Good Show by SLANX, but Caution Is Required

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Performance evaluation of the Deutsche Latin America Equity Fund

The Deutsche Latin America Equity Fund Class A (SLANX) surged 27.5% in the first four months of 2016, and emerged as the third-best performer among the eight funds in this review. In the past year, it has fallen 13%, placing it fourth among its peers.

Meanwhile, from December’s end until May 6, 2016, the fund rose 22.6%. We’ve graphed its performance against two ETFs: the iShares Latin America 40 ETF (ILF) and the iShares MSCI Emerging Markets Latin America ETF (EEML). Let’s look at what contributed to SLANX’s performance in the first part of 2016.

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Portfolio composition and contribution to returns

Financials were mainly responsible for SLANX’s good showing in the first four months of 2016. The amounts of their contributions justified their high exposures in the portfolio. The preference shares of Banco Bradesco (BBD) powered the sector ahead, with a sizable contribution also coming from the preference shares of Itaú Unibanco Holding (ITUB).

The consumer staples sector was impressive not just because it was the second-largest in terms of positive contributions to SLANX’s returns, but also because of the high amount of its contribution. Raia Drogasil did most of the heavy lifting for the sector. Cencosud (CNCO), Embotelladora Andina (AKO.B), and common shares of Ambev (ABEV) also contributed sizably to the sector.

While stocks such as Grupo Aeroportuario del Pacífico (PAC) helped industrials, the sponsored ADR (American depositary receipt) of Enersis Américas (ENI) helped the utilities sector.

The telecommunications services sector, in which SLANX was invested for some time in 2016, contributed negatively to the fund. Both of SLANX’s holdings, America Movil (AMX) and Telefônica Brasil (VIV), contributed negatively to its returns.

Investor takeaway

SLANX has had a great time in 2016 so far. Even though its total returns have been unable to beat the passively managed ILF, it has only marginally missed. Its performance is attributable to the fund managers’ picks from the financial and consumer staples sectors. In both of these sectors, SLANX’s stocks easily outperformed their counterparts in ILF.

Industrials stocks also did well compared to their counterparts in ILF. However, the information technology and telecommunication services sectors disappointed. Both sectors contributed negatively to SLANX’s returns, while their counterparts in ILF contributed positively.

Should you jump on for the ride with SLANX? Though the fund is uniquely positioned, its lack of diversity is a concern. With close to 80% of its assets invested in two sectors, any dip in performance could find the fund in the bottom performers among its peers.

Also, the portfolio has undergone quite a lot of change. Being actively managed is one thing, but this constant shifting makes one feel as though the fund’s management has not found a composition they want to stick with. The fund’s good performance in the period could be by happenstance rather than strategy. Investors would be well advised to stay cautious.

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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