The Strategic Latin America Fund (SLATX) is the best specialist mutual fund you’ve never heard of.

It’s run by a holding company created by the shareholders that own Bolivian banking giant, Banco Mercantil Santa Cruz. They launched Strategic in May 2010 and in that short three year time span it has been ranked the top in its category on more than one occasion.

Morningstar says it’s number one in their balanced, world allocation moderate risk category.

Last year’s total return was over 21 percent, beating much bigger BlackRock, Fidelity and JP Morgan growth funds.

There are, quite frankly, dozens of global balanced funds out there. But for those who want to overweight Latin America and like the highest yield piece of real estate on the map, the pickings are slim. Out of over 200 mutual funds in Morningstar’s World Allocation category, Strategic was ranked 33 in performance over the last 12 months ending Jan. 25.

A year ago, I sat down with Heiner Skaliks, the fund manager for Strategic. We met at Bond, a restaurant at The Langham Hotel in Boston’s financial district that’s plastered with presidential print images on dollar bills and Treasurys. Ironically, that’s the district that brought the world the exchange traded fund, right around the corner at State Street.

The good news is, State Street and BlackRock and other ETF companies have not yet devised a balanced ETF fund for Latin America. Strategic stands alone. Well, almost.

In late 2011, Skaliks said it was not time to invest in Brazilian equities. When we met at Bond in January 2012, he stood by it. He warned against being overweight Brazil and touting better buys and more growth in Mexican equities. He was underweight early, and he was right.

We met in Boston again recently, this time at Blue Inc., a restaurant with fried pickles and liquid nitrogen liquor. He said they’ve been increasing their equity portion of the fund and are now around 60 percent bonds and 40 percent equities, up from around 35 percent last year. The fund still avoids currency risk by buying sovereign debt and corporate debt priced in dollars. For equities, the fund is limited in its strategy by only going after ADRs. It’s missed a lot of the boom in Brazilian retail last year, but Mexico and bond prices more than made up for that.

I asked him what he thought were the next big things in Latin America.

In 2011, the darling of emerging markets was Indonesia. In a relatively bad year for equities, the Market Vectors Indonesia (IDX) ETF beat the MSCI Emerging Markets and the S&P 500 indices, which were negative. Last year, the emerging market favorite was Mexico.

The iShares MSCI Mexico (EWW) ETF returned what the S&P and the MSCI EM did, combined. If Skaliks is right, this is the year for Colombia. Colombia is one of the next big things in Latin America.

Looked at through the ETF lens, the lightly traded Global X FTSE Colombia 20(GXG) ETF is up 0.76 percent so far this year, beating the MSCI EM (but not Mexico, the BRICs, or the U.S.)

“I like Colombian equities this year,” said Skaliks. “The banks, food companies and consumer staples all look attractive. This is a country with a lot of installed capacity that’s gone unused because of the drug wars and uncertainty surrounding the FARC. Now you see that capacity getting cranked up for the first time in a very long while. Colombia has a good geographic location in the region and is the only country other than Mexico to have a free trade agreement with the U.S. So as the U.S. economy improves, I think Colombia stands to benefit from that, too.”

BRAZILIAN EQUITY REBOUND

Anyone buying this one? A Brazilian equity rebound, people. The iShares MSCI Brazil (EWZ) ETF, which tracks the BM&F Bovespa index, is down over 20 percent since January 2010. In 2011, Brazilian equities fell by more than 22 percent, underperforming the MSCI EM index. Last year, while emerging markets were on the upswing, Brazil’s stock market, led by
duds like Petrobras (PBR) and Vale (VALE) disappointed yet again. They were in decline by around 2.5 percent while the MSCI EM was up 15 percent. The two heaviest weighted stocks in the Brazilian market, Petrobras fell over 25 percent last year and Vale fell by more than 5 percent.

“I’m more neutral Brazil than underweight now, but I think we are getting to a point where Brazil will be an overweight,” he said. “It’s more likely to happen in the second half. We got out of equities there around October 2011 when the real (the Brazilian currency) was around 1.75. I’d go to Brazil and spend a fortune in São Paulo for a cup of coffee. And when I’d go to New York, I’d see Brazilians shopping more than usual. That’s when I figured things are getting out of hand,” he said. “Every economy goes through its cycles and Brazil has had some policy shifts that have also hurt the economy, but I think that at this point we are going through that trough and in that process Brazil will either be one leg up, or flat. For me, Brazil looks attractive again when you see the real go to a weak point of 2.07 to the dollar, because that makes industry more competitive. That’s an inflection point for us. If the real strengthens again then I wouldn’t be interested.”

On Jan. 28, the real strengthened to R$1.99. The currency was trading briefly over R$2.05 in mid-November, but Skaliks did not buy. The portfolio maintains a small position in Petrobras and petrochemical firm Braskem (BAK). For now, Skaliks still likes the bonds of Banco Daycoval and meat packers Marfrig and JBS, all yielding over 6 percent. JBS is one of the fund’s biggest holdings, accounting for 4.3 percent of total invested. “We think that Brazilian companies are strong and we are definitely buyers of Brazilian bonds,” he said.

NEW SOVEREIGN DEBT ISSUES

In October of last year, a rare Bolivian bond issue of $500 million surprised the market. The BB rated (read, “junk” bond status) dollar-denominated debt was so popular it was 9 times oversubscribed and interest rates on the bonds fell to a record low 4.8 percent. ”We didn’t get in on that one. But guess who else is doing the same thing now: Paraguay,” he said.
“These are small issues of under a billion, but the yield is fantastic. I think the next big thing in Latin America is more sovereign debt issues from unlikely places.”

Skaliks said he also thinks Peru will have another good year for investors. ”It’s already the next big thing and will continue to be,” he said. Investors have been cashing out of Peruvian equity this year after that market outperformed the MSCI EM. The iShares MSCI Peru (EPU) ETF rose over 17 percent last year, but is a slight underperformer this year versus the benchmark.

Strategic is also still overweight Mexico in the region, with the securities invested there divided evenly between stocks and bonds. Like other fund managers, Skaliks thinking is that this rally in equities has run its course. “I don’t think the leg up in U.S. equities is sustainable. Even with good corporate earnings there are still a lot of doubts about the underlying fundamentals,” he said. “We’ve had a lot of money on the sidelines get put to work early, but we are going to see some profit taking before long and then that money will be back on the sidelines.”

Investors are waiting for more news on the U.S. debt ceiling and still hoping for structural changes in Europe to solve the banking and sovereign debt problems in the peripheral countries like Greece.