Latin America’s only local-currency corporate-debt fund, run by Chile’s Moneda Asset Management SA, increased its exposure to Mexico on a bet the country’s economy will outperform the region.
The fund has about 40 percent of its $380 million of holdings invested in corporate bonds and loans denominated in Mexican pesos, up from 30 percent at the beginning of last year, Javier Montero, one of the fund’s managers, said in an interview at the company’s headquarters in Santiago. Twenty-five percent of the fund is invested in corporate debt denominated in Brazilian reais and 12 percent in Colombian pesos.
Mexico’s currency posted the smallest decline against the dollar in the past 12 months among the six most-traded Latin American currencies, according to data compiled by Bloomberg. It fell 5.7 percent through yesterday, compared with declines of 7.1 percent for the Colombian peso, 11 percent for the Brazilian real and 14 percent for the Chilean Peso. Mexico’s currency is less affected by falling commodity prices than those of other Latin American nations, and that should help increase returns, Montero said.
“Mexico has good prospects with its new president, structural reforms on the way, a high dependency on the economy of the United States, which is growing, and productivity,” Montero said. “The risk is in the small print of the reforms for Mexico, how they are implemented and when they will bring benefits.”
Mexico has been changing laws to open the oil industry to new investors and allow private companies to compete with state-owned firms on exploration projects and the installation of new electrical capacity. In his first full year in office, President Enrique Pena Nieto signed at least 10 constitutional amendments, including one aimed at boosting competition in the telecommunications industry.
As part of a revamp of the nation’s bankruptcy laws, Mexico also eliminated a loophole that had allowed companies to dictate restructuring terms to investors.
A reduction in the U.S. Federal Reserve’s stimulus program and the economic slowdown in China are “the main threats for other Latin American nations,” according to Montero.
Moneda, with $5 billion under management, said its Latin American Local Currency Debt fund, created in 2009, had a net inflow of $80 million last year. A second fund, the Moneda Latin America Debt fund, which invests in high-yield dollar bonds, had $200 million in inflows, which brought total assets at $1.4 billion, he said. That fund posted the best performance among emerging-market funds in the past 10 years, data compiled by Bloomberg show.
The local currency fund had a negative return of 4.5 percent in dollar terms last year, because of the depreciation of Latin American currencies, he said. Since its creation, the fund returned 9.9 percent a year on average in dollar terms and 11 percent in Chilean pesos, he said.
The high-yield dollar-bond fund returned 13.4 percent on an annual basis in the past 10 years, compared with the 9.1 percent gain for the Bank of America Merrill Lynch High-Yield Latin American Emerging Markets Corporate Plus Index. Last year, it returned 13.4 percent, while the BofA benchmark fell 7 percent after defaults such as OGX Petroleo e Gas Participacoes SA, now called Oleo e Gas Participacoes SA. The oil and gas company had $3.6 billion in international bonds, the biggest ever corporate default in Latin America.
Moneda’s Latin America high-yield fund can have as much as 15 percent of its total assets invested in distressed bonds, Montero said. “High-yield companies can eventually default,” he said.
“Historically the minimum price of a bond is on average between 90 days before and 90 days after the company falls into non-payment,” he said, adding that Moneda sometimes buys distressed bonds in this period.
Moneda’s holdings include Banco Cruzeiro do Sul SA, the Brazilian lender liquidated in 2012, and a “very small” position in Oleo e Gas Participacoes SA’s defaulted bonds.
Prospects for this year are good, according to Montero, because fewer companies will default, new debt sales will be smaller than many analysts forecast and yields will rise in most industries.