BlackRock Latin American 12 May 2020
Disclaimer
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 American (BRLA) invests in Latin America for capital growth, using the full extent of BlackRock’s resources as the world’s largest money manager to generate alpha from stock selection and proprietary macroeconomic analysis.
Since 2018, BRLA has also paid a quarterly dividend set at 1.25% of NAV, equivalent to 5% at a constant NAV. The board can pay this out of capital where necessary, which means the managers can continue to focus on the best growth prospects without having to sacrifice growth for yield.
Managers Ed Kuczma and Sam Vecht took over in January 2019. Their aim has been to make the portfolio more active, with individual stock picks more important to performance. As we discuss in the Performance section, this has generally been successful, although the region has been rocked by two major crises during the managers’ tenure.
The MSCI EM Latin America benchmark is dominated by Brazil (c. 61%) and Mexico (c. 24%), and BRLA’s portfolio is similarly weighted. The region’s markets were among the worst hit by the coronavirus pandemic with a c. 45% peak-to-trough fall. The index is now trading on extremely low P/E levels and BRLA is on a 10.3% discount (see the Discount section).
The only two other closed-ended funds investing in Latin America are very small (with net assets well below £50m). As a result, their charges are double BRLA’s. With open-ended funds also rare, BRLA is one of the few options for exposure to the region, and benefits from the advantages of closed-ended funds such as the ability to gear and not having to sell into falling markets.
In US-dollar terms, the Brazilian stock market is at a similar value to what it was in 2005, despite the huge advances the economy has made since then. In our view this is anomalous, and the market could be an intriguing long-term investment. There are also some headwinds: the high exposure of the market to energy, materials and financials means it is cyclical, exposed to the global economy and biased to value. However, all this means that it could be a strong performer in any recovery from the global pandemic crisis – just as it was one of the hardest hit entering the crisis.
BRLA is a highly attractive way to access this opportunity. Its closed-ended peers look sub-scale after the vicious drawdowns of recent weeks, and BRLA is now extremely cheap by comparison. Furthermore, it offers an attractive yield from a region to which few investors will have any exposure (we note that the region is less than 10% of the MSCI Emerging Markets Index, so few investors will have exposure through their EM funds).
Finally, the experienced management team and deep resources of BlackRock have the potential to be a potent combination. We note that the trust has become demonstrably more active under Ed and Sam, with strong evidence they can add alpha against the benchmark – even if that has been derailed in the short term by unpredictable crises.
| bull | bear |
| The trust is on a wide discount and the market is extremely cheap | The fallout from the coronavirus pandemic is unpredictable in the short term |
| A 1.25% quarterly dividend | Latin American markets 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 |
Fund History
