Suddenly, yesterdays Growth Bonanza is todays Banana Republic. If investors in bond funds were badly bruised in 1994, investors in Latin America funds, a smaller and more daring group, have been gutted and left to die since early December: share values in some Latin American funds have fallen by 50 percent in a matter of weeks. Telefonos Mexicano shares, the largest investment in Mexico, have fallen 50 percent from their high in the last year.

The question now: Do investors dare to catch the bloodied, falling knife?

Answer--- those rushing in may be a bit early. There is important evidence that pessimism isn't broad enough to mark a market bottom. Instead, the best thing to do right now is plan a Mexican vacation.   While you're there, make sure you bring back as much Commerativo as possible rather than waiting for the peso price break to work its way through the usual distribution channels.

In other words, go long tequila now, buy shares later.

The most powerful supporting evidence for patience can be found in market performances of closed and open end funds that invest in Latin America. There are 11 such closed end funds, according to Morningstar. As recently as November 25 every single one of them was selling at a discount to net asset value per share. The discounts ranged from a low of 3 percent for Lehman Brothers Latin America fund--- largely because it had been a new issue in October--- to a high of 18.4 percent for the Chile fund. The average discount for all 11 funds was 10 percent.

Since then, of course, all hell has broken loose. Between November 25th and January 13th the Net Asset Value of the Mexico fund, the oldest and largest of the Latin America closed end funds, fell 49 percent. Mexico Equity and Income fund fell 51 percent in net asset value per share. And Emerging Mexico fund fell a stunning 59 percent in net asset value per share. Other funds fell less, but ALL fell.

Net asset values of Latin America open end funds--- the ones that are purchased and redeemed at net asset value per share--- have also fallen dramatically.

Why am I telling you what you already know?

Because MARKET prices of the closed end funds haven't fallen nearly as much as the net assets per share of the underlying funds. Mexico Fund, for instance, is now selling at a PREMIUM to net asset value of 23 percent; Mexico Equity and Income fund is selling at a premium of 29 percent; and Emerging Mexico fund is selling at a premium of 41 percent. As a consequence, closed end fund investors have been protected from some of the decline on the Bolsa.

Instead of losing 49 percent of their investment, shareholders in Mexico fund have lost "only" 32 percent; shareholders in Mexico Equity and Income have lost 30 percent instead of 51 percent; and shareholders in Emerging Mexico fund have lost 38 percent instead of 59 percent. Indeed, where 11 of 11 Latin American closed end funds were selling at discounts in late November, only three were selling at discounts on January 13.

One message here is very clear: if you are looking for a way to capitalize on the Latin American crash, it isn't in closed end funds that sell at premiums to net asset value... it's in open end funds that sell at net asset value.

Another message is more subtle. Latin America closed end funds, selling at a premium, clearly don't reflect broad investor pessimism about Latin America. Investors don't pay premiums when they believe the world is ending. In past periods of worry, Latin American closed end funds have sold at some of the largest discounts to net asset value of any closed end fund category. Here, for instance, are the figures for the $1.3 billion Mexico fund, founded in 1981:

chart

As you can see, it has sold at a discount in each of the last 11 years and the discount has ranged up to 31 percent averaged in 1986.

Does this mean we should despair over Mexico or all of Latin America?

Absolutely not. Over the last ten years the average annual return in the Mexico fund was a stunning 38 percent. That's the kind of return people take risks for.


Personal finance writer Scott Burns is syndicated by Universal Press. His twice weekly column appears in newspapers from Boston to Seattle. He is the Chief Investment Strategist for AssetBuilder, Inc. Readers can register at www.scottburns.com. Questions/comments can be posted directly. They can also be sent, without registration, to scott@scottburns.com. Questions of general interest will be answered in future columns and on this blog.Click on the "Archive" navigation to see other columns. All comments are welcomed and appreciated.