Without a doubt, Brazil and Mexico appeared to be the favoured markets for fund managers investing in Latin America in the past year. However, despite a similar trend in asset allocation decisions, the wide spread in performance figures implies that the Latin American markets rewarded funds that took more of a bottom-up approach. Genesis Investment Management's Condor Fund applied this strategy and whilst its allocation to the two markets was modest, with 23.2% allocated to Brazil and 11.1% to Mexico, it performed the best overall returning 20.84% over the 12-month period to March 3, 1998.

The Condor Fund is a closed-end Guernsey investment company, which, according to its January performance report, regards stock selection as critical to the process of successful investment in the region, as the various countries go through the process of reform with different degrees of success". Specifically the fund attempts to identify those companies that are beneficiaries of structural economic reforms directed towards opening up economies, increasing competition and eliminating state interference in business.

Three of the seven funds Morgan Stanley runs in Latin America are rated in the top ten (see table) with the highest performer returning 14.44% last year and the lowest 12.89%. The $600m funds share the same asset allocation model, and strategy which is to combine both a top-down and bottom-up analysis and aims to invest in countries with improving macro fundamentals, and companies experiencing accelerating earnings growth.

Having identified businesses benefiting from the privatisation wave sweeping the Brazilian market, notably its telecoms industry, a staggering 50% of the funds' portfolio has been ploughed into that market. The telecoms sector is underpenetrated with approximately 10 telephone lines per 100 inhabitants, compared to a US ratio of around 60. As a result the fund believes a real explosion in earnings growth will result from good private management in the first few years after privatisation.

The remainder of the funds' allocation is split between Mexico (25%), Argentina (9%), and Chile (7%), Peru, Venezuela, and Columbia and cash (9%). Unlike some of its fellow fund managers, Morgan Stanley, though investing an apparently large portion of its portfolio in one market, is actually underweight in Mexico and remains cautious despite fair GDP growth expectations for 1998 of 5%. However the fund has identified the growth areas as consumer product manufacturers, which have enjoyed an earnings acceleration thanks to Mexican consumers "benefiting from real wage growth for the first time in many years," says Andrew Skov, fund manager at Morgan Stanley in New York. The fund has traditionally been underweight in Chile, which has the most expensive companies and "relatively lacklustre earnings growth", but earlier in 1998 adjusted weighting in its favour. Skov reasons that Chile's currency concerns last year had brought up "compelling valuations", on certain stocks.

Adding weight to a popular and current theme that smaller funds tend to outperform their larger peers, the $3.7m BanesFondo International 1992 Discovery Fund run by Banco Espanol de Credito (Banesto) was the smallest fund in the top 20, ranked fifth, returning 15.97%. Domiciled in Luxembourg, the Sicav fund owes its performance to its faith in Mexico in 1997, where it dedicated the majority of its assets. "The country with less risk if you take into account the Asian crisis," says Manuel Sanchez, the fund's manager at Banesto in Madrid. "For me it was the best pick." The fund implements a strategy that has an exposure which is linked closely to economic fundamentals, trying to perform in sectors Sanchez considers to be the players in the growth of the economies, who are "contributing to the restructuring and modernisation and liberalisation of the economies," he says.

Mexico is continuing to recover from the Tequila crisis, and the fund sees very good management of a lot of companies with a huge exposure with "a leverage effect to any growth in the economy", says Sanchez. His confidence is amplified by the effect of huge restructuring, with the guarantee of international supervision from the IMF and the US also watching the market closely. In other markets, the fund holds Brazil as its second favourite, based again on the privatisation effect. And while Argentina has been experiencing some impressive growth, the fund is veering away from that market for the time being as it is negative on the last movement in terms of taxes in Argentina last year. "I think we will be concentrating in Brazil and Mexico and marginally in all the stocks in other countries," he confirms, adding "I like some banks in Colombia, some utilities in other countries, where I can see some value there."

While Bankers Trust Fund Managers has a fair representation in the top performing funds league table, its policy was adamantly cautious, holding a high level of cash last year only returning 11.22% and 10.76%.

The BT GAF Latin American Equity Fund is a sub fund of the Global Asset Funds Umbrella UCITS and at the time the Asian crisis hit, the fund held about 21.9% of its portfolio in cash. Since then the fund has been very selective in its buying decisions rather than sticking with market allocations.

However the firm favourite at the moment, not surprisingly, is Brazil with 36.5% of assets allocated to the market.

"We think there are some good stock stories there," says Nick Lister, fund manager at Bankers Trust in London. Again, the telecoms sector is favoured, specifically Telebras, the Brazilian holding company of all the telecom companies which will be further privatised this year. "It could be a fantastic story," he says. The same story applies to Mexico which has the second highest weighting of 32% and the fund's success story for 1998 is Telmex, which is making inroads in the increasingly competitive cellular market."

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