Hottest emerging-markets funds spice things up with Latin America

Latin America has been hotter than fireworks at Carnival — and if your clients own a diversified emerging-markets fund, they may have more South American spice in their portfolio than they had bargained for. Most emerging-markets indices have about 13% to 15% of their assets in Latin America. The Vanguard Emerging Markets Stock Index fund (VEIEX), for example, which tracks the FTSE Emerging Markets All Cap index, has 14.95% of its assets in Latin America. Northern Emerging Markets Equity Index fund (NOEMX) has 13.31% in Latin America. Some funds, however, have double that, much of it concentrated on Brazil. For example, two of the funds that Morningstar categorizes as diversified emerging markets have enough exposure to Brazil to qualify for entry in the 2016 Olympics. Brandes Emerging Markets Value (BEMIX), for example, has 32.17% of its portfolio in Latin America and 20.35% of its portfolio in Brazil, according to Morningstar. Similarly, Invesco Developing Markets (GDTTX) has 29.59% of its portfolio in Latin America and 18.9% of its portfolio in Brazil. Wasatch Emerging Markets Select (WIESX) has 31.67% of its assets in Latin America, but nearly 20% of its portfolio is in Mexico, rather than Brazil. "We don't want those massive interest-rate and GDP-rate swings from Brazil," said Andrey Kutuzov, associate portfolio manager at Wasatch. "As long-term investors, we like the stability of the growth in Mexico." Mexican companies also tend to be better managed than most other Latin American companies, Mr. Kutuzov said. Depending on your client's point of view, a high concentration in Latin America can be good or bad. On the plus side, the average Latin American fund has soared 30.54% this year, vs. 7.04% for the Standard & Poor's 500 stock index with dividends reinvested. The top performer in U.S. dollar terms this year is Brazil, up 52.04%, according to MSCI. One reason for Brazil's hot performance is oil, which has rebounded from $37.13 a barrel this year to $46.05. Another: The Brazilian real has strengthened against the U.S. dollar. A falling dollar boosts returns from overseas markets to U.S. investors. A nimble entry into Latin America or Brazil would be a good boost to performance. Brandes Emerging Markets Value, for example, has soared 24.38% this year, putting it in the top percentile of emerging markets funds. Invesco's emerging markets fund has jumped 23.32%. On the other hand, Brazil's stock market is exceptionally volatile, and the 2016 Rio Olympics, which start next month, have been threatened by everything from the Zika virus to rivers of raw sewage flowing into the ocean where Olympic sailors will be competing. Not all funds with the largest Latin American exposure, however, are larded up with Brazilian stocks. Wasatch Emerging Markets Select (WIESX), for example, has 32% of its portfolio in Latin America, but just 9.48% of that was in Brazil. The biggest stake, 22.9%, is in Mexico. The fund has paid a price for its low Brazilian exposure: It's up just 7.86% this year. Similarly, American Funds New World (NEWFX) has just 4.36% of its assets in Latin America, Morningstar says. The fund has gained 5.32% this year.