When Your Country Doesn't Come Through, Bet on the Neighbors

(Bloomberg) -- Chilean mutual fund investors are having a good year -- thanks to Colombia and bets that a market-friendly candidate will win that country’s presidency Sunday.

The Fondo Mutuo Bice Colombia mutual fund, managed by Chile’s BICE Inversiones, has posted a 12 percent return year-to-date. That’s tops among every open-end fund registered at Chile’s Mutual Fund Association, according to data compiled by Bloomberg. Looking north is paying off, as funds focused on local stocks have underperformed this year after a stellar 2017 that was driven by expectations its own political change would translate into higher profits.

Mabel Weber, who manages the Colombia fund, says most of that the performance can be chalked up to the price of crude oil -- state-controlled Ecopetrol accounts for about 20 percent of its assets -- and expectations of a recovery in the Colombian economy, which is showing signs of improvement.

"Valuations are low, among the lowest in Latin America, and there could be rally in the market if oil prices toe the line," Weber said by phone from Santiago.

The fund’s success should continue. Consumer confidence in Colombia is forecast to pick up in the second half of 2018, buoyed by Ivan Duque’s expected presidential win, Weber said. As a result, she is starting to look at increasing the weight of consumer-oriented stocks in her fund, such as Almacenes Exito.

Exito has underperformed the market so far this year, down 0.5 percent compared to a 2.6 percent gain for the Colcap benchmark index. The stock’s volatility is up in part because of its exposure to Brazil through its stake in retailer Cia Brasileira de Distribuicao, Weber said. Shares of the Brazilian grocer are down 3 percent in 2018.

Another one of her Colombian bets is Banco Davivienda SA. The lender is less sensitive to lower interest rates, trades at lower multiples than peers and is also working on new sales platforms to increase cross selling of products, Weber said. Davivienda’s more liquid preferred stocks are up 18 percent in 2018.

Weber’s not the only one high on Colombia. On June 12, Bank of America Merrill Lynch raised lender Bancolombia, the country’s largest, to neutral from underperform on lower political risks.

"The economy is likely to start picking up after elections and oil prices should remain supportive," BoAML analyst Ernesto Gabilondo wrote in a note. "Likewise, Colombia should be able to focus in solving the deficit problem and reactivating large infrastructure projects."

©2018 Bloomberg L.P.