Latin American Funds: Getting Hot Down There

It's winter in South America right now but Latin American funds are anything but cool.

While U.S. stocks have spent the summer on a volatile trip to nowhere -- the S&P 500 is up a forgettable 1.27% over the past three months -- Latin American stocks and funds have taken off.

The iShares S&P Latin America 40 index(ILF) exchange-trade fund, which includes the largest Mexican and South American stocks, is up 18.54% for the last three months and 26.43% over the last 100 days.

The average Latin American stock fund has gained 17.52% over the last three months. By comparison, the next best-performing international regional fund category, diversified Pacific funds, returned just 3.87% during that time, according to fund-tracking firm Morningstar.

"When you discuss Latin American equities, you are basically talking about Brazil and Mexico," says Zack Henry, Latin American economist for auto manufacturer Toyota. "And this summer rally is primarily being driven by long-awaited domestic growth in Brazil and increased confidence in [President Luiz Inacio Lula da Silva] Lula's economic policies."

Basically Brazil

Brazil's impact on any Latin American equity index is impossible to miss. Companies from the country comprise 49.1% of the seven-country MCSI Latin America Index, with Mexico a distant second at 32.8%. The remaining five countries -- Chile, Colombia, Argentina, Venezuela and Peru -- combine for the remaining 18.1% of the index (see chart below).

So despite the fact that Mexican stocks in the iShares MSCI Mexico Index ETF(EWW) are up 3.8% over the past three months (triple the S&P 500), the major driver of Latin American fund performance undoubtedly has been Brazilian stocks. The iShares MSCI Brazil Index ETF(EWZ) has risen more than 34% since May.

"Generally, there is a return to growth by Brazil," says Brad Durham, a managing director at Emerging Portfolio Fund Research. "The inflation data has been positive and the government is creating the right environment for economic growth." Durham says recent economic data indicate 4% growth in Brazil after a flat 2003.

Latin American Leaders MCSI EMF Latin America Index, Aug. 23

Source: MCSI