The managers of BlackRock Latin America (BRLA), Ed Kuczma and Sam Vecht use BlackRock’s extensive resources to identify the best growth prospects in the Latin America region. The process leans on a mixture of proprietary macroeconomic research done by BlackRock’s large emerging markets team and stock specific research done by the team of four dedicated analysts focusing on the region. BRLA pays a dividend worth 1.25% of USD NAV each quarter - out of capital when necessary. This equates to c. 5% on an annualised basis, meaning the managers focus purely on identifying the best growth prospects.
Ed and Sam believe the main markets of the region – Brazil, Mexico and Chile – are at an early stage of a period of cyclical growth which makes them attractive investments at this time. As discussed in the portfolio section, combining various advantageous domestic developments, they believe the region could be a major beneficiary of the stimulus-driven global recovery from the pandemic. This is partly through the commodity producers that should benefit from infrastructure spend expected in the US and elsewhere. In the longer run, governments have been increasingly committing to transitioning away from fossil fuels, which creates huge extra demand for metals used in electric vehicles and alternative energy production.
BRLA also has exposure to companies benefitting from digitalisation and the growth of e-commerce. Having tilted the portfolio in this direction in 2020, as the pandemic spread, the managers have reduced this exposure and leant more towards commodities. BRLA’s portfolio now has a significant overweight to materials, including the producers of copper, lithium, iron ore and softer commodities such as paper and pulp. BRLA’s share price discount is 9.5%.
Latin American equity markets have historically had high beta to global equity markets, as we discuss in the performance section. This could make BRLA an attractive investment at this point in the cycle. If the global recovery from the pandemic continues, as we hope it will, then there will be a number of tailwinds behind the trust. Aside from this economic recovery hopefully being accompanied by rising equity market, the high weight to commodities – to which BRLA is overweight – should help relative returns, as should the high overall weighting to classic ‘value’ stocks in the benchmark. These include banks that would do well from any boost in real economic activity, particularly if it led to modest rises in interest rates.
BRLA trades on a significant discount of 9.5%, although we note this is narrower than its five-year average and the trust did not often trade much closer to NAV even in the region’s last cyclical expansion.
BRLA is the only pure equity investment trust investing in the region. The other trust, Aberdeen Latin American Income Fund, invests in bonds and equities and is likely to be too small for professional investors (with a sub-£40m market cap). As such, BRLA is the only real closed-end option for them to access the region which has the distinctive, potentially performance-boosting features of investment trusts, having now taken on gearing and continues to trade on a discount to NAV.
|Should display high sensitivity to a global economic recovery
||The fallout from the coronavirus pandemic is unpredictable in the short term
|Offers a 5% annualised yield on NAV
||Latin American markets and politics can be extremely volatile
|An experienced management team with deep resources to draw on
||Any increase of gearing brings greater exposure to falling markets as well as rising markets