Investors Who Make a Run for the Border

The ink has barely dried on the new North American Free Trade Agreement, yet mutual fund investors in the United States already have several ways to capitalize on the landmark agreement.

The New York-based Mariner Fund Group in late May introduced its North America Fund, which spreads its assets among American, Canadian and Mexican companies. Three other U.S.-registered mutual funds invest in Canadian stocks, and two more hold Latin American companies, typically with a large Mexican weighting.

In addition, four closed-end funds focus on Latin American investments, and three more hold nothing but Mexican securities. Closed-end portfolios are similar to regular mutual funds except that they trade like stocks on exchanges.

Most of these products were introduced well ahead of the trade agreement, which was signed Aug. 12. “The most important part of the agreement encourages foreign capital in-flows, which have already been happening in Mexico since about 1989,” says Soraya Betterton, an investment manager for G. T. Capital Management in San Francisco. “NAFTA will be the icing on the cake.”

In fact, Mexico has been liberalizing its economy and trade relations since about 1985, with tariffs falling and many industries opening up to foreign competition, says Luis R. Luis, a Latin American investment specialist for Scudder, Stevens & Clark in Boston.

This process will be hastened, assuming the NAFTA pact is approved by Congress--a good bet considering that both President Bush and Democratic challenger Bill Clinton support the measure.

Investors wanting a piece of the Mexican pie will notice that the country has made great strides toward a more competitive, modern economy. Inflation has fallen from more than 150% a decade ago to about 15%. And capitalism has been encouraged by privatization of about 80% of all state-run companies over the last decade--the most prominent example being Telefonos de Mexico.

Both Luis and Timothy R. H. Love, who manages the Mariner North America Fund, see Mexico’s economy expanding 2.5% to 3% this year and 4.5% in 1993.

An important question for investors is whether Mexican stocks are attractively valued. Love believes that they are. After a sharp run-up over the last few years, the market has gone through what he describes as a “healthy correction” lately, with prices dropping about 20% on average. The result: fewer new stock issues, and a lower market price-earnings ratio of about 11.5, compared to 13.5 last year, Love says.

Luis also likes Mexico’s investment potential, but Betterton doesn’t see much chance for significant gains over the short haul. A strengthening peso has hurt the country’s competitiveness, and interest rates are fairly high because of the government’s anti-inflation drive, she argues.

Still, Mexican political stability and an improving corporate sector bode well for the investment climate long term. “Mexico is one of the best opportunities in the (Latin American) region,” she says. “Mexico and Chile are the two places that will probably make it.”

On a near-term basis, Canada might offer better potential than Mexico--though not necessarily because of NAFTA. “We see an earnings explosion in 1993, perhaps a trebling of profits,” says Patrick J. Moriarty, chief investment officer in New York for Bank Julius Baer of Switzerland.

Canada’s commodity-oriented economy has struggled more than the United States lately, which has forced companies to become more efficient. In addition, the Canadian dollar has dropped about 4% against the greenback this year, making many Canadian goods more competitive.

Plus, Canadian interest rates are high compared to U.S. rates, offering more downside potential. And the country’s inflation rate of below 2% ranks among the best in the world.

According to Moriarty, global money managers are over-weighted in Mexico but under-weighted in Canada, which could ultimately bode poorly for Mexican stocks but well for Canadian shares.

George Domolky, who manages Fidelity’s Canada Fund, agrees that stocks to the north “have some catching up to do.” Last year, for example, the Standard & Poor’s 500 index rose three times more than the Toronto Stock Exchange.

“There’s no question that the long term’s a positive for Canada,” Domolky says.

He also believes that Canadian companies may enjoy proportionately more business opportunities in Mexico as a result of the NAFTA pact. “Both nations suffer from a Little Brother syndrome (regarding the U.S.), and thus might be more willing to work together.”

In addition, Domolky says, the NAFTA pact might increase Americans’ interest in Canada and its companies, thereby boosting demand for Canadian stocks.

But what’s really needed for the market to take off, he says, is improving global business conditions.

Moriarty agrees. “As the world economy improves, Canada will be one of the major beneficiaries.”

What’s Available

Investors wanting to build a North American portfolio will find several Canadian and Mexican choices in the mutual fund area, although none are commission-free products.

Only the Mariner North America Fund (5% load; 800-634-2536) specifically owns Canadian, U.S. and Mexican stocks.

But assuming you already have American investments, you can add some Canadian exposure with Fidelity Canada (3% load; 800-544-8888), Alliance Global Canadian (5.5%; 800-227-4618) or Mackenzie Canada (5.75%; 800-456-5111).

No regular mutual funds invest exclusively in Mexico, but you can gain access to the country through Merrill Lynch Latin America (maximum 4% load; contact local office). A rival fund, G.T. Latin America Growth (4.75%; 800-824-1580), is now closed to new investors.

More choices exist among closed-end funds, including four Latin American portfolios and three Mexico-only products: Emerging Mexico Fund (212-713-2000), Mexico Equity & Income Fund (212-667-5674) and Mexico Fund (212-750-4200).

Like regular mutual funds, closed-end portfolios offer professional management and diversification. However, they issue a fixed number of shares, so they trade like stocks. All three Mexican funds are listed on the New York Stock Exchange.