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Where 50% Annual Returns Are Common

Where 50% Annual Returns Are Common

By Bill Mann and Tim Hanson November 17, 2007

As our Motley Fool Global Gains team prepares for a research trip to South America, we've decided to sit down with some investors who know the region cold. Jose Costa Buck is a Buenos Aires-based analyst for T. Rowe Price Latin America (PRLAX), which has returned more than 53% annually over the past five years -- turning $10,000 into nearly $85,000.

We talked with Jose last week about how they've done it, and what American investors need to know before they can do it, too.

Bill Mann: At Global Gains, we are global investors; we go where the values are, and we have done very well in Asia, and we have done very well in Latin America as well. I was wondering if you, as a Latin American specialist, are seeing a lot of values in your region these days?

Jose Costa Buck: The short answer would be yes. Of course, the region has been very, very strong over the last three years, so valuations and of course the whole region has re-rated significantly. Companies -- like Petrobras for example -- were trading at six, seven times P/E three or four years ago; now with strong oil prices, the company is paying at 18 times P/E. Clearly there has been a massive re-rating in some stocks, but there are some good companies and some values, particularly when you compare emerging market regions.

Mann: One thing American investors tend to do is think of Latin America as being a single market, when it is in actuality more than a dozen countries. Are there any countries that you are finding to be cheaper than others at this point?

Costa Buck: In absolute terms, Mexico now looks cheaper than Brazil. Chile, which in the past has been a country that was trading at a premium to other countries, now is pretty much in line with Brazil. Of course there are a lot of reasons behind those factors, and that explains why valuations have changed between countries. Brazil is growing very fast in some sectors; Mexico is now more exposed to the U.S. market.

Tim Hanson: Jose, you guys have put together a very impressive track record, especially over the past five years. What are you looking for in stocks that other people aren't -- or what are you looking for and finding that other people aren't?

Costa Buck: I don't know. To be honest, I don't know what other people look at. I know what we look at, and yeah, the Latin American Fund has been a very successful product. We pay attention to broad themes like corporate governance. We try to look over the very long term; we have a very low turnover and try to have a long-term view. It is very unusual for us to buy a stock today and sell it in a couple of weeks, or in one or two months. That is part of our discipline.

Then, when we go into specific sectors or stocks ... our approach is growth at reasonable value, and that has worked well for us in the last couple of years. The banks, CVRD (NYSE: RIO), the mining companies. It is a mix of everything, but just to make an answer short, these are some of the things that we look at.

Mann: Do you think that the potential for a merger between Rio Tinto (NYSE: RTP) and BHP Billiton (NYSE: BHP) will have any impact on CVRD? Do you think they are in play as well?

Costa Buck: The sector is very concentrated, and if this happens, it will be even more concentrated, and I think that would be good news for CVRD.

Hanson: You mentioned the banks. We have heard from some American money managers that they see a big opportunity for multinational banks such as Citigroup (NYSE: C) in emerging markets, because they don't think customers there really trust the domestic banks. We don't think that is true. We have recommended a great bank in India, and we notice that you have a number of financial holdings in the Latin American market. Could you talk a little bit about what you see in the future for these companies?

Costa Buck: Overall, aside from Chile, the maturity of the financial system and the financial services is very low, so there is a huge opportunity for these companies and banks to explore. I disagree with those people that say that about these banks, but I think if you look, a lot of different banks have come into the region. The Spanish have invested heavily in Brazil and Chile and Argentina and Mexico buying local banks.

Mann: Banco Santander (NYSE: STD) is probably the best example.

Costa Buck: Yeah, exactly. But they [Latin American banks] are very well-managed -- at least, that is my experience for many years. Brazil has very low penetration, same for Mexico, so I think it is a long-term, very positive outlook for them. And very cheap compared to other emerging markets.

Mann: Several of the companies that you have in your top holdings are also recommendations of ours: the Pacific Airport Group and Cemex (NYSE: CX). We also, a little more than a year ago, recommended Sadia. I see that you have their competitor, Perdigao (NYSE: PDA). Is there a reason why you prefer one over the other?

Costa Buck: Not necessarily. I think originally we felt the stock was cheaper a long time ago; not that long time ago, but it was cheaper than Sadia. I think we considered the management teams. We felt more comfortable with Perdigao's management team. In terms of governance, I think it was ahead of Sadia.

Mann: What are some of the big trends you are seeing in Brazil or Argentina or Chile?

Costa Buck: These countries are not growing at Chinese rates, but Brazil is growing at 4% or 5% this year and the same for next year. Chile probably a little bit higher, 5% or 6%. Argentina, very strong; well, not very strong, but they are growing at 5% or 6% next year.

And again, if you look at the fiscal policy of all these countries, they have kept very prudent policies over the last couple of years, and they have been taking advantage of the high commodity prices.

Mann: Speaking of fiscal policy and commodity prices, I saw that the Argentine government was raising its tax rates on certain commodity exports. Is this something that is permanent?

Costa Buck: Well, hopefully not.

Mann: It just seems like a horrible idea to me.

Costa Buck: It is an easy tax for the government to collect, so for the moment, it is a very easy way to increase tax collection. The government has been extremely populist in the last 12 to 18 months, so the fiscal spending has been growing 50% to 55% while tax collection has been going up 30% to 35%. Of course, even though there is still a primary surplus, if these trends remain and continue, then very shortly the country is going to have a fiscal deficit. Rather than attack or cap some spending, they decided to increase tax collection, and as I said, even though this tax is very easy to collect, then that was the main reason.

Mann: Jose, thank you very much.

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