How the UltraLatin America ProFund’s Leverage Strategy Pummeled Returns in September

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Performance evaluation

The UltraLatin America ProFund Class A (UBPIX) plummeted by 20.7% in September 2015 from the previous month. In the three- and six-month periods that ended on September 30, the fund nose-dived by 46.8% and 44.4%, respectively. In the YTD (year-to-date) period, the fund fell by 56.2%. However, from the end of September until October 28, the fund rose by 11.4%.

Clearly, UBPIX fared quite poorly across the periods under review. But this was primarily due to its leverage strategy. This can be seen from the month-to-date returns for October, which are nearly twice that of some other funds in this review. Still, let’s look at what specifically contributed to this poor performance.

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Portfolio composition and contributions to returns

UBPIX was launched in October 2007. According to its latest geographical disclosure, Brazil, Mexico, and Chile are the top three invested geographies, in that order, making up ~91% of the fund’s assets.

The latest complete portfolio available for the fund as of October 2015 is based on June 2015. Hence, we’ll take June’s portfolio as our base and consider valuation changes as they stood at the end of September 2015 for our analysis. All portfolio percentages mentioned from here on refer to weights according to changes in valuation from June to September.

As we explained in the previous part of this series, UBPIX is a leveraged fund. Since the leverage multiple is 2, it means that, on a daily basis, the fund provides returns that are theoretically two times that of the underlying index, which is the BNY Mellon Latin America 35 ADR Index.

The sharp fall in UBPIX’s returns have to be considered in the same manner: twice of the daily movement in the index. Since Latin American economies have had a hard time so far in 2015, equity markets in these nations have fallen, resulting in sharp negative returns for all associated instruments.

Here’s a sectoral breakdown of contributions to the fund as of September 2015:

  • Unlike other funds in this review, the energy sector contributed the most to the fund’s negative returns in September 2015. All five holdings contributed negatively, led by Petrobras (PBR). YPF SA (YPF) and Ecopetrol SA (EC) followed PBR.
  • Consumer staples followed the energy sector, led by Companhia Brasileira de Distribuicao (CBD). Ambev SA closely followed (ABEV).
  • Other major negative contributors included Grupo Televisa, SAB (TV), LATAM Airlines Group SA (LFL), CPFL Energia SA (CPL), and Companhia Energética de Minas Gerais SA (CIG).

Factors driving performance

The major reason for its poor showing is that unlike other funds in this review, UBPIX is a passive fund. Also, because it’s a leveraged fund with a multiple of two, the fund always nearly doubles the impact of market movement, whether the movement is a rise or a fall.

In the next and final part of this series, we’ll look at the overall picture of Latin America-focused mutual funds, given what we can gather from our analysis of the nine funds we’ve selected.

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