BlackRock Latin American 10 December 2019
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by BlackRock Latin American. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
BlackRock Latin America (BRLA) aims to profit from the growth potential in Latin American equities, chiefly those of Brazil and Mexico. The trust is managed by Ed Kuczma and Sam Vecht, who lean on the deep resources of the broader BlackRock emerging markets team. Currently BRLA is heavily weighted towards Brazil. The managers are highly bullish on the country thanks to its favourable political scene, the potential for further interest rate cuts and booming personal consumption.
Although Ed and Sam aim to maximise capital growth, the trust pays out 1.25% of NAV each quarter as a dividend, which would be 5% on a constant NAV basis. The dividend is paid from capital if income is not sufficient.
The trust’s process has been revamped under the new managers, who took over in January 2019. While the key elements of the strategy remain the same, there has been greater integration with the wider EM team, aided by Sam’s presence. Sam heads the EMEA, Frontiers and Latin America desk and runs portfolios with a broader focus, while Ed is a Latin America specialist. The managers report that they have integrated macro and political analysis deeper into the portfolio construction process, while they have also made the portfolio more concentrated and active, increasing its potential for outperformance.
BRLA is overweight Brazil and Mexico, and gearing is also high relative to its possible range, indicating the managers’ optimism for their markets and expectations of good returns to come. Their more active stance has not yet been rewarded with returns, however, as we discuss in the performance section.
BRLA currently trades on a 12.7% discount at the current share price, close to its five-year average of 13%. The discount narrowed in the first half of the year, following the announcement that Ed and Sam were taking over as managers, but has widened back out to near where it started 2019.
For investors in BRLA, taking a view on Brazil is crucial given it makes up two thirds of the trust’s benchmark index, and is currently an overweight in the portfolio. In our opinion, this is an exciting time to invest in the country, with a reformist president making changes many thought impossible. Bolsonaro has even managed to raise the Brazilian pension age, reducing the biggest drain on the state’s resources (many Brazilians have hitherto been entitled to retire in their 50s on a state pension). For investors, however, the government’s new policy of not interfering with how private companies are run, and the potential for further rate cuts, are probably the biggest reasons to be bullish. The currency being at historic lows should also provide some support.
In terms of the trust itself, the new managers’ more active policy should increase the potential for alpha generation. The integration of BlackRock’s sophisticated macroeconomic resources and analysis should also bring benefits. BRLA offers an attractive way to invest in a market of which investors in broad emerging markets funds are unlikely to own much – Brazil now makes up less than 8% of the MSCI Emerging Markets Index. As well as the potential for capital growth, the new 1.25% quarterly dividend policy should also be attractive for those seeking to diversify their sources of income.
|Exciting prospects for Brazil, the trust’s largest position
|Politics can be volatile in the region
|A 1.25% quarterly dividend
|The region can be dependent on external economic forces on trade, currencies, etc.
|A more concentrated and high conviction portfolio has greater alpha-generation potential
|A more concentrated and active portfolio can underperform more as well as outperform more