A Quirky Play on Mexican Infrastructure

10/29/2007 12:00 am EST

Focus: GLOBAL

Vivian Lewis

Editor and Publisher, Global Investing

Vivian Lewis, editor of Global Investing, finds an unusual closed-end fund that has profited from its big exposure to companies building infrastructure in Mexico.

Latin infrastructure is an idea whose time has come, [and] infrastructure funds in emerging markets irresistibly combine growth and yield.

Mexican infrastructure will be boosted by new tax advantages under tax reform. Corporate taxes will rise, but a new "control tax" will favor capital expenses. This will encourage startups, building airports, and shipping and infrastructure companies. Also more public revenue will be spent on improving energy production at Pemex, which will also help infrastructure companies, according to analyst Michael Kurtz of Bear Stearns.

To invest in [Mexican infrastructure], invest in the closed-end Mexico Equity and Income Fund (NYSE: MXE). I figure MXE is about a third in infrastructure plays, depending on how you count them. Mexico is one of the few countries in the world whose currency is firmly fixed to the US dollar. That may not be official, but merely a reflection of the economic impact of declining Mexican oil output.

So, MXE's performance is based purely on stock picking, and not on the impact of a weaker greenback. And what a performance it has produced! Its net asset value (NAV) is up [around 60%] in the last 12 months. This is twice as good as the Mexico Fund (NYSE: MXF), its chief rival, more of an index tracker [and] the iShares MSCI Mexico Index  (NYSE: EWW) ETF, which has a similarly restricted mandate.

Yet at $35 and change, the fund is still at [more than an 11%] discount to NAV. There are a couple of reasons for the persistent discount. First of all, this is a stand-alone closed-end fund, rather than one in a group, so its promotion is haphazard. Its website is being redesigned and is now offline, no small matter in the current market. Its toll-free number is out of commission. It did a recent rights issue at NAV to try to reduce the discount, but it was poorly timed.

But above all, this is a quirky fund, investing in small caps and special situations, as it is allowed to do by being an SEC-registered "nondiversified" closed-end fund. Some analysts fear it will not be able to keep it up. MXE yields 9.7% yield. 

Its leading holding as of the close of July were America Movil, a telco, 9%; Promotora y Operadora de Infraestructura, an infrastructure firm, 8.8%; Empresas ICA, another infrastructure firm, 8.1%; hotel- and time-share developer Grupe S.A., 7.2%; retailer Wal-Mart de Mexico, 6.6%; Grupo Mexicano Desarrollo, another infrastructure stock, 5.3%; miner Grupo Mexico, 4.1%; Promotora Ambiental, another infrastructure stock, 3.5%, and Banorte, a bank, 3.1%.

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