The UltraLatin America ProFund: Defeated by Its Leverage Strategy

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Jan. 29 2016, Updated 7:29 a.m. ET

Performance evaluation

The UltraLatin America ProFund – Class A (UBPIX) fell 13.7% in December 2015 from a month prior. In the three-and six-month periods ended December 31, the fund fell by 12.8% and 53.6%, respectively. In the one-year period, the one we’ll be analyzing, it declined by 61.8%. Meanwhile, from the end of December until January 25, the fund fell by 25.9%. The fund finished dead last among the eight funds in this review, primarily because of its leverage strategy.

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Portfolio composition and contribution to returns

UBPIX was launched in October 2007. According to its latest geographical disclosure, Brazil, Mexico, and Chile are the top three regions it invests in, in that order, making up 93.6% of the fund’s assets.

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

As we had explained in the previous article, 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, the BNY Mellon Latin America 35 ADR Index. The sharp fall in the fund in 2015 represented twice the daily movement in the index.

Consumer staples and financials were the biggest negative contributors to the fund’s returns in 2015. While BRF (BRFS), Companhia Brasileira de Distribuição (CBD), and Ambev (ABEV) hurt the consumer staples sector, financials were driven down by Banco Bradesco (BBD), Itaú Unibanco Holding (ITUB), Bancolombia (CIB), and other stocks.

Grupo Televisa (TV), the only holding in the consumer discretionary sector, drove down that sector’s returns, while Vale (VALE) and CEMEX (CX) drove down the materials sector.

Other negative contributors included LATAM Airlines Group (LFL) from industrials, CPFL Energia (CPL) from utilities, and YPF (YPF) and Ecopetrol (EC) from energy.

Reasons for performance

The fund has fared the worst among its peers due to its leverage strategy. Being a fund with a leverage multiple of 2 means that its movement will nearly double that of the market, whether it is a rise or a fall. In the last article of this series, we’ll look at the overall picture that emerges from this analysis.

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