Fund Profile

abrdn Latin American Income 08 March 2023

Disclaimer

This is a non-independent marketing communication commissioned by abrdn. 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.

Overview
ALAI offers a high yield from a region which could hedge inflation…
Overview

Latin America is an exciting region which offers high yields alongside multiple growth drivers and low correlation to mainstream equity indices. abrdn Latin American Income Fund (LON:ALAI) invests in both equities and government bonds in the region in order to deliver a high income and capital growth. At the time of writing, the trust has a historic dividend yield of 6.2%, exceptionally high for a majority equity portfolio. The Dividend was fully-covered in the last financial year, ending in August 2022, and the board has stated it intends to maintain the dividend at last year’s level.

ALAI’s portfolio is managed by Brunella Isper and Viktor Szabo. They are members of, respectively, abrdn’s global emerging markets equity team and emerging markets bonds team. While ALAI is relatively small, at £35m in net assets, the managers are members of teams that manage much larger pools of assets in these markets. They use the analysis and input of large teams to select their investments. In the case of the equity sleeve, which accounts for c. 70% of the portfolio, this means quality growth companies with pricing power, strong balance sheets and competent management teams. In the case of the debt sleeve, it means using macro analysis to understand the different opportunities in the region and select those bonds which offer high yields, whilst being well-supported by country fundamentals.

Latin America has had a strong year as commodity prices have rallied (see Performance). Brunella and Viktor tell us they think their region is in a better position now to face a tough economic period than it was in the past, with the prospect of rate cuts to come later in the year, which could boost asset prices.

Analyst's View

Few investors have much exposure to Latin America, which has shrunk as a proportion of the emerging market index as China and other North Asian countries have grown. However, the region has offered low correlation to the mainstream emerging market and developed world indices, which could be valuable for long-term investors. Notably, it rallied hard in 2022 as the MSCI Emerging Markets Index fell. The heavy exposure to mining and energy, which is important not only for the companies in these industries, but also government revenues and general economic health, means that investing in the region brings some element of an inflation hedge.

Alongside this, a key attraction of ALAI is the high dividend. While equities in LatAm can sometimes offer exceptionally high yields, this can also be volatile, and the weighting to bonds creates a more stable income account. The discount of 9.3% at the time of writing does boost the yield, but even on a NAV basis, the yield would be 5.5% - high for an equity fund. ALAI has not outperformed its benchmark or a straight equity index in recent years. However, we believe the proposition is to generate high yield from a portfolio, which should be less volatile than one with just straight equity funds, and with a more stable income stream. The quality growth strategy of the equity managers is in keeping with this relatively defensive strategy.

Bull

  • Exposure to dynamic region with growth prospects and low correlation to mainstream indices
  • High and stable dividend boosted by fixed income exposure
  • More diversified than equity-only Latin America portfolio

Bear

  • Highly volatile region, in asset prices, currencies and politics
  • Small size of trust will make it uninvestible for professional investors and reduce liquidity of the shares
  • High charges due to small size of trust
Continue to Portfolio

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