Fund Update Invesco Latin American Fund (UK)
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Fund Update
Invesco Latin American Fund (UK)
July 2021 (covering the three months ending 30 June 2021)
This document is for Professional Clients only and is not for consumer use. Investors should read the legal
documents prior to investing.
Summary real has had room to recover some of last year’s lost
ground.
• Led by a strong return from Brazilian equities and Part of the rally in Brazil’s currency may also be attributed
currency, Latin American equities were the best- to a change in rate differentials. While developed world
performing region in the world in the second central banks wonder when they might start to think about
quarter, bouncing back after a difficult start to the raising rates, Brazil, along with several other emerging
year. markets, have moved more quickly to dampen inflationary
• Boosted by positions in cyclical sectors such as pressures before they build further. Between March and
materials, banks, and consumer discretionary, the June, Brazil’s central bank thrice lifted interest rates by 75
Invesco Latin American Fund (UK) outperformed bps to bring the benchmark SELIC target rate from a
its index during the quarter. record-low 2.0% to 4.25%. More rate hikes seem likely in
the coming months.
• The fund strategy is to pursue the optimal balance
of risk and reward according to where we see Mexico’s equity market and currency also strengthened
value in the region. This led to some repositioning during the quarter, with the MSCI country index returning
during the quarter. We trimmed back some over 8% in US dollar terms. For Mexican markets, the key
cyclical positions and increased the fund’s event in the quarter was the midterm elections in June,
exposure to Chile, where we think recent which resulted in something of a stalemate. The ruling
Morena coalition did particularly well in several
drawdowns have created compelling valuation
gubernatorial races and retained their majority in the
opportunities in a country that we believe has
Chamber of Deputies. However, they lost the two-thirds
among the best economic prospects in the region.
majority that would be necessary to make constitutional
amendments, and this should reduce the scope for
Market and economic review Morena to carry out radical changes that could spook the
After a difficult start to the year for Latin American market.
equities, the region’s bourses bounced back in the second
Political developments were less positive in the smaller
quarter and emerged as the best performing region in the
Andean countries of Chile and Peru, with the MSCI
world over the period, with the MSCI regional index rising
country indices suffering negative returns in the quarter.
by 13.8%. Virus outbreaks began to ease in many
MSCI Chile fell 14.6% in the quarter as investors fretted
countries, and even though vaccination programs still lag
over a political climate that has shifted leftward over the
progress in the US and Europe, Latin America’s
past year and a half. As the country plans to re-write its
populations are learning how best to live with the virus
constitution, a vote for delegates to the upcoming
while still going about their daily lives. This is making the
constitutional convention did not provide as many market-
economy more resilient against the pandemic.
friendly representatives as many investors had hoped.
Brazilian equities had a particularly strong quarter, with Meanwhile, a presidential election looms in November that
the MSCI country index gaining over 21% in US dollar seems likely to remove the ruling centre-right government
terms, helped by a strengthening Brazilian real that went from power.
from over 5.60 BRL/USD at the start of the quarter to less
Peru held its presidential election in the second quarter,
than 5.00 BRL/USD at the end. The real had been one of
resulting in a narrow victory for Pedro Castillo, a union
the most depreciated currencies globally since the
leader who ran under the banner of the left-wing Free
emergence of Covid-19 and the Brazilian government’s
Peru party. This victory for the left contributed to a 9%
decision – despite pre-existing concerns about fiscal
decline in the MSCI country index during the quarter.
sustainability – to use even more fiscal stimulus to support
While Mr Castillo has moderated much of his rhetoric
the economy through the pandemic. However, with some
since the election, investors await more certainty that he
of those temporary fiscal supports being withdrawn, and a
won’t seek to nationalise industries or take other steps
strong commodity environment boosting government
that could damage the investment climate in what has
coffers, the fiscal position has eased somewhat and the
been one of the best economic growth stories in the
region over the past two decades.
1Fund Update
Invesco Latin American Fund (UK)
July 2021 (covering the three months ending 30 June 2021)
This document is for Professional Clients only and is not for consumer use. Investors should read the legal
documents prior to investing.
combined with undervalued currencies has greatly
Fund performance* enhanced the prospects for future cash flow generation for
The fund gained 17.4% during the three-month period to many companies in the portfolio. This includes miners like
the end of June 2021 versus a 16.8% return for the Vale and Ero Copper, steel producers like Gerdau, and
benchmark MSCI Emerging Markets Latin America Index gold and silver streaming companies like Wheaton
GBP (net total return). Precious Metals.
Performance (% growth) * The fund also has significant exposure to banks across
the region, and these holdings provided further positive
Fund Benchmark
contribution to both absolute and relative returns. Banks in
2020 -19.7 -16.6 both Mexico and Brazil rallied on signs that economic
2019 16.3 13.8 activity is starting to pick up in both countries after
pandemic-induced recessions, while asset quality issues
2018 -2.1 -2.4
that were much feared a few months ago have not
2017 7.6 12.3 materialised. The one drag on performance among banks
2016 46.3 61.0 came from Credicorp, the fund’s one holding in Peru,
which suffered following the apparent victory of a left-wing
3 months 17.4 16.8
populist in the country’s presidential election.
6 months 7.6 7.9
Consumer discretionary stocks, particularly in Brazil, also
1 year 30.3 28.8
helped the fund’s performance, driven by expectations
3 years 9.3 13.4 around economic reopening as vaccine campaigns started
5 years 18.8 35.5 to make better headway. Apparel retailer C&A Modas and
Arcos Dorados, which holds the master franchise for
McDonald’s across most of Latin America, both performed
Standardised rolling 12-month performance (%
well in the second quarter. Alpargatas, owner of the
growth) havaianas flipflop brand, also reached a new all-time high
30.06.16 30.06.17 30.06.18 30.06.19 30.06.20 in the quarter as management continue to develop the
30.06.17 30.06.18 30.06.19 30.06.20 30.06.21 potential for havaianas to become a truly global brand.
Fund 14.0 -4.6 22.5 -31.5 30.3 The biggest detractor from performance at the sector level
21.4 -1.7 24.1 -29.0 28.8 was the fund’s underweight position in energy during a
Benchmark quarter when the price of West Texas Intermediate crude
rose by over 20%. While a rising oil price is good news for
This information is updated on a calendar quarterly basis. future operating cash flows in this sector, we remain
Up-to-date information is available on our website concerned about governance and capital allocation
www.invesco.co.uk decisions at the national oil companies that comprise most
Past performance is not a guide to future returns* of the benchmark’s exposure to energy. Moreover, we
believe the oil price could be vulnerable to the outcome of
political machinations within OPEC that are difficult to
At the country level, the fund’s absolute performance was
driven mostly by the strong rally in Brazil. However, most predict.
of the fund’s performance relative to the benchmark came
from its overweight position and stock selection in Mexico, Strategy and outlook
as well as an underweight position in Chile that saw its
Latin American equities represent a compelling value
currency suffer from a perceived rise in political
opportunity in comparison with the region’s own history as
uncertainty during the quarter.
well as in comparison with other regions of the world.
The fund’s overweight position in materials was a strong According to data from JPMorgan, Latin American equities
contributor to both absolute returns as well as relative to ended the quarter trading on 10.9x consensus 12-month
the benchmark. A strong commodity price backdrop forward price-earnings, below its 15-year average of
2Fund Update
Invesco Latin American Fund (UK)
July 2021 (covering the three months ending 30 June 2021)
This document is for Professional Clients only and is not for consumer use. Investors should read the legal
documents prior to investing.
12.1x. This also leaves the region on a substantial Brasil, a state-controlled bank that should trade on a
discount to Emerging Markets that currently trade on discount to its private sector peers, but trading on 0.6x
14.1x, Europe trading on 16.5x, and the US trading on book value is simply far too undervalued. Elsewhere in the
22.5x. region, we trimmed back our position in Peruvian bank
Credicorp in advance of the country’s presidential
These valuations in Latin America come after a election and the risk of an adverse outcome (which in the
challenging decade of low commodity prices, weak event did lead to a sizable downdraft in Credicorp’s
economic growth, depreciating currencies, and volatile shares).
politics. However, we believe Latin America is set for a
better decade ahead. The region is likely to be buoyed by Recent weakness in the Chilean market has resulted from
a combination of strong commodity prices, currencies that a combination of political uncertainties in an election year
generally look undervalued in terms of their purchasing as well as changes to the structure of domestic pension
power, and the likelihood of a weaker US dollar – usually funds that have historically supported the local market.
a helpful backdrop for emerging market equities – as a However, this has created an opportunity for us to close a
result of the remarkably easy fiscal and monetary policy in longstanding underweight position in Chilean equities. We
the United States that has become even more pronounced did this in the second quarter by adding on weakness to
in the wake of the pandemic. existing holdings such as the winery Concha y Toro and
the utility Enel Chile. Additionally, we added a new stock
Part of the reason for the low price-earnings multiples in that we have followed for some time where the valuation
Latin America is the significant exposure within the region became highly compelling.
to highly cyclical sectors that have had a difficult decade
and have fallen out of favour with investors. Both the Coca-Cola Andina was the one new addition to the fund
materials and banks sectors are cases in point. We find in the quarter. This Santiago-listed bottler holds the
many companies in each of these sectors where share license to distribute Coca-Cola branded products in its
prices do not adequately reflect the future cash flows that home country of Chile as well as in parts of Brazil,
these businesses are likely to generate. As a result, these Argentina, and Paraguay. While currency headwinds have
sectors remain well-represented within the fund. diminished earnings growth in recent years, we think the
market has priced in virtually no future earnings growth
Fund Positioning into the shares. Trading on less than 6x 12-month forward
That said, the strength in these cyclical sectors during the EV/EBITDA, Andina is among the cheapest listed Coke
second quarter provided an opportunity to trim back bottlers in the world. Moreover, we think Andina’s
positions in some stocks where the return potential management is engaged in a series of initiatives – from
became less attractive due to higher share prices. So, for digitising its distribution channel to partnering with beer
example, we trimmed back the position in iron ore giant giant Ambev to distribute beer on its trucks in Chile (a
Vale as the shares rallied as the iron ore price moved partnership that is proving beneficial to both companies) –
above $200/tonne. While Vale will be generating that are likely to boost earnings in the years to come.
tremendous cash flows at this iron ore price, we believe it
is unsustainable and are concerned that the downward In summary, after a difficult decade and a woeful
correction in the price – when it comes – could weigh on experience with the Covid-19 pandemic, Latin America is
Vale shares. starting to bounce back. Moreover, we believe the market
is potentially underestimating the pace of earnings
recovery in the years to come. Regional equity markets
Similarly, we trimmed back some of our positions in banks
present many compelling valuation opportunities for
as share prices rose during the quarter. We reduced our
investors to pursue, and we will continue to focus on
positions in two large Brazilian banks, Itau and Bradesco,
seeking out the best risk-adjusted returns that we can find
which traded on a substantial premium to their book value. in the region.
However, we recycled part of the proceeds into Banco do
3Fund Update
Invesco Latin American Fund (UK)
July 2021 (covering the three months ending 30 June 2021)
This document is for Professional Clients only and is not for consumer use. Investors should read the legal
documents prior to investing.
Geographic breakdown (%) * Top 10 stock holdings (%) *
Country Fund Benchmark Difference Fund
Argentina 0.0 1.6 -1.6 Vale 9.8
Brazil 65.5 66.5 -1.0 Banco Bradesco 6.9
Canada 1.8 0.0 1.8 Itau Unibanco 5.9
Chile 5.2 5.5 -0.3 Petrobras 5.2
Colombia 0.0 1.8 -1.8 FEMSA 4.1
Mexico 24.4 22.3 2.1 Suzano 3.6
Panama 0.8 0.0 0.8 Telefonica Brasil 3.4
Peru 2.0 2.3 -0.3 Wal-Mart de Mexico 3.3
Grupo Financiero Banorte 3.2
Sub-sector breakdown (%) * Bradespar 3.1
Fund Benchmark Difference
Most overweight
Banks 23.7 18.7 5.0
Food Beverage & 11.6 8.5 3.1
Tobacco
Consumer Durables 2.5 0.3 2.2
& Apparel
Consumer Services 1.5 0.0 1.5
Materials 26.6 25.1 1.5
Most underweight
Energy 5.2 9.8 -4.6
Diversified Financials 0.0 4.3 -4.3
Health Care 0.0 2.3 -2.3
Equipment &
Services
Household & 0.0 1.9 -1.9
Personal Products
Media & 0.0 1.2 -1.2
Entertainment
4Fund Update
Invesco Latin American Fund (UK)
July 2021 (covering the three months ending 30 June 2021)
This document is for Professional Clients only and is not for consumer use. Investors should read the legal
documents prior to investing.
Investment risks Where individuals or the business have expressed
The value of investments and any income will fluctuate opinions, they are based on current market conditions,
(this may partly be the result of exchange-rate they may differ from those of other investment
fluctuations) and investors may not get back the full professionals and are subject to change without notice.
amount invested.
This document is marketing material and is not intended
The fund invests in emerging and developing markets, as a recommendation to invest in any particular asset
where there is potential for a decrease in market liquidity, class, security or strategy. Regulatory requirements that
which may mean that it is not easy to buy or sell require impartiality of investment/investment strategy
securities. There may also be difficulties in dealing and recommendations are therefore not applicable nor are any
settlement, and custody problems could arise. Although prohibitions to trade before publication. The information
the fund does not actively pursue a concentrated portfolio, provided is for illustrative purposes only, it should not be
it may have a concentrated number of holdings on relied upon as recommendations to buy or sell securities.
occasions. Accordingly, the fund may carry a higher
degree of risk than a fund which invests in a broader For the most up to date information on our funds, please
range of companies or takes smaller positions in a refer to the relevant fund and share class-specific Key
relatively large number of holdings. Investor Information Documents, the Supplementary
The fund may use derivatives (complex instruments) in an Information Document, the Annual or Interim Reports and
attempt to reduce the overall risk of its investments, the Prospectus, which are available using the contact
reduce the costs of investing and/or generate additional details shown.
capital or income, although this may not be achieved. The
use of such complex instruments may result in greater Issued by Invesco Fund Managers Limited, Perpetual
fluctuations of the value of the fund. The Manager, Park, Perpetual Park Drive, Henley on Thames,
however, will ensure that the use of derivatives within the Oxfordshire RG9 1HH, UK. Authorised and regulated by
fund does not materially alter the overall risk profile of the the Financial Conduct Authority.
fund.
EMEA 5577/2021
Important information:
*All data is as at 30 June 2021, sourced from Invesco
unless otherwise stated. Fund and benchmark
performance data is sourced from Lipper. Fund
performance is in Sterling, inclusive of income reinvested
and net of the Ongoing Charge and portfolio transaction
costs to date shown. Fund performance figures are based
on the Z accumulation share class. Performance figures
for all share classes can be found in the relevant Key
Investor Information Document. The benchmark is the
MSCI Emerging Markets Latin America Index GBP (net
total return). Given its geographic focus the fund’s
performance can be compared against the benchmark.
However, the fund is actively managed and is not
constrained by any benchmark. MSCI Emerging Markets
Latin America Index information is sourced from Refinitiv,
total return, Sterling.
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