Risky funds pay off in 2003

INVESTORS who bravely backed Latin American funds last year will be entitled to a samba celebration for New Year.

Booming stock markets in Brazil, Chile and Argentina mean the Latin American fund sector, as defined by the UK‘s Investment Management Association, has been crowned the best performer of 2003.

The average fund turned £1,000 into £1,520 over the year, according to fund analyst Trustnet. The average fund from the UK all-companies sector would have returned £1,230.

An improvement in the economic and political situation in South America coupled with a rally in commodities, particularly metals, helped boost exports for most countries.

A surge in the price of copper boosted Chile's stock market, which is laden with mining stocks, and shares in Argentina recovered with the government's decision to lift a freeze on bank accounts and assets, although the country is still in default on international loans.

International investors piled back into Brazil once they realised new left-wing president Luiz Inácio Lula da Silva was prepared to make much-needed economic reforms. The country's economy has also benefited from recovering pork, poultry and grain prices, of which it is a large exporter.

Economists have huge expectations for Brazil. The country's economy, the 10th largest in the world, is expected to grow to fifth place in the next 35 years. A recent report by US investment bank Goldman Sachs predicted that the BRICs economies – Brazil, Russia, India and China – would outweigh the seven western industrialised nations of today, known as the G7, by 2040.

David Manuel, manager of the Invesco Perpetual Latin American Growth fund, delivered the best return (79%) last year. Manuel, who also runs the firm's Emerging Countries fund, says he is backing Brazil and some of Asia‘s smaller tiger economies for success in 2004.

But he stresses the dangers of investing in Latin America. 'These stock markets look cheap but global issues can easily override domestic issues,' he warns.

Other fund sectors to perform well in 2003 were global emerging markets (+38%), UK smaller companies (+35%), Far East excluding Japan (+35%) and European smaller companies (+34%).

The worst fund sectors were the index bear funds (-22%), UK gilt (+1.2%), money market (+2%), guaranteed/protected funds (+4.2%) and UK corporate bonds (+5.2%). The poor performance of UK bond funds will be particularly annoying for small investors – the sector was the best selling in Britain in 2003.