Franklin Templeton Latin America Fund

The Franklin Templeton Latin America fund aims to achieve long-term capital appreciation by investing mainly in equity securities of companies incorporated or having their principal business activities in the Latin America region. Its geographic weighting is approximately two thirds to Brazil and around 23% to Mexico with some very small exposures to Chile, Argentina, Peru and Panama.

Managed by emerging markets expert, Mark Mobius, the fund has grown significantly in recent years and now sits at $2,7 billion under management, with this growth attributable to both significant inflows and fund performance. “There are not as many funds offering Latin America as say Eastern Europe or Asia, so inflows have been favourable as this sector attracts investor attention.”

It biggest sector weightings are to materials, food/beverage and tobacco, banks, energy, and a lower exposure to telcos. Mobius is very positive on Mexico which is undergoing significant political reform. “It is on the doorstep of the US, and as shipping costs increase dramatically, the US is starting to source more of its imports from producers closer to home.” The fund has a holding in wireless communication giant, America Movil, at around 7,5%, which has extensive exposure to the entire Latin American region. Mobius comments that one area where Mexico has not maximised on some significant potential is in the energy sector. “The oil sector is still controlled by government and for example, there has been insufficient upkeep in the oil fields.”

For performance measurement purposes, the fund index benchmark is the MSCI EM Latin America Index. For the annualized one-year period ending May 31, 2008, the fund had positive performance, returning net 34.56%in U.S. dollars with the materials, energy and financials sectors continuing as the most positive contributors to performance. Exposures outside of Brazil and Mexico are small, and although there are compelling valuations in some of these other countries, the shares are usually lower capitalization and less liquid.

FTIF Templeton Latin America Fund has an “AA” rating from S&P Fund Management and a 4-star Morningstar Overall Fund rating. Mobius attributes the fund’s recent four-star Morningstar rating to a combination of consistency, long-term performance and investment philosophy.

The fund holds a relatively low number of stocks as a consequence of a more limited and concentrated investment universe as opposed to a global fund, and Mobius observes that interestingly, as the fund grows, the number of positions have tended to reduce.

The fund presently holds around 45 stocks, with the maximum limit on each counter being 10% of the total fund value. Some holdings are very close to this upper ceiling – Petrobras at 10% and Vale, the world’s biggest iron ore producer, at 9,2%. Vale is one of the main global exporters in a market with few suppliers, giving the company solid pricing power. When positions passively surpass their maximum limits through natural performance growth, the fund is required to offload excess holdings but in a reasonable and flexible way, not immediately so.

The energy sector continues to set price records, particularly companies in the oil, gas and consumable fuels industry. The fund is almost exclusively invested in this industry, which has benefited from historically high oil prices and unceasing demand. Petrobras continues to make discoveries in the very deep waters offshore Brazil and in other parts of the world and this holding gives the fund exposure to the phenomenal growth in biofuels and ethanol, with Brazil now the single most effective country when it comes to alternative sources of fuel.

The managers have positioned the fund to take advantage of overarching trends that are causing major shifts in certain Latin American economies. One of these trends is increased consumer demand resulting from higher disposable income and a more established middle class. Financials is another sector where positioning of the fund reflects the view on the strengthening of the consumer, representing 16% of the fund as of end- May. Another theme is the increased global demand for agricultural commodities and raw materials. Latin America is uniquely positioned to be a supplier to the developing world and overall markets here are projected to grow at around 4% in 2008 compared to forecast growth of 2% or less for developed countries.

Michael King, the Director for Franklin Templeton in South Africa, confirmed that the Franklin Templeton Latin America Fund was registered with the Financial Services Board during 2007 and has been garnering increasing interest since the beginning of 2008. “We continue to offer institutional and retail investors one of the broadest and most reputable range of offshore funds in South Africa.”