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OVER THE PAST

year, the big South American oil company

Petroleo Brasileiro

Exxon Mobil

Petrobras has become a common holding among funds that invest in South and Central America. As Petrobras shares have run up, this fund category Lipper labels it Latin American has posted a 7.2% year-to-date return and a 25.4% average return over the trailing 52-week period. Only commodity funds and energy funds have done better. Most other fund categories are in the red for those time periods.

The meteoric rise of Petrobras provides us with an opportunity to once again look at Latin America funds for this week's screen. This category contains just 23 funds and share classes, one of the smallest universes of offerings we start with all year. We instantly knocked out 19 that charge sales loads. After we accounted for our usual performance and expense criteria, we were left with just two offerings from T. Rowe Price and Fidelity. They are listed on the table below.

Latin America funds invest primarily in Mexico and Brazil and, to a smaller extent, the surrounding countries, too. The intrigue with these emerging markets and with others across the world is their growth rates. South and Central America, Eastern Europe, China and India have flourishing middle classes and growing economies. Indeed, the economic growth rates for Brazil, Chile, Argentina and Central America as a whole easily outstrip that of the U.S.

However, investing in emerging markets carries considerable risk. The stocks these funds own tend to be either financials or, in most cases, energy-related. That means the funds are subject to sector bias. Also, there are very few large, liquid companies to pick from. That's why you will see Petrobras as a major holding in most funds (including the two on our list). What happens, though, if Petrobras can't manage to get its reserves out of the ground in a timely fashion? A fund's performance could ride on the whims of the investors in that single stock.

There are more macro issues at play, too. Political risk is always a concern. Hugo Chavez, Venezuela's erratic leader, may not have a say on running South America. But his actions certainly impact the business climate there. There are also signs that inflation could eventually creep into emerging markets, cooling off regions that have been red-hot investments the last few years (although the growth rates are still healthy).

"The fact that people might be trimming risky positions at this point isn't surprising. When fear rises [these investments] tend to get hit first and hardest," says Stephen Barnes, founder of Barnes Investment Advisory in Phoenix. "But the slowdown really isn't showing up in emerging markets yet. They are still extremely strong. We don't share any valuation concerns." Barnes has as much as 12% of his clients' international portfolio in emerging markets, including Latin America.

One option to take into account is purchasing an exchange-traded fund. IShares, for example, has country funds that follow Brazil, Chile and Mexico. It also trades the S&P Latin America 40 fund. This offering has most of its assets in four industries: materials (35%), energy (19%), financials (14%) and telecommunications (14%). Petrobras accounts for a 12% holding. The appeal of using an ETF for such a potentially risky bet is that investors could get in and out of these funds quicker than a traditional mutual fund. Another route to consider is a diversified basket of emerging-market countries. Vanguard Emerging Markets Stock Index fund has its assets spread over almost two dozen countries.

"You can diversify away the risk," says Frank Armstrong, founder of Investor Solutions in Coconut Grove, Fla.

There are advisors, though, who counter that when investing money overseas it's best to put it in the hands of a proven manager who can exploit all the inefficiencies of the global marketplace. If you believe that theory, you should check out T. Rowe Price Latin America, one of our finalists this week.

The fund's manager, Gonzalo Pangaro, has been running it since 2004. (He's been with T. Rowe for a decade.) The $4.3 billion fund is a bit concentrated with just 46 stocks in its portfolio. Indeed, 21% of the fund is taken up by just two positions: Petrobras and telecom firm America Movil. But the fund isn't a highflier. According to Morningstar analyst William Samuel Rocco, Pangaro has begun trimming some of his exposure to richly valued commodity names and is instead buying cheaper midcap stocks. That has dinged performance lately. The fund's 4.7% return in 2008 puts it squarely in the category's basement. But over longer periods, Pangaro has proven himself a decent stock picker. The fund is in the top third of that same category over the trailing five-year period and it holds the top spot during the three-year span. We're betting Pangaro will soon strike it big just as it appears Petrobras has.

The Criteria
We started with the funds Lipper lists in its Latin America category. They had to be open to new money, charge less than a 1.5% annual expense ratio and require a minimum investment under $5,000. The funds' three- and five-year performance track records put them in the top half of the category. Finally, we didn't include load funds.

Also see:

• Five Once-Great Funds Due for a Comeback

• Midcap Funds Rebound From Bad First Quarter

• Real-Estate Funds Quietly Make a Comeback

See the Fund Screen Table

Source: Lipper

Note: Data as of June 13, 2008

Latin America Fund Screen Recipe

• Five Once-Great Funds Due for a Comeback

• Midcap Funds Rebound From Bad First Quarter

• Real-Estate Funds Quietly Make a Comeback