Latin American Stocks Aim for a New Decade of Gains CVRD, via Reuters CVRD, the giant iron ore mining company, operates the Brucutu mine at São Gonçalo do Rio Abaixo in Brazil. STOCK markets in much of the world may have suffered a lost decade, but there was much to gain by investing in Latin America. A vigorous and persistent economic and political renaissance, especially in Brazil, produced annualized returns of 17.1 percent for funds that focus on the region during the 10 years through March, including a 13.3 percent return in the first quarter of this year. Another decade like that may be too much to hope for, and fund managers who concentrate on emerging economies highlight a handful of potential challenges for Latin American markets. The markets can be volatile too; they fell sharply in 2008 and more moderately in 2011. Still, continued success is widely expected for the region and for investors who keep their money there for the long haul. Rick Schmidt, a manager of the Harding Loevner Emerging Markets fund, attributed the run of phenomenal performance to "two and a half stories." One is sustained, strong economic growth across the developing world. Significant growth of another sort - in democratic political institutions and sound economic management - was an even greater contributor to success, in his view. "The countries that made changes to more open markets and to developing their middle class saw the greatest returns," Mr. Schmidt said. His other favorable circumstance, or half of one, was a lucky coincidence. The economic and currency crisis that began in Asia in 1997 moved on to Russia a year later and then to Latin America. Markets there bottomed almost exactly 10 years ago, he noted, making the returns since then look especially robust. Gonzalo Pangaro, head of the emerging-markets group at T. Rowe Price, also mentioned improvement in leadership in Latin America, and said it extended from government ministries to corporate boardrooms. "Most governments, including the key ones in Brazil and Mexico, have implemented very sensible macroeconomic policies - fiscal prudence, controlling inflation - and public companies tend to be of very good quality," he said. The quality of management and protection of minority shareholders are right up there, and growth opportunities are as good as you can find in some of the fast-growing Asian countries. The healthy increase in profits at Latin American companies has kept valuations reasonable, even as markets have continued to soar. Stocks in Brazil, the region's dominant market, recently traded at about 10 times earnings, compared with a multiple of about 13 for the Standard & Poor's 500-stock index in the United States. Good management is crucial for maintaining robust profits, and so are good customers. Fund managers find plenty of those in Latin America, where growing demand for products and services from increasingly well-off people is helping to transform economies and businesses. "Seventy percent of Brazil is middle class or higher, and they're active consumers," said William Landers, manager of the BlackRock Latin America fund. Many of investors" favored stocks in the region are of companies that cater to consumer needs and wants, particularly Brazilian banks and real estate developers. Housing is in short supply in Brazil, portfolio managers say, and a government program in which employers make regular contributions to subsidize employees" mortgages should keep demand high for homes and financing. Mr. Landers likes Banco Itaú and the home builder PDG Realty, which he credits with having "one of the better managements in the sector." Mr. Schmidt, meanwhile, holds Itaú and one of its main rivals, Banco Bradesco. Mr. Pangaro casts a third vote for Brazilian banks, especially Itaú, which he called "a very well-run bank with very good profitability." Jonas Krumplys, manager of the Ivy Asset Strategy New Opportunities fund, holds a broad range of stocks tied to Brazilian real estate, including home builders and developers of shopping malls and warehouses. One company outside Brazil that he expects to benefit from the expansion of the Latin American middle class is Copa Airlines, which is doing brisk business flying passengers between North and South America via its base in Panama. Apart from banks, Mr. Schmidt recommends the brewers Ambev of Brazil and Femsa of Mexico, along with Coca-Cola Femsa, an affiliate of Femsa and Coca-Cola. One sector not on managers" favored list is telecommunications. Use of cellphones and the Internet is much lower in Latin America than in mature economies, leaving great scope for growth, but managers find too many companies competing to offer services.