Profile: Fiona Manning of the Aberdeen Latin American Income Fund

IROs at banks in developed markets should watch their competitors in Latin America for lessons in survival of the fittest, to judge by this month’s fund profile.

Latin American IROs who want to sell their stock to investors must show how their companies benefit from domestic consumption and investment and young, growing populations with rising incomes, and why they are lean and fit enough to survive an entire market cycle.

So says Fiona Manning, senior investment manager at Aberdeen Asset Management’s Aberdeen Latin American Income Fund.

You are overweight in consumer staples and consumer discretionary. Can you discuss four stocks and explain their key attractions?

Our investment process is bottom-up, based on our analysis of the individual opportunities within the stock universe rather than with any focus on the benchmark.

As such, overweight and underweight positions reflect where we find the highest-quality companies which are able to generate sustainable returns for shareholders across the business cycle.

Our large position in consumer names is due to our optimism about the potential for domestic demand growth in Latin American economies driven by their young, growing populations and improving economics.

These businesses typically are able to generate strong earnings and cash flow, and are well-managed and focused on their core markets.

Multiplan, Brazil’s leading mall owner – with well-located shopping malls, solid tenants and near-full occupancy – has sites under development. This business is a driver of the increasing penetration of formal retail in Brazil.

Lojas Renner, one of Brazil’s leading department store chains, has a nationwide presence and has been able to grow earnings and profitability sustainably for a number of years.

The management team has a record of delivering returns for shareholders and a strong regard for corporate governance.

FEMSA, the Mexican beverage company, which is also the leading Coca-Cola bottler in Latin America, is poised to benefit from rising domestic consumption.

Its earnings tend to be relatively defensive because its products are largely consumer staples; these have demonstrated particularly strong growth in their convenience retail format, which reflects the growth and development of formal retail in the Mexican market.

Falabella, the Chilean retail chain offering department stores, DIY and home wares and hypermarket formats, is one of the most sophisticated local retailers in Latin America and has developed a very strong brand in the Chilean market.

The company is using this strong base to move into the higher-growth Andean markets of Peru and Colombia, where penetration of formal retail is very low.

You’re also overweight in financials. Why?

We see financials as a play on domestic consumption through which we can capitalize on the rise of the middle class in Latin American markets, particularly given the low penetration of financial services.

The banks that we own in Latin America are investments of high quality which offer a high return on equity and are well capitalized, with conservative lending policies and low levels of non-performing loans, in particular contrast to many of their developed-market counterparts.

Do you invest in IPOs? If so, what facts do you need?

We occasionally participate in IPOs where the investment case is particularly compelling. In terms of facts, we obviously need full financial statements including the profit and loss account, balance sheet and cash flow statements to evaluate the financial positioning of the firm; we also like a reasonable track record for this data to see how the company has developed over time.

More important to us, however, is the opportunity to meet the management team and to understand their approach to running the business and their attitude to risk and corporate governance.

Most of the companies we own are controlled companies. As minority investors it is important that our interests are aligned with those of the owners and managers of the business and that our rights are protected.

Where we do invest, we usually keep the initial investment small and look to build the position over time as our confidence grows in the business and the management team.

What are the smallest market cap stocks which you hold? What criteria must they pass?

We own a number of companies with market caps of less than $1 bn, including Mexican airport operator OMA at $840 mn and Brazilian IT company Valid at $863 mn.

Small companies must pass exactly the same quality criteria that we look for when researching all businesses. We meet hundreds of companies each year and look to invest in those with good management, healthy balance sheets and an attractive business model which can weather a full market cycle.

In terms of smaller companies, liquidity is a consideration, but as long-term owners of businesses we find that the analysis of liquidity is secondary to our quality and valuation criteria.