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LATIN AMERICA
SMALLER COMPANIES FUND, INC.
JANUARY 31, 1998
QUARTERLY REPORT
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American Express Asset Management
International Inc.
Regulated by IMRO
Offices in London, Minneapolis,
Hong Kong, Singapore, Tokyo
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LATIN AMERICA SMALLER COMPANIES FUND, INC.
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FROM THE PORTFOLIO MANAGER JANUARY, 1998
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Dear Shareholders:
I am pleased to announce that pursuant to shareholder approval, the name of
the Fund has changed to Latin America Smaller Companies Fund, Inc. We believe
this name is a better reflection of the investment objective of the Fund, since
its mandate is to invest at least 80% of its assets in the stocks of Latin
American companies with a market capitalization under $500 million at the time
of purchase. The change of name will emphasize the nature of the asset class in
which the Fund is invested.
It is also my pleasure to present the inaugural quarterly report for the
period ended January 31, 1998. We determined to introduce quarterly reports to
provide more timely information to shareholders and prospective investors about
the Fund.
PERFORMANCE
During the last three months the net asset value of the Fund fell by 0.83%.
This performance continues to reflect the influence exerted on all global
markets by problems in Asia. No global market was exempt from the turmoil, and
it is to be expected that Asia will continue to have a bearing over the course
of 1998 on the performance of the stocks of Latin American companies, small and
large alike.
ECONOMICS AND POLITICS
The need to protect the real from speculative attack has seen interest
rates in BRAZIL remain at punitively high levels. This has squeezed some life
out of the consumer sector of the economy in particular, but in recent weeks the
Banco Central do Brasil has taken action to attempt to inject some life into the
economy, by aggressively reducing interest rates. Some observers have suggested
the action is too optimistic, taking advantage as it does of some short-term
respite in attacks on the Asian currencies. Nonetheless, monetary policy in
Brazil remains comparatively tight and this will have implications on the
economy for the balance of 1998. This is significant, as the presidential
election takes place in October, since it is a measure of the huge success of
President (then Finance Minister) Cardoso's 1994 Real Plan that there is no
viable opponent to his re-election.
Any slowdown in demand from Brazil will clearly have an impact on the trade
position of its Mercosur partner ARGENTINA. During 1997 the domestic economy
continued to post higher-than-expected growth, and this continued into 1998.
However, the trade balance and current account are expected to show signs of
deterioration into 1998, which may once again raise the prospect of pressure on
the currency later this year. Unlike many Asian countries, Argentina will
benefit from the fact that its currency operates in a currency board system
rather than as a managed peg. This means that all pesos in issue are backed by
dollars, and therefore provides protection to the system.
Over the course of the last twelve months MEXICO has seen one of the
highest rates of economic growth in recent history. Recovery from the
post-Tequila Crisis lows has seen growth in excess of 6% year-on-year, and is
feeding through to the performance of corporate earnings. This is one of the
reasons why the Mexican market held up well during the worst ravages of the
Asian crisis, but the other reason is the extent to which the economy is more
closely linked, via NAFTA, with the U.S. economy. This is perceived as good
protection from any Asia-related downturn. However, the Mexican market has
started 1998 on a weak note, with concerns about the impact of a lower oil price
on fiscal revenues, the sustainability of recent economic strength and also
about the deteriorating external balances and their implications for the peso.
We remain confident that corporate earnings growth will provide positive
surprises, and if there is any further fall-out from the Asian crisis, this
market should be well-insulated.
Once again the CHILEAN central bank has taken action to demonstrate its
independence of the global monetary cycle, with a rise of 150 basis points in
interest rates so far in 1998. Whereas there had been concern that the level of
easing of monetary policy in 1998 had been too aggressive, given
1
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LATIN AMERICA SMALLER COMPANIES FUND, INC.
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FROM THE PORTFOLIO MANAGER (CONTINUED) JANUARY, 1998
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the state of the economic cycle, it is now feared that the central bank is being
too cautious. However, since inflation in Chile tends to lag economic activity
by a significant margin, it is not yet clear what impact the move will have. It
is certainly true that while certain areas of the economy remain comparatively
strong, there is noteworthy weakness in some important economic sectors such as
mining, where the lower copper price has caused particular concern. This is also
one of the reasons for the deterioration in the country's external balances, and
subsequent fall in the peso. In light of the greater economic uncertainty, we
retain our low exposure to the Chilean market.
OUTLOOK
The key events for the balance of 1998 will be the progress of the
Brazilian privatization program, and its implications for the widespread reform
of the economy, and also in Brazil, the October presidential election. Later on
this year it can be expected that politics will play an important part in the
behaviour of the Argentinian market, as the major candidates jockey for position
in the run-up to the presidential election there. In Mexico and Venezuela there
will be a focus on the price of oil, since both economies have a larger
dependence on oil-related revenues, but in Mexico particularly it will be an
emphasis on the sustainability of growth that has a more direct bearing on
equity prices.
The broader influences on the Latin American markets will be exerted from
farther afield, namely Asia and Wall Street. A stable or steadily-rising U.S.
equity market will provide more stable underpinnings to the Latin American
markets, but it will be Asia in the short term that determines market direction.
This may not be in the most obvious fashion, however. Although it would
doubtless be better for the health of most global markets if Asia remains stable
at current levels, this does not seem likely. A two-way pull between investors
looking for value and those concerned with the still poor economic outlook may
lead to volatility which will spread around the world. What is irrefutable,
however, is that in the near term the outlook for growth and asset quality is
considerably better in Latin America at the moment than it is in many other
emerging markets around the world.
Sincerely,
/s/ Ian King
IAN KING
Portfolio Manager
2
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LATIN AMERICA SMALLER COMPANIES FUND, INC.
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PORTFOLIO OF INVESTMENTS (UNAUDITED) JANUARY 31, 1998
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<TABLE>
<CAPTION>
SHARES VALUE
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COMMON STOCKS -- 78.4%
ARGENTINA -- 15.9%
4 Astra Compania Argentina de Petroleo $ 6
750,000 Atanor, S.A. 825,359
319,076 Banco Del Suquia, S.A. 791,653
1,133,333 Comercial Del Plata 1,451,298
250,000 Corporacion Cementaria Argentina (CORCEMAR) 1,045,455
932,128 Indupa, S.A. 951,184
308,642 Inversiones y Representaciones (IRSA) 972,645
164,717 Juan Minetti, S.A. 477,888
139,567 Renault Argentina, S.A. 175,931
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6,691,419
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CHILE -- 8.3%
250,000 Empressa Telex Chile, ADR 796,875
50,000 Laboratorios de Chile, ADR 837,500
100,000 Maderas y Sinteticas, ADR (MASISA) 825,000
36,000 Vina Concha y Toro, S.A., ADR 1,044,000
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3,503,375
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COLOMBIA -- 2.5%
67,000 Cementos Diamante, ADR, Class B++ 737,000
312,000 Gran Cadena de Almacenes Colombianos (CADENALCO) 297,497
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1,034,497
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MEXICO -- 41.1%
400,000 Acer Computec Latino America, S.A.+ 796,877
49,000 Bufete Industrial, S.A., ADR+ 441,000
75,000 Grupo Casa Autrey, ADR 1,467,187
1,200,000 Grupo Elektra, S.A. de C.V. 1,859,695
1,250,000 Grupo Financiero Banorte S.A. de C.V., Series B+ 1,981,545
2,000,000 Grupo Industrial Camesa, S.A., Series B+ 1,147,522
100,000 Grupo Iusacell, S.A., ADR+ 1,975,000
60,000 Grupo Radio Centro, ADR 757,500
469,000 Industrias Campos Hermanos, S.A., Series B+ 1,814,303
275,000 Sanluis Corporacion, S.A. de C.V. 1,756,773
520,000 Sistema Argos, S.A., Series B 781,261
225,000 Transportacion Maritima Mexicana, S.A. de C.V., ADR (TMM) 1,532,812
60,000 Tubos de Acero de Mexico S.A., ADR (TAMSA)+ 997,500
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17,308,975
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PERU -- 10.6%
200,000 Banco Wiese, ADR 975,000
40,000 Cementos Lima, S.A. 791,652
1,587,956 Ferreyros, S.A. 1,599,956
54,837 Indeco S.A. 8,880
1,091,254 Industrias Pacocha, S.A. 408,386
451,626 Minsur, S.A. 700,435
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4,484,309
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TOTAL COMMON STOCKS (COST $33,740,092) 33,022,575
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LATIN AMERICA SMALLER COMPANIES FUND, INC.
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PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) JANUARY 31, 1998
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<TABLE>
<CAPTION>
SHARES VALUE
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PREFERRED STOCKS -- 13.1%
BRAZIL
224,030,001 Bombril Cirio, S.A. $ 873,699
1,476,047 Centrais Eletricas de Santa Catarina, S.A., Series B
(CELESC) 1,340,546
80,000,000 Ceval Alimentos, S.A. 384,650
8,000,000 Marcopolo, S.A. 897,516
1,100,000,000 Perdigao, S.A. 1,371,205
2,000,000,000 Randon Participacoes, S.A.+ 641,083
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TOTAL PREFERRED STOCKS (COST $11,149,301) 5,508,699
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FACE VALUE
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SHORT-TERM INSTRUMENTS -- 9.0%
COMMERCIAL PAPER
$1,666,000 Ford Motor Company, 5.500% due 02/02/1998 1,666,000
$2,150,000 General Electric Capital Corporation, 5.640% due 02/02/1998 2,150,000
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TOTAL SHORT-TERM INSTRUMENTS (COST $3,816,000) 3,816,000
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TOTAL INVESTMENTS (COST $48,705,393*) 100.5% 42,347,274
OTHER ASSETS AND LIABILITIES (NET) (0.5) (200,727)
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NET ASSETS 100.0% $42,146,547
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* Aggregate cost for Federal tax purposes.
+ Non-income producing security.
++ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration to qualified institutional buyers.
ADR -- American Depositary Receipt.
4
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LATIN AMERICA SMALLER COMPANIES FUND, INC.
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QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
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<TABLE>
<CAPTION>
NET REALIZED AND UNREALIZED NET INCREASE/(DECREASE)
NET INVESTMENT GAIN/(LOSS) ON IN NET ASSETS
INCOME/(LOSS) INVESTMENTS RESULTING FROM OPERATIONS
TOTAL TOTAL TOTAL
QUARTER ENDED (000) PER SHARE (000) PER SHARE (000) PER SHARE
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FISCAL YEAR 1997
January 31, 1997........... $(113) $(0.03) $ 3,399 $ 0.85 $ 3,286 $ 0.82
April 30, 1997............. 105 0.03 1,721 0.43 1,826 0.46
July 31, 1997.............. 80 0.02 6,594 1.64 6,673 1.66
October 31, 1997........... (113) (0.03) (8,472) (2.11) (8,584) (2.14)
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TOTAL.................... (41) (0.01) 3,242 0.81 3,201 0.80
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FISCAL YEAR 1998
January 31, 1998........... (120) (0.03) (7,021) (1.75) (7,141) (1.78)
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TOTAL.................... (120) (0.03) (7,021) (1.75) (7,141) (1.78)
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LATIN AMERICA SMALLER COMPANIES FUND, INC.
One Exchange Place
Boston, MA 02109
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DIRECTORS AND OFFICERS INVESTMENT ADVISER
Peter L. Lamaison American Express Asset Management
Chairman of the Board International Inc.
11th Floor Dashwood House
69 Old Broad Street
Philip H. Didriksen, Jr. London EC2M 1Qs
Director United Kingdom
Rodman L. Drake
Director
INVESTOR RELATIONS
Kathleen C. McClave 1-800-310-8239
Director (Recorded Market Commentary)
1-612-671-2334
Peer Pedersen (To request additional information)
Director
Ian King
Vice President ADMINISTRATOR AND
and Investment Officer TRANSFER AGENT
Coleen Downs Dinneen, Esq. First Data Investor Services Group, Inc.
Secretary One Exchange Place
Boston, MA 02109-2873
Michael Kardok
Treasurer SHAREHOLDER SERVICE NUMBER
1-800-331-1710
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
FUND COUNSEL CUSTODIAN
Shereff, Friedman, Hoffman & Goodman, LLP Boston Safe Deposit & Trust Company
919 Third Avenue One Boston Place
New York, NY 10022 Boston, MA 02108
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