IA Latin America was one of the best places to be invested in recent years, with average returns of 16.4% and 23.2% in 2022 and 2023, respectively, making it the top-performing sector in each of those periods. But though funds in the mining-rich market were propelled to new heights amid a commodities supercycle, their soaring rally came to an abrupt end in 2024.
The past 12 months have been a very different story for Latin America funds, which plummeted 25% on average, making it the worst-performing category of last year. Investors consequently sold out of the sector en masse, with many seeking more diversified exposure to the asset class through broader IA Global Emerging Markets vehicles.
Yet investors’ lack of appetite for Latin America funds is not a recent phenomenon – the sector has been in structural decline for many years, according to Juliet Schooling Latter, research director at Chelsea Financial Services.
“There are not nearly as many Latin American funds as there used to be when I started my career.
Even then it was always deemed to be extremely high risk with high return potential,” she explains.
“It’s an area you can get quite right, but one you can get quite wrong. We would rather allocate somewhere with better visibility of returns. I wouldn’t say it’s uninvestable today, but I certainly don’t see any demand for Latin American product at all. The number of funds has dropped massively because most people would rather get their Latin America exposure now from global emerging markets funds.”
Terminal decline?
This diminishing demand from investors is evident in the outflows the category has suffered since launching from the IA Global and IA Specialist sectors four years ago. The combined assets under management have halved, from £426.5m at launch in 2021 to £208.3m by 2024. Likewise, the number of funds in the sector has almost halved, from 15 at launch in 2021 to eight today following several closures.
This drop in funds has placed the IA Latin America sector under review by the Investment Association’s Sectors Committee, which may result in its closure.
The IA told Portfolio Adviser: “The IA considers closing a sector when the number of funds populating it falls below 10 for an extended period. The IA typically consults the committee for its views on whether a sector is likely to see growth in the mid- to near term. If a sector is not viable and unlikely to see new fund launches, it may be closed.”
It wouldn’t be the first time the IA shuttered a sector for not containing enough constituents. It rolled the IA Japanese Smaller Companies category into IA Japan in 2023 when the number of funds fell to eight, which is higher than the number IA Latin America has currently.
The dwindling number of Latin America strategies has posed a predicament for the investment trust universe, too. The IT Latin America sector contained six trusts when it launched in 1999, but only one exists today – BlackRock Latin America.
Misleading benchmark
Yet the Association of Investment Companies (AIC) has no plans to close the sector. Communications director Annabel Brodie-Smith says that having a small sector, even if it contains just one constituent, makes more sense than comparing it against a peer group that has an entirely different investment universe.
“It’s been an area where there hasn’t been much demand, to put it bluntly. There really hasn’t been much interest from investors, and while there used to be quite a lot of companies, that has dwindled.
“There is now only one Latin American trust in the whole investment trust universe,” Brodie-Smith explains.
“But it would be misleading for investors if that was put in another sector because if it’s invested in something completely different, then it’s not comparable with its peers. That one Latin America trust would not be comparable to the emerging markets sector. Even if it’s one unique trust and it has a unique remit, we need to set up its own comparable sector.”
And that’s exactly what the AIC has had to do for niche trusts in the past. When the Foresight Sustainable Forestry trust listed in 2021, the trade body set up the IT Forestry and Timber sector to house it, just so it wasn’t being benchmarked against an inaccurate sector average.
Regardless of the debate around sector size, Brodie-Smith notes the overall trend of Latin America strategies closing and no new launches on the horizon reveals a lot about investors’ interest in the asset class.
“It is a strong reflection of demand for the region because the thing with investment trusts is if there is not sufficient shareholder demand, then that trust is likely to be wound up. They exist to deliver for shareholders, so if that demand isn’t there then it will go away.”
This article originally appeared in the March issue of Portfolio Adviser magazine