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) - Get Report

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

In response to both political stability and pricing pressure, Landers raised his weightings on Brazil's largest commodity producers,

Petroleo Brasileiro

(PBR) - Get Report

(10%) and iron ore exporter

Companhia Vale do Rio Doce

(RIO) - Get Report

(9%).

Not that these two stocks were hidden gems. When it comes to Latin American funds, stock selection is curtailed by serious benchmark and liquidity constraints.

"There are not too many choices as to where you can go," says Healy. "To a certain extent it's all about how much Petrobras you have." Petrobras accounts for about 11.8% of the MSCI Latin American Index (combining

NYSE

-listed ADRs with Brazilian Bovespa-listed shares).

When reviewing the Latin American funds available -- and there aren't that many -- it's tough to dispute Healy's point.

(FLATX) - Get Report

Fidelity,

(PRLAX) - Get Report

T. Rowe Price and

(MILAX) - Get Report

Morgan Stanley each offer Latin American funds comprising nearly identical stock selections with different weightings.

The overlap provides for a narrow range of returns, thus leading Healy to wonder why they need to be so pricey. Merrill's fund, for example, has a front-end load of 5.25% and an above-average expense ratio of 2.10%.

Fee-conscious investors looking south of the border might take a look at the

iShares S&P Latin America 40 Index ETF

(ILF) - Get Report

. It trades like a stock, so the only expenses it requires are commission fees and a minimal expense ratio of 0.50%. ILF shares returned 60% last year, compared with Landers' fund-leading 68%, so you can see how tightly Latin American funds hug their respective benchmarks.

Investors looking to dive directly into the Brazilian markets can purchase the

iShares MSCI Brazil Index

(EWZ) - Get Report

, but they should do so with caution. It's tough to dollar cost average, as you might want to do in a volatile fund. The Brazil ETF was up 114% last year.

If the greater Latin American ILF returned 61% and the Brazil Indexed EWZ returned nearly double that, which countries were slowing down the growth?

It's not so much countries as country. And that country is Mexico. iShares tracking the Mexican markets returned 37% in 2003.

Mexico makes up 34% of the MSCI Latin American index compared with Brazil's 48%. Coming in a distant show is Chile with close to 11%.

Mexico outperformed its powerful neighbor to the north last year -- the

Dow

and

S&P 500

both returned about 25% -- though fund managers continue to see problems with Mexico going forward. Most will continue their slight underweighting of Mexico in Latin American funds in 2004 as well.

Andrew Clark, Lipper's senior research analyst, says the problem starts at the top: "President Fox is losing popularity, and it's causing a serious impact on confidence."

Landers agrees that Fox has not been as effective as his Brazilian counterpart Lula. "President Fox has been stifled in Congress, and the PRI is blocking him on everything. Mexico needs both electricity reform and fiscal reform."

From a global perspective, China's emergence has not been the boon to Mexico that it has been to Brazil. The American manufacturing jobs Mexico sucked south are now being sucked across the Pacific to China. Mexico, like the U.S., is trending toward a service-based economy. And as with the U.S. in the past few years, it is the Mexican consumer keeping the economy afloat.

When it comes to exports, Clark estimates that 70% of Mexico's exports come into the U.S. Thus, the health of Mexico's economy will continue to be coupled with the U.S. recovery in 2004.

The fate of Mexico's markets, however, is more a function of two communications stocks:

Telefonos de Mexico

(TMX)

and

America Movil

(AMX) - Get Report

, which make up 7.6% and 6.6%, respectively, of the MSCI Latin American index.

Landers says that real estate plays might be the best bet in Mexico in 2004 as Fox's government tries to increase the nation's homeownership.

Going forward, however, Landers is "not too excited about opportunities in Mexico," so he will continue to underweight the country in his fund compared with weightings for Brazil and a burgeoning Chile. Chile, the world's leading copper producer, is currently riding high on a weak dollar, high copper prices and strong Chinese demand.

Lipper's Clark remains hopeful on Chile in 2004 but acknowledges that a lot of Chile's success rides on President Lagos "not trying to be a superstar."

Well, we can't all be like Lula.