BlackRock’s Latin American specialist Will Landers has been a standout name in emerging market equities for some time but recent performance has been a distinctly mixed bag for the Citywire Euro Stars A-rated manager.
Landers’ small and mid-cap BSF Latin American Opportunities fund has continued to excel, returning almost 48% in the five years to the end of December, against the MSCI EM Latin America TR USD return of 0.62%.
Over three years, it has returned 21.2% compared with the benchmark’s 3.7%, and outperformance continued in 2012, with the fund gaining 17.4%, almost double the benchmark’s 8.9%.
Performance has been driven by stock selection across all countries in the region, with contributions ranging from Brazilian retail stocks, Mexican consumer and industrial stocks and Central-American airlines.
So far so good, but Landers’ continuing success in picking small and mid-cap winners has not been so easily replicated on his large-cap focused flagship fund BGF Latin American.
The $4.5 billion heavyweight has struggled and is now behind the index over five years, posting -6.6% compared to the modest 0.6% gain by the latter to the end of December.
After a decent 2010, the fund fell behind the index in 2011, and lost further ground in 2012. The key drag was its overweight stance to the Brazilian large caps that dominate the index as Mexico outperformed its larger peer.
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Landers admits that it was more a case of ‘how small he could take his holdings’ in the large-cap fund last year as small and mid-caps enjoyed a stronger relative run.
The fact that his UK-domiciled Latin American investment trust outperformed its index slightly in 2012 was partly due to the fact it could be more flexible with its companies and moved down the market cap spectrum.
Landers told Citywire Global: ‘While the BGF Latin America fund underperformed its benchmark slightly last year, the investment trust actually beat it by approximately 200 basis points. It was a question of how small one could get with a portfolio, especially in Brazil, but also in Mexico to a lesser extent.’
Underperforming stock picks
Despite large caps generally underperforming the overall index Landers admits that some of his key stock picks also dampened returns.
A core position in Brazil’s Banco Itau is a case in point. At the end of December the bank was the fund’s fifth largest holding, making up 5.4%.
Landers says the bank was caught out in the first half of 2012 by a rash of defaults particularly from the autos sector and moves from the Brazilian government to lower spreads across some products. This led Landers to go underweight the stock in the first half of the year, before gradually building the position back up again.
Another underperformer last year was Brazilian private oil and gas exploration company OGX which failed to deliver on its stated production targets and then endured sustained share price falls.
Landers acted swiftly by removing what had been a core holding from the portfolio. He is also now wary on the whole exploration sector as OGX was not the only company in the sector to miss production targets.
‘We removed OGX and virtually all other exploration companies from the portfolio and are in no hurry to bring them back until they can prove their ability to move from project to operating entities.’
Despite these issues, Landers is optimistic that, as long as bad news emanating from the US fiscal cliff, Europe and China does not overshadow markets, Brazil’s large caps can bounce back in 2013.
‘I do think it will be very much more stock specific as to which stocks do well during 2013. Assuming more “normal” newsflow from the US and Europe, Latin American stocks can then trade on their own merit, and stock picking will be key.
‘With growth rebounding in the Brazilian economy, the prospects for government interference in the private sector should also fall, which will be good for many stocks in the large-cap universe.’
He has half the index weighting to Chile, a market he describes as both expensive and illiquid, but he is positive on the cheap relative valuation of the overall Brazilian market, which is trading on 10.5 x 2013 earnings, compared to Mexico’s 16 x earnings.
Mexico outshone its larger peer in 2012 and Landers expects the latter to close the valuation gap this year.
He took advantage of weakness in the fourth quarter to ramp up his exposure to Brazilian mining giant Vale, taking profits out of state-owned oil & gas group Petrobras, which is now an underweight.
Vale had been taken to a neutral weighting earlier in 2012 before being moved back to an overweight by the end of the year.
Vale now makes up around 9.5% of the fund, and Landers is encouraged by some early success in the first few days of 2013 as operating improvements made by its new management and an anticipated early year rise in the demand for iron ore has been borne out.
‘We entered 2013 believing there was a short-term chance for outperformance from a higher iron ore price which is playing true currently. On a more medium-term view, we believe the new administration, now in place for just over a year, is implementing stricter controls over capital expenditure and the company’s overall strategic focus. I think this will be most welcome by global mining investors.’
BGF Latin America: then and now
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|Cyrela Brazil Realty||2.43%||Ambev||3.92%|
While Landers is staying away from credit card firms, Brazil’s largest banks, Banco Bradesco and Banco Itau have been increased to 6.5% and 5% of the fund respectively and Landers is expecting a renewed focus on Brazil’s domestic consumption story to help boost returns in 2013.
‘The asset quality of Brazil’s banks has been improving and we expect them to grow their loan books faster as interest rates continue to come down.
‘Bradesco is our favourite Brazilian bank as it is growing faster than the competition among private banks, with better asset quality, and it is not impacted by bad loans to the auto sector.’
Another key potential growth area for Landers is infrastructure, and he has made a top 10 position in Brazilian toll road operator CCR his largest overweight.
‘We continue to like CCR as our favoured stock among infrastructure plays in Brazil. The company remains very disciplined with its acquisition strategy while managing a current portfolio of assets effectively and generating significant cash.’
Landers also has high hopes this year for Mexico’s TV firm Televisa which he tips to benefit from strong growth in pay TV and broadband access.
Despite remaining overweight Brazil with 65% of the portfolio in the country compared with the benchmark’s 57.5%, Landers continues to avoid certain sectors with specific structural problems.
‘We are still staying away from steelmakers and remain wary about telcos as they face a tough regulatory environment. We prefer to play this theme through American Movil,’ says Landers, speaking of his second largest holding in Mexico.
He has been reducing the Mexican mobile phone group recently after a strong run, and is looking to increase his industrials exposure which he sees as more liquid.
Matt Goodburn, Investment Editor
Despite recent underperformance on the large-cap fund, Landers’ strong outperformance on his small and mid-cap version has been impressive enough to gain him an A rating and a Manager Ratio of 0.56, showing he has plenty to offer as a Latin American specialist. While he was hurt by his overweight to Brazil’s large caps last year he was also let down by a handful of individual stock selections. He is hoping for a less volatile year where macro news does not dominate local markets and is positioning to take advantage of a renewed focus on Brazil’s growing consumer demand story. After poor performance by Brazil’s largest companies last year, any reversion to the long-term mean should also help him recover lost ground this year, as would continued strong performance from his largest holding Vale. Early signs are encouraging.
This article originally appeared in the February issue of Citywire Global magazine