Chile has been a favorite investment destination for quite a while. I was out for a while before getting back in late last year (I have disclosed this a few times).The chart shows the bank stock I bought in green (the name does not matter), the benchmark Chilean index in blue and the S&P 500 in red.
One of the reasons I like Chile is that only 15% of its exports go to the US so its fate is not that tied to the US. The chart shows there was sympathetic price movement but the fundamental link between the two is not that strong.
There are several reasons I went with a bank stock including that while Chile is obviously a commodity based economy I had enough materials stocks and this bank in particular has fewer moving parts than a lot of banks including no tier 3 capital.
One popular way to access Chile is with electric utility companies. This very well could be a way to invest but Chile is facing an issue with not being able to generate enough power to avoid rolling brown outs. I may have this wrong but rolling brown outs would seem to be a negative catalyst for a power generator or distributor.
As obvious as that seems to me I should note that the iShares Chile (ECH) has outperformed my bank stock YTD and it allocates 23% to utilities, Enersis (ENI) is up even more than ECH. For now the market does not care about this (IE I am wrong for now) but I think it makes sense to avoid what seems like an obvious issue.
The other important catalyst for Chile, that I have written about before, is that they have what is essentially a privatized social security program which creates a constant demand for Chilean equities.
Other than the privatized social security Chile is not that different from other commodity based economies. The country is at a different point in its economic cycle, it is a surplus country (not all of them are, however) and there are far fewer moving parts than in the US.
The point is not that you should run out and buy Chile but the work needed to understand the big picture is not that complicated. This is true of many countries.
8 comments:
"...they have what is essentially a privatized social security program which creates a constant demand for Chilean equities.
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Is there some sort of "law" that their program can invest in only Chilean equities?
One of the best performers in my kid's custodial accounts is a Chilean company (that is not listed as a holding in ECH, interestingly).
I just read the artice you did for thestreet.com , Four Fixed-Income Funds to Add to Your Portfolio
Why did not include Pimco Total Return Fund PTRAX, managed by Bill Gross? What are your thoughts?
as I understand it Chileans have a menu of choices similar to what most folks have for their 401k. I do not know if international is a choice
I could have very easily included PTRAX, there is no way to cover all the bases.
The fund has a great track record, I do not own it but have nothing negative to say.
Wouldn't rolling brown outs be a sign that Chile needs to invest more in power generation and distribution as demand is growing? This to me seems like a good reason to invest in Chile.
It's the same negative argument people make about India - that its infrastructure is not good enough to keep up with economic growth - well, duh, that's a reason in my book to invest in companies that will partake in infrastructure growth.
Hi Roger, you do a terrific job with your blog.
I´m from Chile, so regarding to one comment about chilean AFP´s,(Administradoras de Fondos de Pensiones), the companies that manage the pensions funds, effectually they have caps to their allocations, so basically they have to invest some % in fixed income, some in chilean stocks and some % in foreing stocks. Each APF has 5 Predesigned Portfolios and people chose, in wich portfolio their obligatory contributions are made, each monthly contribution is 11% of the income, in case of dependent workers. Today this Portfolios, range for 80% Stocks (The A Portfolio, most risky)to 100% fixed income (E Portfolio). If you don´t chose a Portfolio, your are asigned acordign to your age. More young more risk, more old less risk. The law only sets ranges, say A Portfolio up to 90% in variable income, and up to 30% in chilean stocks.
The oldest Portfolio (1982), today called the C one (40% variable income and 60 fixed income), has yielded a real 10% average anually, over inflation, std. deviation 8.2%, best year 1991, 29.7% over inflation, and worst year 1995, -2.5%.
A typical A Portfolio today has 19.03% in chilean stocks, 54.3% in foreing stocks (5.83 USA, 0.89 UK, 6.12 Developed Europe, 2.4 Japan, 4.6 Developed ASIA, 14.8 Emergent Asia, 11.44 Latam, 7.97 Emergent Europe), 10.26% Chilean Short Time Fixed Income and 16.41% long Term Chilean Fixed Income.
Bye,
Ignacio, thank you for the detail, that is a great explanation.
thanks again
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