The Wall Street Journal-20080130-Latin American Funds Begin to Cool

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Latin American Funds Begin to Cool

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Mutual funds investing in Latin American stocks were the darlings for most of 2007, averaged returns of 46%, compared with 5.5% for the Standard & Poor's 500 index, according to investment-research firm Morningstar Inc.

But late last year and so far this year, market volatility has delivered a cold blast of reality -- Latin American funds have lost about 7.9% this year through Jan. 28, compared with the 7.7% decline in the S&P 500 index, Morningstar said.

So much for decoupling.

It isn't only Latin America funds that have taken a hit; emerging markets in general are off, and Latin America equity funds are standing up better than some regional funds.

Some investors are voting with their feet. Globally, outflows from all four of the major emerging-markets equity-fund groups set records in dollar terms during the week ending Jan. 23, said EPFR Global, which tracks fund flows to financial institutions around the world. Globally, investors pulled $1 billion out of Latin American equity funds in the period, EPFR Global said.

The downturn may prove to be a great opportunity for those with a longer-term horizon. While fund managers are generally more cautious now on Latin America than they were a few years ago, the region still holds a lot of promise, they say.

Latin America funds can be extremely volatile, and are generally even more concentrated than an Asia fund because Brazil and Mexico dominate the investment universe, said Bill Rocco, a senior analyst at Morningstar.