The Hedgeweek Interview - Andres Pitchon, senior portfolio manager, Merchant Bankers Associados: Investing in Latin America's economic upswing

Andres Pitchon says that falling interest rates, rising credit quality and strong economic growth make Argentina and Latin America as a whole an attractive target for investment over the next year.

HW: What is the background to Merchant Bankers Associados?

AP: MBA is the oldest and most respected investment bank in Argentina, with 25 years of impeccable track record; Global Finance ranked MBA as the best Argentine investment bank in 2003, 2004 and 2005. MBA has proven experience in financial restructurings and complex transactions and is a leading brokerage house in Argentina. Franklin Templeton is a shareholder of MBA, which also has an alliance with Lazard to provide cross-border advisory financial services.

HW: Who are your key service providers?

AP: Our prime broker is Bear Stearns, and the administrator is HSBC.

HW: Have there been any recent events such as launches or additions to the management team?

AP: In June 2006 we launched The Latin America Opportunity Fund. In December we launched a Brazilian equities mutual fund in association with Brazilian firm Opus for the domestic institutional investors. We have recently hired two portfolio managers for equities, as well as a sales and distribution person in order to strengthen our team.

HW: What is your investment process?

AP: Our investment team of six senior investment professionals and two senior strategists make a proposal to the investment committee of three senior members. The investment committee approves or rejects the investment proposal, considering both top-down and bottom-up approaches as well as compliance with the strict risk management policy.

HW: How have your funds performed?

AP: The Patagonia Argentine Growth Fund returned 12.2 per cent in 2006 and has returned 17.7 per cent per annum since its inception in 2003. The Latin America Opportunity Fund, which was launched last June, had an annualised return of 13.3 per cent in 2006. In addition, our managed accounts returned 16.4 per cent in 2006.

HW: What are the strategies of your funds?

AP: The Patagonia Argentine Growth Fund is a multi-strategy fund that invests in Argentina. It can invest up to 20 per cent of total assets under management in a single credit, up to 20 per cent net long in equities and up to 100 per cent in local currency.

The Latin America Opportunity Fund is a multi-strategy fund that invests in Latin America. It can invest up to 50 per cent of total assets in any single country, 50 per cent in any single currency, 50 per cent in equities, and 20 per cent in any single credit.

HW: What events do you expect to see in your sector in the year ahead?

AP: In Argentina, we continue to see strong growth combined with twin surpluses. We expect president Néstor Kirchner to win the 2007 presidential elections. The Argentine peso is among the cheapest currencies in the world, and we believe excess supply of the US dollar supports real exchange appreciation. Argentine corporate credits have one of the best yield to credit quality ratios in the emerging markets sector.

For Latin America, we believe the outlook is positive. In our view, US tightening has most likely ended, with a soft landing as the base case. The macro environment remains positive for major countries, and we see flexible currency exchange regimes across Latin America. Peru, Colombia and Brazil are the next candidates to become investment grade. Domestic rates in Brazil are in a declining trend, so we like Brazilian equities and domestic fixed-income instruments.

HW: How will these developments impact your portfolios?

AP: In Argentina, the expected real appreciation of the peso should have a positive impact on inflation-adjusted peso bonds, while the GDP warrants and stocks such as the banking sector should continue appreciating on the back of strong economic growth. We also believe the utility sector offers a good investment opportunity, as the government is likely to increase utility tariffs after the elections to be held in October 2007.

In a Latin American context, we believe Brazil equities and fixed income offer good investment opportunities due to the expected decline in interest rates. Among Brazilian equities, we prefer domestic economy plays. We also believe that Colombian local fixed income, Argentine corporates, and the short-end of the Argentine USD curve also offer good investment opportunities.

HW: What differentiates you from other managers in your sector?

AP: Two key issues differentiate us from other Latin American managers. First is our platform: we are Argentina's top investment bank, with 25 years of experience in the region. Secondly, our Latin America Opportunity Fund is truly a Latin American fund, in contrast to most funds that are based in Brazil and focused exclusively in Brazil. During 2006 we invested in eight different countries.

HW: What are your views on risk?

AP: Our view is that when markets are going up, investors' appetite for risk seems infinite. However, what they really want is to make more money, not to take more risks. We are always trying to make more money without taking unnecessary risks.

HW: How do you deal with rising investor expectations?

AP: Investors in fact tell us that they are happy with our target returns of 15 per cent a year with low volatility - especially since we have delivered almost 300 bps above our target.

HW: How do you distribute your products?

AP: Emergent Asset Management is the distributor of our hedge funds.

HW: Are you planning any further launches this year?

AP: It will depend on investors' demand. As an example, during our recent trip to Europe, several German investors showed strong interest in investing in a long-only vehicle that would be better suited to German regulations for institutional investors. We also plan to launch a new mutual fund for Argentine equities, mainly for Argentine pension funds.



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