Latin America mutual funds have had a torrid time for the last five years, witnessing heavy outflows and dismal performances. According to Morningstar, US-domiciled Latin America funds have seen their asset base slump a major 85% to $1.4 billion since 2010. The concerns are not limited to the US alone. European-domiciled Latin America funds have seen a 70% plunge in the asset base since 2010. The performance has been equally dismal, as some analysts note that many Latin American funds have lost over 50% in the last five years.
We don't need to go back half a decade for a performance appraisal. Recent results haven't been encouraging either. Among the International Equity Funds, Morningstar data shows that Latin America Stock category has the largest declines for all comparable periods, i.e., 1 month, year to date, 3 months, and 1, 3 and 5 years.
Some experts fear that the outflows may continue, forcing many investors to stay away from the Latin America focused funds. Thus, the survival of some of these funds may well be in question. In the light of these dismal facts, we would like to highlight 4 Latin America focused funds that carry unfavourable Zacks Mutual Fund Ranks, which investors should stay clear of.
Latin America's Biggest Economy Disappoints
Much of the weakness in Latin America is due to the failure of its largest economy. Brazil is witnessing the worst recession in decades after its GDP nosedived 4.5% year on year in the third quarter. The decline in the Brazilian real may be advantageous in terms of releasing some pressure from exports.
However, imports are expensive and this hikes inflation. Eventually, the central bank has to raise rates, even during a recession. Inflation in Brazil reached a 12-year high in October and hovered around the 10% level - way above the central bank's target of 6.5%. In September, Standard & Poor's had cut Brazil's credit rating from investment grade to junk status with a negative outlook.
On a quarterly basis, the Brazilian economy contracted 1.7% in the third quarter. This follows a 2.1% contraction in Q2 and a 0.7% contraction in Q1. In the first nine months of 2015, the Brazilian economy shortened 3.2%, the largest decline ever.
Investment declined for the ninth successive quarter and household spending dropped for the third straight quarter, making the recession acute. A persistent slump in commodity prices has badly hit the commodity-rich Brazilian economy. If this was not enough, China - one of the key trading partners of Brazil - is suffering from a prolonged manufacturing slowdown leading to further woes in Brazilian exports.
Latin America's Macroeconomic Prospects
Latin America is showing favourable trends in governance, but perhaps that is not helping the region right now. Argentina appointed a new president, Mauricio Macri, who is believed to be pro-market. Venezuela now has two-thirds congressional majority in opposition, while Brazil's parliament adopted a resolution of impeachment against the leftist president Rousseff.
South America's second-largest economy, Argentina, has been plagued with weak growth, high inflation, declining currency and debt default issues. Macri promises sweeping economic reforms to boost the country's economy. The investment climate in Argentina has been clouded by excessive governmental control over the economy ranging from heavy taxes on agricultural exports to capital and currency controls.
The macroeconomic outlook according to LatAmEconomy.org is not favourable as well. They acknowledge that the high economic growth prospects experienced in the 2000s are over now. They state: "The region continues to deal with a deteriorating external environment that, without experiencing any major internal crises, is leading to modest growth rates. Medium-term growth projections, however, show further downward revisions. This suggests that potential output growth is less robust than expected, which could present a risk to recent socio-economic achievements."
4 Latin American Mutual Funds to Avoid
Below we present 4 funds, which focus on Latin America and carry either a Zacks Mutual Fund Rank #4 (Sell) or Zacks Mutual Fund Rank #5 (Strong Sell) . Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
These funds are in the red for year-to-date and 1-year periods and have negative 3- and 5-year annualized returns. The minimum initial investment is within $5000.
Fidelity Advisor Latin America A ( FLFAX ) invests the majority of its assets in Latin American securities and other financial instruments economically connected to Latin America. Investments are allocated across Latin American nations. A maximum of 35% of its assets are invested in an industry that covers over 20% of the Latin American market.
Fidelity Advisor Latin America A currently carries a Zacks Mutual Fund Rank #5. Over year-to-date and 1-year periods, FLFAX has lost 28.2% and 22.5%, respectively. The respective 3- and 5-year annualized losses are 20.4% and 14.8%. Annual expense ratio of 1.38% is however lower than the category average of 1.75%. FLFAX carries a maximum front end sales load of 5.75%.
BlackRock Latin America Investor A ( MDLTX ) invests most of its assets in securities of any size from Latin American economies. MDLTX does not invest in a large number of nations. MDLTX invests in securities that are denominated in Latin American currencies.
BlackRock Latin America Investor A currently carries a Zacks Mutual Fund Rank #5. Over year-to-date and 1-year periods, MDLTX has lost 27.7% and 22%, respectively. The respective 3- and 5-year annualized losses are 16.6% and 13.4%. Annual expense ratio of 1.53% is however lower than the category average of 1.75%. MDLTX carries a maximum front end sales load of 5.25%.
T. Rowe Price Latin America ( PRLAX ) seeks capital appreciation over the long term by investing in companies that are either located or have their primary operations in Latin America. PRLAX invests a lion's share of its assets in these economies and its portfolio generally includes four countries.
T. Rowe Price Latin America currently carries a Zacks Mutual Fund Rank #5. Over year-to-date and 1-year periods, PRLAX has lost 24.4% and 17.8%, respectively. The respective 3- and 5-year annualized losses are 17.2% and 13.8%. Annual expense ratio of 1.31% is however lower than the category average of 1.75%. PRLAX carries no sales load.
Deutsche Latin America Equity A ( SLANX ) invests most of its assets in Latin American common stocks. A maximum of 20% of assets may be invested in US and other non-Latin American issuers and debt securities that may include junk bonds.
Deutsche Latin America Equity A currently carries a Zacks Mutual Fund Rank #5. Over year-to-date and 1-year periods, SLANX has lost 29.7% and 24.6%, respectively. The respective 3- and 5-year annualized losses are 16.2% and 11.9%. Annual expense ratio of 1.54% is however lower than the category average of 1.75%. SLANX carries a maximum front end sales load of 5.75%.
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