LONDON (By David Clarke, Bloomberg) November 29, 2005  —  European investors are plowing almost five times as much money into Latin American funds as they did a year ago, profiting from record stock markets in Brazil and Mexico.

The best performing mutual funds in the U.K., France and Switzerland in the 12 months through October all focus on the region. In Britain alone, four of the top 10 funds this year track Latin American companies.

"It's simple,'' said Jean Echiffre, head of investments at State Street Corp. in Paris, where its Latin America fund ranks first after rising 69 percent. "We've done well because stock markets there have done well.''

The MSCI Latin America Index, a regional benchmark, has risen 57 percent in the past 12 months, compared with a 21 percent gain in Europe's Dow Jones Stoxx 50 Index. European investors added a net 1.2 billion euros ($1.4 billion) to Latin American funds in the first nine months of 2005, up from 253 million euros in the same period last year, according to Feri Fund Market Information in London.

Fund managers such as Invesco Perpetual's Dean Newman and Scottish Widows's Alastair Reynolds, who run the U.K.'s first-and second-best performing funds, both benefited from holding an above- average amount of money in Brazil.

Booming demand in China and India for commodities such as iron ore has spurred Brazil's $683.5 billion economy and lifted shares. The Bovespa Index rose 28 percent in the past 12 months, reaching a record on Nov. 23, while the Brazilian currency's 23 percent advance against the U.S. dollar added to returns for international investors.

Buying Brazil

At the end of October, Invesco's Newman, 41 and based in Henley-on-Thames, had about 57 percent of the fund invested in Brazil. That compares with an allocation of 52 percent in the MSCI Latin America Index. Reynolds at Scottish Widows in Edinburgh has about 62 percent of his fund in Brazil.

"The big picture for the country has improved dramatically and the wealth created by the commodity boom has not been squandered,'' said Reynolds, 34.

The Invesco Perpetual Latin American fund rose 64 percent in the 12 months to the end of October, while the Scottish Widows Latin America fund advanced 61 percent, according to data compiled by Bloomberg.

Both funds were helped by investments in Banco Itau Holding Financeira SA, the country's biggest bank by market value, and Banco Bradesco SA. Brazilian banks are becoming more profitable as the country's central bank cuts interest rates, encouraging consumers and companies to borrow.

Shares of Banco Bradesco, based in Osasco, near Sao Paulo, more than doubled in the past year, while shares of Banco Itau gained 67 percent.

Consumer Revival

Reynolds is now reducing his holdings in those banks and investing more in companies that stand to benefit from a pickup in consumer spending in Brazil. Retail sales in the country rose 5.6 percent in September from a year earlier.

During the last six months he bought shares in luxury apartment developer Cyrela Brazil Realty SA Empreendimentos e Participacoes, whose shares have almost tripled, and Submarino SA, Brazil's biggest internet retailer, whose stock has doubled.

"For the first time in a number of years we have consumer- related stocks that are becoming worthwhile investments,'' said Reynolds.

Brazil isn't the only Latin American market that's surged. Colombia's IGBC index is the third best performer in 2005 among 80 world indexes tracked by Bloomberg, more than doubling. The Mexican Bolsa is up 31 percent, led by Corporacion GEO SA, the country's second-largest house builder, and America Movil SA, Latin America's biggest mobile-phone company.

High Risk

The rally is due for a pause, says Rupert Brandt, who runs the fifth-best performing fund in the U.K. over the past 12 months for F&C Asset Management Plc in London. He says he is skeptical about prospects next year after the MSCI index more than tripled in the past three years. "Latin America is a little over-extended,'' he said.

Investing in the region isn't for the faint-hearted. Four years ago Argentina defaulted on $95 billion of bonds and devalued its currency. The country's benchmark Merval Index fell 29 percent in 2001.

Brazil's main interest rate still stands at 18.5 percent, more than four times the 4.5 percent benchmark rate in the U.K. Venezuela's Caracas Stock Exchange Index has fallen 31 percent over the past 12 months. President Hugo Chavez stepped up seizures of private property and the nation's highest court ruled that CA Nacional Telefonos de Venezuela, which accounts for 22.5 percent of the index's weighting, had to pay back pensions.

Risk

"We would give the region 10 out of 10 on risk,'' said Darius McDermott, a financial adviser at Chelsea Financial Services in London. He says clients with less than 50,000 pounds ($85,800) should refrain from putting money into a Latin American fund because the region is too volatile.

State Street's Echiffre says his company's fund is selling shares in Mexico because of concern about the region's political outlook. Mexico holds a presidential election next July and Andres Manuel Lopez Obrador of the Party of Democratic Revolution is leading Felipe Calderon, the candidate of President Vicente Fox's National Action Party, in opinion polls. In a speech on April 24, Lopez Obrador said he would slow efforts to open the economy to more private investment.

"The election could increase the volatility of the markets,'' Echiffre said.

Brandt at F&C pulled money from Mexico this year. Since June he has sold shares in Mexico-City based America Movil and Cemex SA, the world's third-largest cement company. Shares of America Movil have risen 46 percent over the past six months, while those of Monterrey, Mexico-based Cemex have gained 44 percent.

Valuations

"The stocks in Mexico are valued too high,'' Brandt said. Mexico's Bolsa has a price to earnings ratio of 10.9 percent, compared with a 9.7 percent ratio for the Brazilian Bovespa.

Brandt has been moving money to Chile, in part because he says higher levels of stock ownership by local pension funds mean the country's markets are less susceptible to rapid swings in international fund flows.

He bought shares in Aguas Andinas SA, the country's biggest water company, and clothing and electrical retailer Comercial Siglo XXI SA. Shares of Santiago-based Aguas Andinas have fallen 7.3 percent over the past six months while shares of Comercial Siglo, also based in the Chilean capital, have advanced 20 percent.