Checking Out Steamy Funds South of the Border

There's only one way to describe the performance of Latin American mutual funds in 2003: GOOOOOOOOOOOOOOAL!

Latin American fund managers scored returns well over 50% in 2003. The MSCI Latin American Index -- nearly half of which is Brazilian stocks -- was up 67%.

With such a tremendous run-up in Latin American equities, is it too late for new investors to get into the game?

Will Landers, portfolio manager for Merrill Lynch's (MDLTX Quote)Latin America Fund, does not think it's time to blow the whistle on the rally just yet.

"We will have a decent 2004," says Landers. "We should get into double digits as the political risks decrease and local economies improve."

Managing political risk was a large factor behind Landers' success in leading Merrill's Latin America Fund to a category-leading 68% return in 2003.

In late 2002, while the world was waiting to see if Brazil would drown in a sea of defaulted debt, Landers traveled to Brazil to meet with officials from incoming President Lula da Silva's cabinet. After assessing that Lula would be less radical than billed, he jumped on the bandwagon by adding to the fund's Brazil positions.

"Lula came in with question marks. Brazilian bonds were trading 2,500 basis points over Treasuries when Lula arrived. Now it is down to 500," says Landers. "I was surprised by Lula's success in obtaining the social security reforms, tax reforms and bankruptcy reforms his party once blocked."

"Sentiment changed quickly when Lula turned out not to be a threat to the free market," says Morningstar analyst Langdon Healy.

Lula wasn't the only good thing to happen to Brazil last year. Rising commodity prices also lent a hand.

As a low-cost exporter of iron ore, pulp, steel, soybeans and coffee, Brazil benefited from escalating raw-material prices and ravenous Chinese demand.

Big Caipirinha MSCI EMF Latin America Index, Dec. 30

Source: MCSI

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