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AGF likes Latin American beat

Fund manager bets on more powerful consumer influence

INVESTMENT REPORTER

Emerging markets took a hit several months ago in the face of concerns about a global economic slowdown, but fund manager Patricia Perez-Coutts remains upbeat about their prospects.

For one thing, she doesn't subscribe to a doom-and-gloom scenario for the global economy. "I think growth will moderate but it won't come off significantly," said the manager of the AGF Emerging Markets Fund. And given that scenario, "there are still plenty of areas and sectors in emerging markets that will continue to do well."

Furthermore, she notes that consumers are becoming a more important factor in emerging nations, making those countries' economies less reliant on international trade. The markets that are most dependent on trade with the United States -- such as South Korea and Taiwan -- are having some trouble recovering from their May lows. They also can be more volatile while those in some other countries are more insulated because their strength comes primarily from the domestic economy. The U.S. represents about 40 per cent of the global economy.

Furthermore, emerging market stocks tend to be cheaper, yet "they offer you the best growth prospects in terms of earnings," Ms. Perez-Coutts said. "We are no longer facing the high risk/reward type of investments that we used to have."

However, Ms. Perez-Coutts warns that emerging market returns in the next few months "may not be stellar." But she adds: "This is a very secular growth story," so over her time horizon of three to five years, "the returns should be very strong in my view."

So far this year, the $271.5-million AGF fund, which includes stocks from 19 countries, is up 12.42 per cent, trailing the 27.14-per-cent return of the 12 months to July 31, or the 27.94-per-cent return annualized over the past three years. The five-year return was 14.85 per cent. Ms. Perez-Coutts took over the running of the fund in June, 2002.

The sharp correction in May and June in emerging markets opened up a "lot of opportunities," she said.

Consumer staples and consumer discretionary issues constitute the fund's greatest exposure, relative to its benchmark.

She noted that some central banks are making a determined effort to boost the contribution of the consumer to their countries' gross domestic product. Financials and telecom issues are also significant factors in the fund.

Brazil and Mexico are the two most heavily weighted countries in the fund, and together they account for almost 30 per cent. It is that heavy weighting in Latin America that helped the fund to do so well in the past few years, said Ms. Perez-Coutts, who hails from Peru.

The consumer sector is a key attraction in both countries. With Brazil, an additional consideration is the economic turnaround that President Luiz Inacio Lula da Silva has engineered. Mr. Lula, who had socialist leanings, has proven to be "the best friend that investors could possibly have," she said.

When he became president four years ago, Brazil was "very much in dire straits." No longer. With Mexico, the attraction is a combination of factors including robust wealth creation and an economy that has been growing 3 or 3.5 per cent annually, accelerating to possibly 4 or 4.5 per cent providing needed structural reforms are put in place, Ms. Perez-Coutts said.

Among the stocks she holds in the portfolio is Petroleo Brasileiro SA, better know as Petrobras.

"Petrobras boosts by far one of the best production profiles in the world," she said. Yet the shares trade at about a 25-per-cent discount to the majors, she said. The shares also trade at a discount to energy companies in some other emerging markets, she added.

She also likes Lojas Renner SA, a Brazilian apparel retailer. "Same-store sales . . . have been charging along rather nicely at about 15 per cent," she said. And profit growth has been "sky high," she added. The dividend yield on the shares is close to 2.5 per cent.

Another of her favourites is China Overseas Land & Investment Ltd., one of the largest residential developers in China. The stock trades at a 25-per-cent discount to its net asset value, she said.

*****

'There are still plenty of areas and sectors in emerging markets that will continue to do well.'

PATRICIA PEREZ-COUTTS, MANAGER OF THE AGF EMERGING MARKETS FUND.

*****

AGF Emerging Markets

CategoryEmerging markets equity
Total assets$271.5-million
Fund typeOpen-ended
Management expense ratio2.85%
Sales fee typeOptional
Globefund 5-star rating system*****
Inception April, 1994

Returns to July 31, 2006

1-month simple rate of return4.25%
3-month compound annual- 6.44
6-month compound annual1.28
1-year simple rate of return27.14
3-year compound annual27.94
5-year compound annual14.85
10-year compound annual6.2

Top 10 holdings As of Sept. 6, 2006

1.Petroleo Brasileiro SA - Petrobras3.40%
2.Banco Bradesco SA preferred2.5
3.China Overseas Land & Investment2.1
4.British Amer. Tobacco Malay. Berhad2
5.Lojas Renner SA1.9
6.Comp. de Minas Buenaven. SA ADR1.9
7.Tenaris SA ADR1.7
8.Telefonos de Mexico SA ADR1.6
9.Consorcio ARA SA de CV1.5
10.Mega Financial Holding1.5

SOURCE: GLOBEFUND.COM

© 2007 The Globe and Mail. All rights reserved.

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