Latin America overlooked by investors

NEW YORK — NEW YORK -- It is not only grass that's always greener on the other side of the fence. So, apparently, is money.

During the 1980s, while America's jet-set investors focused first on the profits in Japan and then in Europe, one of the decade's strongest stock markets was (have you guessed it?) Mexico's.


And, while entrepreneurs go tumbling after opportunities in Eastern Europe, the leading countries of Latin America are years ahead in understanding private investment.

Until fairly recently, Central and South America had been written off the investment map. Dictatorship, class grievances, corrupt state-owned enterprises, regulated markets, and hostility to outside capital, especially from the United States, have been holding most of those countries in thrall.


But in recent years, a few home-grown examples are making it clear that Latin America needn't be synonymous with expatriate wealth, huddled poverty and hyperinflation.

Chile and Mexico led the way toward stronger private enterprise and more balanced economies. Brazil, Argentina and Venezuela are taking steps in that direction. As those countries open their securities markets, investors follow, chiefly through closed-end mutual funds.

With a closed-end mutual fund, money is raised just once, for investment in an ever-changing portfolio of securities. The fund trades like a stock. You buy shares through a stockbroker, not from the fund itself. Closed-end funds are attractively priced when you can buy at a considerable discount (10 percent or more) from the value of the securities in their portfolios.

The latest closed-end entry is the Latin America Investment Fund, brought out in July by Salomon Brothers. It will typically put 65 percent of its assets (or more) into Mexico, Chile and Brazil, and the rest into other Latin countries.

The 3-year-old Templeton Emerging Markets Fund, which invests Third World markets everywhere, recently raised its commitment to Latin American by about 5 percent, said its president, Mark Mobius, to a current total of 23 percent of assets. Mexico is Mobius' favorite country, followed by Turkey and Hong Kong.

The astonishing Mexico Fund is up 30 percent so far this year, reports Thomas J. Herzfeld Advisors, and not just on its oil advantage. Last year, the fund gained 111.6 percent, thanks in part to the Mexican President Carlos Salinas de Gortari, who leans more toward the free market than did his predecessors.

Since taking office in December 1988, Salinas has reduced inflation greatly, begun a program to close or make private hundreds of state businesses (including the telephone company and the national bank), given more responsibility to the private sector and is now hammering out a free-trade agreement with the United States.

In Chile, democratically elected President Patricio Aylwin is presiding over what the U.S. Department of Commerce calls "the most open market in Latin America." The Chile Fund had a great run earlier this year. But Chile depends heavily on imported oil. Partly because of the standoff with Iraq, the fund is down 8 percent for the year.


The Brazil Fund, run by the Boston mutual-fund group Scudder, Stevens & Clark, has had the wildest ride -- down 31 percent since January, compared with a 37.5 percent drop (in U.S. dollars) for the small Brazilian market as a whole.

Brazil's new president, Fernando Collor de Mello, is applying brute force to wrench his country away from hyperinflation and ++ stultifying state ownership. His risky anti-inflation enterprise has been endangered, however, by the Middle East crisis. Brazil is a heavy user of imported oil.

Nevertheless, the Brazil Fund appeals to Thomas Herzfeld, an expert on closed-end funds, because it's selling at such a big discount to the value of the securities in its portfolio (around 18 percent at the end of least week). He also likes Salomon's Latin America Investment Fund at a 19 percent discount. The latter fund, and Templeton Emerging Markets (at a 5.8 percent discount), carry the advantage of diversification.

Latin America won't clean up its act overnight. Furthermore, the growth economies depend heavily on the health of the United States. The risk of a U.S. recession helped knock the Mexican market down 15 percent in a week, says Javier Artigas, vice president of OBSA International, which manages the Mexico Fund.

Still, a lot of good assets south of the border are going cheap. A long-term investor should think about climbing aboard.