In managing Fidelity Latin America, Claudio Brocado has the advantage of fluency in Spanish and some long-standing relationships with Latin American executives that go back to his school days in Mexico City.
"Many of the classmates I grew up with went on to become CEOs and CFOs," says the portfolio manager for Boston-based Fidelity Investments, who has been the lead manager of the fund since January 2003. "I know how they think and I know their track records." In addition to managingFidelity Latin America A andB, Brocado is also responsible for Latin American portfolios available to Fidelity's U.S. and overseas investors.
With Latin America boasting some of hottest stock markets in the world during the past couple of years, he has been in the right place at the right time. The $11.6-million Fidelity Latin America A, for example, has seen a sizzling two-year average annual return of 37.9% under his tenure, slightly ahead of the category's median return of 37.3%.
"The fundamentals have improved significantly from the distressed levels of a few years ago," Brocado says. "Earnings are strong, but there has not yet been a significant expansion in price-earnings multiples, and prices are still attractive."
Throughout the region, countries have been implementing favourable economic and political reforms, and untying their currencies from a fixed peg to the U.S. dollar to float freely. "There's been a form of Darwinism taking place, with a lot of creative destruction as some industries have been wiped out while others have flourished or become globally competitive," says Brocado.
The resource boom stimulated by growing Chinese demand has been good for Latin America, which is rich in oil, forest products and minerals, and is able to produce competitively due to low labour costs. There are also opportunities beyond the raw materials, Brocado says.
He cites Brazil, for example, as a dominant world player not only in iron ore but also in steel production. Also, with Brazil's expanding middle class, investment opportunities are domestic as well as export-driven.
Accordingly, Brocado is investing in such domestic industries as telecommunications, food and beverage stocks, and retailers. "On average, the populations of Latin American countries are younger than in North America, they're forming families and there's a propensity to consume," he says.
While Brocado can roam anywhere in Latin America, his biggest country weightings are in Mexico and Brazil, which together make up more than 90% of the fund. He keeps an eye on the benchmark MSCI Latin America Index, and typically keeps his weighting in any one country to within eight percentage points of the index weighting.
"Country selection tends to be a by-product of my bottom-up work," he says. "I first identify the companies and then see what the country weightings are. If I'm uncomfortable I'll make a shift."
With individual companies, his weightings may be as much as four times the index weight, although he won't allow any company to grow to more than 15% of fund assets. Usually, he holds 60 to 80 companies in the fund.
Brocado applies a variety of financial measuring sticks, but pays particular attention to cash flow generation and earnings surprises. He sells when companies reach his price targets, but will revise his targets as conditions change.
He keeps turnover to about 25% a year. "I study the companies carefully before I buy, and like to let them pay off over time," he says.
Brocado's talent for languages led him to obtain a BA with a double major in international languages and business from Washington State University, which he attended on a Fulbright Scholarship.
After graduating in 1984, he worked in finance for a California restaurant chain for eight years, and also completed his MBA at the University of California in 1990. He then became a research analyst at a brokerage firm based in Mexico City, later becoming director of research and transferring to New York and then San Francisco.
He next served as the coordinator of Latin American business development for Dresdner RCM Global Investors in San Francisco, and then joined Putnam Investments in Boston as manager of Latin American equity funds. He moved to Fidelity in 2002 as a research analyst for Latin America, and took over as lead manager of Latin American funds in January 2003.
Brocado travels several times a year to Mexico and Brazil, and less frequently to the other countries in Latin America. His Spanish is useful almost everywhere, and his fluent Portuguese helps him in Brazil.
"Many Latin American executives speak English, but not all of them," he says. "Being fluent in the local language can often lead to more frank discussions. A CEO who is not comfortable in English may find it difficult to fully articulate the corporate strategy."
