Performance evaluation

The Deutsche Latin America Equity Fund – Class A (SLANX) fell 4.7% in December 2015 from a month prior. In the three- and six-month periods ended December 31, the fund fell 1.7% and 26.4%, respectively. In the one-year period, the one we’ll be analyzing, it fell 32.2%. Meanwhile, from the end of December to January 25, the fund fell by 9.4%.

The fund had a good 4Q15. However, considering the performance in the full year, the fund placed seventh among eight funds in this review. Let’s look at what contributed to this fund’s poor performance.

Staples Sector Drags Down the Deutsche Latin America Equity Fund

Portfolio composition and contribution to returns

Launched in May 2001, SLANX has the third-longest track record among the funds in this review. According to its latest geographical disclosure, Brazil, Chile, and Mexico are the top three regions it invests in, in that order, making up 78% of the fund’s assets. Since the previous reporting period, Chile overtook Mexico. The key thing to note is that 54% of the fund’s assets are invested in Brazil.

Since the latest complete portfolio of the fund is from November 2015, we’ll consider that as our base. For December, we’ll consider valuation changes for our analysis. All portfolio percentages mentioned from here on refer to weights according to changes in valuation from November to December.

Financials led all sectors in terms of negative contribution to returns for 2015. The preference shares of Itaú Unibanco Holding (ITUB) and Banco Bradesco (BBDO) were quite close in terms of the scale of negative contribution for the period. Other negative contributors from the sector included Grupo Aval Acciones Y Valores (AVAL) and Popular (BPOP). Grupo Financiero Galicia (GGAL) emerged as the highest positive contributor among the sector’s holdings and, along with BBVA Banco Francés (BFR), reduced the drag substantially.

The consumer staples sector’s negative impact on the fund was shockingly strong, higher than for any other long-only fund in this review. The sector was driven down by negative contributions from the preference shares of Companhia Brasileira de Distribuição (CBD) and BRF (BRFS). Other negative contributors included Chilean retailer Cencosud (CNCO) and Coca-Cola FEMSA (KOF). There was some support for the sector as sponsored ADRs (American depositary receipts) of Anheuser-Busch InBev (BUD) and Fomento Económico Mexicano (FMX) reduced the negative returns slightly.

Reasons for poor performance

Since 65% of the fund’s assets are invested in financials and consumer staples, the fate of the fund pretty much lies in how these two sectors fare. Though there were a few sizable positive contributions, such as that from Globant (GLOB) from the information technology sector, the negative contribution by other stocks was just too much to deal with. Therefore, the fund had a forgettable 2015. It remains to be seen whether fund managers will continue to remain bullish on financials in 2016 and whether they reconstitute the holdings from consumer staples. We’ll look at the last fund in our review, the UltraLatin America ProFund – Class A (UBPIX), in the next article.

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