Performance Review 2005
Patrice Lemonnier:"In 2005 the 5.7% of outperformance (55.35% vs 49.65%) stemmed from the following positions: our overweight on Brazil and our underweight on Chile have been the main contributors in terms of country allocation. In terms of sector allocation our overweight of the consumer sector in Brazil and of the financial sectors in Brazil and Mexico contributed significantly to the performance. In terms of stock picking, participation in cheap Brazilian IPOs also contributed to outperformance."
Performance Review 2006
Patrice Lemonnier:"In 2006, the fund achieved an outperformance of 6.44% (50.01% vs 43.57%). Contribution from country allocation was still positive but lower than in 2005. Added value came mostly from underweighting Chile and Columbia. Positive contribution from sector and stock picking was significant especially in Brazil (overweight financials and industrials) and in Mexico (overweight on consumer staples and financials)."
Performance Review 2007
Patrice Lemonnier:"In 2007, the fund outperformed its benchmark by 3.38% (53.78% vs 50.40%). Country allocation was positive as a result of Brazil´s strong overweight and relative strength, although sector and stock contributions were penalised by the structural underweight of Petrobras (which may not represent more than 10% of the pooled funds, for regulatory reasons while weighting 19% of the benchmark). Stock picking in Brazilian Telecommunications and Financials as well as in Mexico (mid caps in retail and housing sector) contributed materially."
Performance Review 2008
Patrice Lemonnier:"In 2008, the fund underperformed its benchmark by 38 basis points (-51.79% vs -51.41%). Country allocation, including foreign exchange, had a negative contribution mainly due to our overweight of Brazil which underperformed more defensive countries such as Chile and Colombia (both underweight positions in the fund) in the second half of the year. Sector selection had a significant positive contribution, mainly due to the overweight position on telecoms and utilities as well as in financials in Brazil and to our structural underweight in energy. Stock picking had a negative contribution and erased gains made by sector selection, mainly due to Brazilian financial and material stocks and consumer staples in Mexico."
Performance Review 2009
Patrice Lemonnier:"In 2009, The fund outperformed MSCI Latin America by 22.68% (126.45% vs 103.77%). Country allocation, including foreign exchange, had a significant positive contribution mainly due to our overweight on Brazil which strongly outperformed and to our neutral (+) position on Mexico. Sector selection had a negative contribution, mainly due to the overweight position on telecoms and utilities in Brazil. Stock picking had a tremendous positive mainly due to good picks in Materials and Consumer Discretionary in Mexico as well as good choices in Industrials, Financials, Consumer Discretionary and Utilities in Brazil."
Performance Review 2010 - Year-to-Date
Patrice Lemonnier:"YTD at the end of September, the fund achieved an outperformance of 134bps (9.53% vs 8.19%). Country allocation, including foreign exchange, had a significant negative contribution mainly due to our underweight on Colombia and Chile which strongly outperformed. Sector selection had a positive contribution, mainly due to the underweight position on energy and consumer discretonnary in Brazil and overweight position on consumer staples in Chile. Stock picking had a strong positive contribution mainly due to good picks in Brazil (energy, consumer discretionary, telecom) and in Mexico (Materials)."
Performance since 2005
Patrice Lemonnier:"Over the full period from 30/12/2005 to 30/09/2010, the fund achieved an outperformance of 44.56% (175.85% vs 131.29%). Country allocation, including foreign exchange, had a positive contribution mainly due to our overweight on Brazil and underweight on Mexico and Chile. Sector selection had a negative contribution, mainly due to the forced underweight position on energy in Brazil, overweight position on telecom in Brazil and on consumer discretionary in Mexico. Stock picking had a strong positive contribution mainly due to good picks in Brazil (energy, consumer discretionary) and in Mexico (Materials)."
Investment Process and Strategy – How does the Fund Manager Invest?
Patrice Lemonnier:"Our emerging markets equity investment style is characterised by benchmarked active management combining top-down and bottom-up approaches. Portfolios are managed with a Growth At a Reasonable Price (GARP) approach including large, mid and small caps. The management style allows a relatively stable and consistent out-performance over time whatever the position in the market cycle.
Our investment philosophy is based on:
- Fundamental analysis
- Anticipating changes rather than relying on past correlations
- Research-based judgemental decisions
- Founded on the constant re-evaluation of prospects vs. valuations and risks
- Risk diversification
- Three sources of alpha generation : country selection, sector allocation & stock picking
- Large number of holdings
- Medium-term investment horizon
- Leading to a lower turnover ratio.
Our process is based on a proactive management approach focused mainly on fundamental analysis and implemented by an investment team with access to a rich network of information sources so as to make informed decisions.
The three main sources of performance are geographic allocation (country selection), sector allocation within each country and stock picking. The three sources are combined in a tried-and-tested management process combining top-down and bottom-up approaches in order to take into account the specific characteristics of investment and management risks inherent to emerging markets. Macroeconomic prospects and changes in risk perception (political, economic, etc.) are two key factors when deciding to invest in a geographic zone. A third key factor is the analysis of relative valuations, when making both geographic and sector allocations and when picking stocks.
Currently, the main positions in the portfolio are as following:
Strong overweight positions on copper in Mexico, real estate in Brazil and Mexico and consumer discretionary in Brazil; strong underweight positions on Staples in Brazil, materials and utilities in Chile, consumer discretionary and telecoms in Mexico."
Investment Outlook
- While all countries currently in the Latin America MSCI index have been showing sound economic recovery and still enjoy solid fundamentals, the Latin America stock market is going to continue to be much influenced by global economic developments.
- We believe the 2 main risks at this point in time are not internal but exclusively linked to the global economy. The first is the macroeconomic volatility that could result from a messy resolution of the renminbi undervaluation. The second is the risk of double dip in the developed world.
- With the vote of the US Representative House to authorise taxes on imports and the French presidency of the G20 calling for more decisive negotiations on currencies, pressures are mounting over China to decisively revalue its currency. Depending on China’s response, further intensification of so called protectionist behaviours from developed countries could be expected, together with a deteriorating global business environment. This could prove jittery for global equity markets. We keep the view that Latin America would probably be little exposed to the protectionist risk since a large part of its exports are commodities which are not easy to substitute. However, potential negative effect on commodity prices could prove to be a major drag for the region.
- We do not either expect governments from developed countries to put in place policies that would be extremely harsh on the renminbi as they would be afraid of potential disruptive effect on their own economies.
- As for the economic activity in developed world, US congress elections in November are likely to validate rising political discontent and a lack of support to more counter-cyclical measures. Accommodative policy stance now seems bound to persist through 2012 with a second round of quantitative easing very likely to be implemented by policymakers in order both to prevent deflation and weaken the greenback. However, US deleveraging consumers could continue to put a brake on economic activity. In addition, it is doubtful that the reduction of fiscal deficit implemented in Europe will lead to a revival of private investment. These are the main reasons why some leading economists are bearish on the developed world prospects. Unfortunately, difficulties in the west would be a drag on emerging bourses as it could trigger a global equity de-rating.
- Latin America remains also dependent on the fluctuation of commodity prices, the volatility of which is not expected to diminish: shifting of the Chinese economy from investment to consumption, US quantitative easing, emerging market growth and currency war are potent opposite forces that create uncertainties.
- However, on a relative basis, we think that more investments will continue to flow into emerging markets, Latin America included, as relative risk and growth differential are more blatant both to global investors and company managers.
- Despite lingering risks, including the volatility linked to commodity exposure, we continue to be confident that Latin American stock markets are well positioned to continue to outperform other developed markets over the medium term thanks to the relatively low leverage of its financial system and its relatively sound fiscal policy.
- We believe that after its recent underperformance, Brazil valuations are very attractive, on a relative basis. Brazil has also the huge advantage of being a deeper market where opportunities are relatively easier to find.
- We also believe that Chile’s strong macro-economic framework will continue to make it a safe haven in any economic scenario. The reconstruction phase following the earth quake should foster growth in the coming quarters. However, stock valuations are not cheap in general.
- Meanwhile, the future of Mexico remains strongly tied to the uncertain US economy in the short to medium term, hence our slightly underweight position.
- The top-down scenario, housing package and political issues (year of presidential election), substantial unattended demand and compelling valuation at the stock picking level still make us comfortable in our main sector overweight in Brazilian real estate.
- Though capital control intensification cannot be fully discarded, we keep the view that Latin America is probably the least exposed region to protectionist risk since a large part of its exports are commodities which are not easy to substitute.
