Our View On-the-Ground

Latin America is a mosaic of unique cultures, economies, and societies guided by an assortment of leaders and governments.

For those who live outside of the region that stretches from the southern border of the U.S. to Cape Horn, there’s a tendency to limit investment considerations to the countries with the largest stature—Brazil, Mexico, and Argentina. Especially among U.S.-based mutual fund and ETF companies.

But Latin America is far more dynamic beyond those three anchors, and in many ways, the differences and nuances are only evident to those born and raised in Central and South America.

With regard to investments, that depth of localized knowledge can lead to ideas and returns rooted in companies far from the biggest names in the biggest countries. That is, companies with stock that isn’t available via American Depository Receipts (ADRs), but possess promising, durable growth prospects.

Our name, OTG, stands for On the Ground, which defines the way we do business. Based in Bolivia, our entire investment team was born and raised in this part of the world, and prides itself on using that to our advantage in investing in Latin America.

Non-U.S.-Centric Perspectives

Many U.S.-based mutual fund and ETF companies offer Latin American investment options, featuring ADRs and perhaps a handful of local issues that survived the scrutiny of investment committees in the U.S. Sometimes, the ideas originate from analysts stationed in small satellite offices in select capital cities around the region.

That’s the developed market lens to investing in emerging markets. And it opens numerous opportunities for investment managers rooted in the region who have deep relationships with an established network of local experts and security analysts throughout Latin America. Key connections that:

• Highlight economic, industry, and company opportunities in a broad cross-section of markets
• Provide insights into evolving challenges and issues
• Present the interplay of sectors, asset classes, and currencies against the broader backdrop

Such knowledge provides a firm foundation for the due diligence required on any potential investment, especially as conditions constantly shift and change.

Accustomed to Navigating the Ebbs and Flows

Some of the best market intelligence comes from face-to-face meetings with analysts and management teams from across the region. Our team finds exceptional value in an annual conference that bolsters our emphasis on Chile, Peru, and Colombia by allowing for hour-long one-on-one meetings with multiple CFOs and other company executives, as well as industry peers with similar perspectives on the region.

To the outsider, investing in Latin America may seem precarious, with periodic political upheaval and the resulting impacts driving risk levels higher.

That’s fair. To a point.

Experienced investors born and raised in the region have lived through many cycles of volatility and recovery. Hyper-inflation. Restrictive monetary policies. Political currents that can lead to rapid changes governments, although those tend to reflect broader preferences that swing from right wing thinking to leftist leadership and back again (presently, the pendulum resides left-of-center).

It’s a very dynamic environment, but there are always companies that do well not matter who’s in charge. Regardless of the political leanings of the government, consumers still behave in ways that support constructive GDP growth. It may be in different proportions than developed nations, but there will always be economic activity within the region that benefits select companies.

And so, investment success comes down to choosing the right companies.

A Sampling of Current and Potential Investments

For many investors, initial thoughts on possible Latin American investment opportunities go right to the materials and energy sectors.

That’s a reasonable response, given the vast natural resources in the region.

But a well-diversified portfolio steps beyond the obvious to pull in solidly performing companies that are not only thriving in different sectors, but serve a local clientele and are therefore not reliant on the twists and turns of the global commodity markets.

For example, companies around the region that have proved compelling of late include:

Ferreyros—A leading heavy machinery supplier in Peru, selling Caterpillar trucks and equipment into the mining, construction, aggregates, and agriculture industries, among others. The company’s top-line resilience validates its “harvest” thesis around parts and services, which favors sales growth and improving operational profitability. Ferreyros’ healthy leverage levels also suggest it will be able to further support attractive dividend distributions.

Gentera—A Mexico-based financial services provider serving 4 million customers in Mexico and Peru. It has a proven record of execution amid uncertainty and while profitability has lagged of late, Peru is becoming a tailwind. Efficiency gains driven by digitalization are also surfacing for Gentera.

Grupo Comercial Chedraui—A diversified company based in Mexico that operates warehouse-style retail stores that offer groceries, apparel, household appliances, and furniture; develops shopping centers; runs a freight company; and owns a chain of bakeries. Its 800-plus retail sites are split between Mexico and border states in the Southwest U.S.

SQM—One of Chile’s two companies that mine lithium, a key component in electric vehicle batteries. Although the commodity markets can be volatile, our view on lithium prices remains constructive and we are heartened by the company’s aggressive expansion plan. Separately, the company has benefited from the government’s insistence that it will not nationalize the country’s lithium industry, as well as a persistent rally in iodine prices, as SQM is one of the world’s largest producers of iodine.

SMU—The only supermarket company with stores in all 16 regions of Chile. It currently operates more than 500 retail groceries in Chile, where it’s based, and has a growing presence in Peru through two business lines. Its overall 2024 growth plans include 19 new stores in Chile and five new locations in Peru.

Don’t Underestimate the Currency Effect

Regardless of the sector, analysis of any company in Latin America doesn’t stop at an assessment of the business strategy, growth potential, and financials.

Even if a firm seems like the right fit, investors must account for how currencies:

• Are trending in the company’s home country.
• Are acting in any country where the company does business.
• Are impacted by monetary policies—both at home and elsewhere.
• Are affected by political developments, including elections.
• Are influenced by China’s growing interest in the region.

Ultimately, currencies in Latin America are best viewed as a type of asset class: When one is running high, it’s time to be cautious as they have a tendency to drop, but when one’s trading lower, there could be some potential for enhanced gains.

And it’s not as simple as placing a few hedges to offset potentially dramatic moves. Precise timing is critical and the complexities frequently add up to considerable costs.

At OTG, hedges aren’t currently part of our investment strategy. We’ve explored certain maneuvers and will likely implement hedges at some point in the future, but for now, we’re relying on daily monitoring, which is made easier by our local vantage point.

On the Ground Expertise an Asset

Admittedly, we’re biased, but we believe in the promise of Latin America, where more people are getting an education and expanding their exposure to banking and other financial services. That translates into solid economic prospects that will continue to support the evolution and growth of the companies in which we invest.

Even with that, an active approach is essential in this region—it’s not a space where you put your funds and walk away for 10 years. Given the tendency toward volatility, you take gains when you get them, which may mean you don’t wait for your target price.

Such a tactical mindset allows for nimbleness between companies, countries, and currencies, and tends to reward the localized knowledge we thrive on and the creativity we weave throughout our investment decisions.

*Fund holdings and/or sector allocations are subject to change. Please click here for the current top ten holdings of the fund