings this year in an effort to combat contagion from the global slowdown. Valuations in Mexico are not as attractive as in Brazil and the country will continue to be impacted by its close correlation to the US, political gridlock until next year’s presidential election and ongoing security concerns. Other markets in the region have some representation in the portfolio but suffer from a combination of higher valuations and/or low liquidity.
Latin America, like many emerging markets, does not have any liquidity or debt issues to contend with, has ample foreign reserves, strong banking systems, strong domestic economies and attractive equity valuations (relative to its own history as well as other markets) - which in our opinion, will allow the region to be one of the first to recover once the issues from Europe achieve some type of satisfactory resolution."
