Let’s say Peru’s strong economic growth and its rising stock market caught your eye while nursing an entire season’s worth of sunburn or frostbite (depending on your hemisphere). How exactly do you go about investing in the Peruvian stock market?
Compared to US and European stock markets, La Bolsa de Valores de Lima (BVL), or as it is known in English, the Lima Stock Exchange, is certainly a road less traveled. The language may be a barrier for some investors, while for others, the lack of online resources could be daunting. What follows is a basic guide on ways to invest in the BVL, listed in the order of time and effort required by the investor.
A few companies that have the majority of their operations in Peru also trade on US stock exchanges. These are Southern Copper (ticker symbol SCCO), Creditcorp (BAP), Compañia de Minas Buenaventura (BVN) and Cementos Pacasmayo (CPAC). Investing in these very large companies is as easy as calling up your stock broker or logging in to your online brokerage account and placing a trade in the same way you would buy Apple or GE stock.
Just as easily you could purchase the exchange traded fund (ETF) iShares MSCI All Peru Capped Index Fund (ticker symbol EPU), which roughly tracks the Lima Stock Exchange. An ETF is a fund that is bought and sold on the stock market just like the shares of any company would. An ETF holds a basket of stocks, commodities, or bonds, and trades at a value close to the sum of its component parts. Most ETFs track an index, such as the S&P 500 and this particular one represents a basket of Peruvian stocks (the largest 28 as of this writing).
How well does EPU track the actual BVL? Well, EPU is a market cap weighted ETF meaning that the larger stocks get a larger representation within the ETF. Because the BVL is a relatively top heavy index, the top 10 stocks make up over 71% of the ETF and anything outside the top 10 gets a representation of only 3% or less.
Over the past year, EPU’s performance was +3.4% and so far in 2012 up +18.2% through the end of March. El Indice General de la Bolsa de Valores de Lima (IGBVL), the main index of the BVL, was up +11.7% over the past year and in 2012 up +21.4%, also through the end of March. As you can see, EPU’s performance has lagged the IGBVL over these periods and may not be a perfect representation of the Peruvian stock market.
Another option could be to invest in Peru through mutual funds. Unfortunately, I have not seen any mutual funds sold outside of Peru that invest strictly in Peruvian companies. You could purchase a mutual fund with a Latin American focus but then you would mostly be investing in companies that are based in the larger economies of Brazil, Chile, and Argentina.
The next two options are to open an investment account in your home country with an investment advisor that has access to the BVL or to open an account with a Peruvian stock broker called a Sociedad Agente de Bolsa (SAB). These options will involve more time to research different investment advisors and possibly even a trip to Peru to open an account at a SAB. (My wife would be very upset with me if I did not at least mention that our company, Valcarcel Asset Management, is an investment advisor operating in Lima with access to the local Peruvian market.)
The main benefits of working with an advisor are having a) an investment account tailored to your needs, and b) access to the stocks of companies that do not trade on foreign exchanges and are not included in ETF’s or mutual funds. In my opinion, these are the companies that offer the most compelling investment opportunity within Peru for two reasons.
First, smaller companies usually have the opportunity to increase their profits and gain market share while staying within Peru. The larger companies which trade on foreign exchanges and are included in ETFs will probably eventually need to cross international borders to expand which is a more difficult proposition.
Second, because these companies do not get much attention from abroad, they tend to offer the better value. Their prices should rise at a higher rate than larger companies\’ as the world’s investors continue to turn their eyes towards Peru.
If we’ve picked the right stocks, not only should we see increasing profits every year from these companies, but the prices other investors are willing to pay for each dollar of their earnings should also increase and create a double wind at the back of their stock price. As an investor, the road less travelled could potentially be a very profitable one.
Jorge Valcarcel is an experienced investor in equities, fixed income, derivatives and alternative investments. He is currently the CEO of Valcarcel Asset Management, an investment management firm serving both institutional and individual clients around the world. He can be reached at firstname.lastname@example.org