RNS Number:7471U
Deutsche Latin American Cos Tst PLC
28 January 2004
Deutsche Latin American Companies Trust
REPORT FOR THE MONTH OF DECEMBER 2003
SUMMARY
Latin American equities outperformed the U.S. markets and their emerging markets
peers both in December and for the 12 months ending 31 December 2003. The MSCI
Latin American Free was up 6.3% in sterling terms for the month, and 50.2% for
the year. The year got off to a bit of a slow start, with profit taking in
January and February after the big gains of the fourth quarter 2002, however
from March onward, there was no looking back. April posted a one month gain of
15.8% in sterling, signalling a turn in investor confidence in the region. The
best performing market for the year was Brazil, with the Bovespa stock index up
a stellar 117% in sterling. Argentina was close behind, up 112%, but at a mere
3% average weight for the year was far less significant. Brazil overtook Mexico
in early 2003 as the region's largest weight in the benchmark, nearly 42% on
average, to Mexico's 40.7%. Mexico returned a mere 16.8% in sterling, while
Chile added over 60%.
2003 marked again the tale of two currencies: the Brazilian real strengthened
over 10% against the pound, which the Mexican peso weakened nearly 17%. The
Chilean peso bolstered its market's performance, up 9.6% for the year, while the
Argentine peso also strengthened by over 3%. Not as significant as far as
equity contribution, but important as a signal, the Venezuelan Bolivar lost
nearly 22% of its value against the pound.
Our NAV was up 7.3% for the month of December and 45.3% for the year. The
country allocation was positive for the month with a Brazilian overweight and
Chilean underweight helping performance. Stock selection overall, however, was
slightly negative and although stock picking in Brazil ended the year on a
positive note our Brazilian holdings outperforming the composition of Mexican
names, coupled with the country overweight, once again was detrimental to
performance.
Two fundamental positions affected our performance for the year - an overweight
Mexico stance in the blue chip consumer names, which posted lacklustre results,
and a tempered enthusiasm for Brazil, which resulted in a bit of catch up later
in the year. Moreover, our bias toward more liquid markets meant a lower
exposure to certain countries which outperformed during 2003, such as Chile,
which in addition to a lack of liquid names, offered much higher valuations as
compared to other markets. Finally, lack of exposure to markets such as
Venezuela, Argentina and Peru (ex the gold stock) for risk reasons, resulted
also in underperformance as collectively these markets added alpha to the
benchmark returns.
In 2003, many of the small capitalisation stocks in the MSCI Brazil and Mexico
indices outperformed the liquid, Latin blue chips which make up the majority of
the portfolio. Historically, the Latin small caps have been very difficult to
own, particularly for a dedicated fund with any size. Analysts project that
ignoring the bottom 10% of the MSCI index in Brazil cost investors between
800-900 basis points in 2003.
The manager's bias toward Mexico, which exhibited sound macro fundamentals and
reasonable valuations, and which contributed positively toward performance the
prior two years, kept her from adding materially to Brazil at the beginning of
2003. The rapid change in sentiment surrounding President Lula's agenda and
expectations of a turnaround in the economy (reduction in interest rates and
country risk) were not fully appreciated by our team. Our risk perception
regarding sectors still under government control, i.e. energy and electricity,
kept us from adding materially to that sector, which is born out in our slight
underweight of Petrobras for the twelve months and a later addition of Cemig,
both of which were outperformers for the year. We believe we have corrected this
position and currently have overweights in both names. Our traditional focus on
the consumer names was not rewarded as our more significant overweight in Ambev
and CBD did not contribute as much as other names. Regarding the materials
sector: mining, pulp and paper and steel, we were more on the mark and the
portfolio benefited from our positions in CVRD, Aracruz, VCP, CSN and Gerdau.
Our traditional bias toward the banks, Itau in particular, helped performance,
however we did not capture as much upside in our Unibanco holding, a name which
was added later in the year.
An analysis of stocks held versus the benchmark confirms that our overweight
position in Mexico and in particular the bias toward the blue chip consumer
names - Femsa, Modelo, Bancomer, and Walmex, - worked against performance.
These names significantly underperformed the benchmark and collectively made a
big impact. While we maintained a more neutral position in Telmex, the stock
returned under 10% for the year, and given its large weight in the portfolio
(the second largest holding for the better part of the year) this name did not
contribute positively to performance. While Telmex continued to pay healthy
dividends, buy back stock and post decent numbers for the period, the stock was
largely out of favour in 2003 due to lack of catalysts in Mexico, and its
treatment as a bellwether stock for the market. Given its more recent
indications of top line growth and a willingness to invest in capex, management
is sending a signal that they expect more robust returns in 2004. The stock is
trading near its historic lows and boasts superior management and competitive
position to virtually all of its Latin peers.
Finally, several names which historically have not met our investment criteria,
for reasons of leverage, poor treatment of minority shareholders, or competitive
position, such as Eletrobras, Embratel, the Brazilian cellulars, CANTV, Alfa, TV
Azteca, Telecom Argentina, and the Chilean locally listed names such as Copec
and CMPC all outperformed and together negatively impacted performance.
Despite the recent year's underperformance, we have chosen to stick with our
investment philosophy described above, which has proven itself in this volatile
asset class. We invest in fundamentally sound companies with low leverage and
strong consistent cash flow. We also own companies where management interest,
majority shareholder interests and minority investor interests are aligned.
Historically, we believe that virtually all of our excess return has come from
stock selection and we continue to believe our investment strategy will be
rewarded in time. To that end, we have made adjustments in the portfolio,
adding materially to Brazil which we believe has the most upside through the
first half of 2004, and have selectively increased our exposure to Chile, which
also demonstrates sound economic fundamentals, a strengthening currency and an
expected rebound in the economy. As of the end of 2003, Brazil accounts for
approximately 51% of the portfolio, compared to 45% in the index, our largest
overweight. At 39%, Mexico has been substantially reduced (benchmark weighting
36%), on the basis that the economic rebound is not yet imminent, and the
political landscape, passage of reforms, etc. not nearly as positive as Brazil.
In 2004, Latin America should again outperform most other regions of the world,
particularly during the first half of the year. Valuations remain supportive,
with Mexico and Brazil trading below their historical averages, and most
economists believe GDP growth is poised to accelerate in the region. We believe
that growth will drive positive earnings revisions and some multiple expansion
(particularly as spreads continue to contract as in the case of Brazil)
resulting in healthy equity performance.
With an economic recovery in the region taking root, a continued positive
outlook for Latin America's key commodity exports (copper, iron ore, pulp,
steel), declining interest rates, and strengthening currencies, we remain
bullish on the prospects for the Latin equity market. In addition, this year
there are elections in only two countries: Mexico (governors) and Uruguay
(president) which limits potential noise as in 2002. The political landscape in
Venezuela will continue to be worrisome, in Argentina a question mark, and in
Mexico a potential disappointment (again) as President Fox may be a lame duck
with respect to passage of reforms. Brazil remains the bright spot, with Lula's
passage of major reforms at year end confirmation of his intention to steer the
country in an orthodox fashion. In turn, country risk is falling in Brazil (and
Chile) and an improvement in debt ratings is expected. Provided there are no
external shocks to the financial system, including an earlier (and more
pronounced) tightening by the U.S. Fed of interest rates, Latin American
equities should be on course for continued outperformance again in 2004.
Early in January we have increased gearing to approximately 15%.
NET ASSET VALUE
Fully diluted
31/12/03 30/11/03 31/12/03 30/11/03
82.4p 76.8p 86.1p 81.7p
MID-MARKET SHARE PRICE 31/12/03 30/11/03
Ordinary Shares 70.75p 65.00p
Warrants 14.75p 14.50p
Discount/(Premium) % 14.1 15.3
NAV based on total assets less current liabilities of #39.4 million (#36.7 million).
Market exposure
31/12/03 30/11/03
%) %
EQUITIES
Brazil 54.6 50.4
Chile 7.1 6.7
Mexico 35.1 39.2
Peru 2.5 2.9
TOTAL PORTFOLIO 99.3 99.2
Net Current Assets 0.7 0.8
-------- --------
TOTAL 100.0 100.0
-------- --------
Based on total assets of #43.6 million (#41.1 million).
GEARING
Gearing at 31/12/03 30/11/03
10.6% 11.9%
===== ====
LARGEST HOLDINGS (market value #39.6 million equal to 91.4% of total portfolio)
Country #000's % of portfolio
Petrobras Brazil 5,268 12.2
Vale do Rio Doce Brazil 4,407 10.2
America Movil Mexico 3,268 7.5
Banco Itau Brazil 2,317 5.3
Telmex Mexico 2,269 5.2
Ambev Brazil 2,257 5.2
Wal-Mart de Mexico Mexico 2,254 5.2
Grupo Televisa Mexico 1,877 4.3
G.F BBVA-Bancomer Mexico 1,604 3.7
Cemex Mexico 1,580 3.6
Tele Norte Leste Brazil 1,261 2.9
Cemig Cia Energy Brazil 1,182 2.7
Femsa Mexico 1,156 2.7
Minas Buenaventura Peru 1,106 2.6
Enersis Chile 1,007 2.3
Sider Nacional Brazil 973 2.3
Embraer Emp Brazil 832 1.9
Unibanco-Uniao Brazil 767 1.8
Telecom de Chile Chile 734 1.7
Gerdau Brazil 682 1.6
Brasil Telecom Brazil 671 1.6
Bco Bradesco Brazil 554 1.3
Bco Santander Chile 532 1.2
Pao de Acucar Brazil 511 1.2
Arazruz Celeulose Brazil 503 1.2
For further information, contact Mark Pope at Deutsche Investment Trust Managers
Limited on 020-7545-0520.
For additional copies, changes of address or details of our Private Investors'
Plan, low cost ISA and Dividend Reinvestment Plan (a plan through which
shareholders, who hold their shares on the Company's main register, can use
their dividends to purchase further shares) contact Mark Pope on 020-7545-0520,
e-mail address: mark.pope@db.com. Further details of Deutsche Latin American
Companies Trust including the latest annual, interim and monthly reports can be
found on the Deutsche Investment Trust Managers website located at
www.deutsche-its.co.uk.
Issued and approved by Deutsche Investment Trust Managers Limited, One Appold
Street, London EC2A 2UU, authorised and regulated by the Financial Services
Authority and manager of Deutsche Latin American Companies Trust PLC. Investors
should note that the price of shares and the income from them can go down as
well as up and are not guaranteed and investors may not get back the amount they
invested. Fluctuations in exchange rates may also affect the value of your
investment. Deutsche Latin American Companies Trust PLC may invest in shares
traded in emerging markets which may at times be illiquid and/or volatile. The
use of gearing is likely to lead to volatility in the Net Asset Value (NAV),
meaning that a relatively small movement either down or up in the value of the
Trust's total assets will result in a magnified movement in the same direction
of that NAV. In extreme circumstances, investors may get nothing back at all if
the fall in value is sufficiently large.
This information is provided by RNS
The company news service from the London Stock Exchange
END
MSCILFIRLEITFIS
