BlackRock Latin American 28 September 2021
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BlackRock Latin America (BRLA) offers exposure to the dynamic Latin American equity markets. Managers Ed Kuczma and Sam Vecht aim to maximise total returns, but the trust pays a dividend of 1.25% of NAV each quarter (5% on an annualised basis) from capital where necessary. This means BRLA offers a high yield without being constrained to buy high-yielding companies, which might have worse growth prospects.
Ed and Sam use a combination of bottom-up research on companies and top-down macroeconomic analysis in building their portfolio. In recent months they have focussed on increasing the quality of the portfolio, believing companies in strong competitive positions are likely to outperform in the recovery. With a number of elections on the horizon, they have recently been reducing country risk to ensure they are not exposed to unexpected outcomes and stock selection is a greater driver of returns.
Latin America has outperformed in the reflationary rally since the emergence of vaccines against COVID-19 (see Performance section), driven by its high exposure to materials and energy. Ed and Sam believe fiscal stimulus in the US and globally as well as the continuation of economies reopening support the commodities companies in the near future. As we discuss in the Portfolio section, there are also secular trends behind some commodities such as the shift to electric vehicles, while the opportunities in the growth sectors of technology and e-commerce are growing in the region from a low base, and increasingly diversifying the portfolio.
BRLA trades on a discount of 12%, with the shares having sold off as the delta wave spread and the reopening trade slowed.
BRLA is the only equity-only trust offering access to the Latin America region. The strong returns over the past year illustrate the sensitivity of the region to global economic growth, and the trend may continue as the recovery from the pandemic does. Additionally, the commodity producers which form an important part of the portfolio are likely to benefit from secular trends, chiefly the switch to EVs from petrol and diesel cars, and also from the infrastructure spending planned to boost the recovery – some of which have an environmentally friendly angle.
However, the region is also very volatile. As well as being exposed to any negative surprises for the recovery, political volatility has to be borne in mind too, hence the managers’ decision to reduce country risk relative to the benchmark in the near future. Nevertheless, with China’s strong run of outperformance at an end, and with the political and regulatory issues facing that country’s equity markets, we think investors are likely to be looking to diversify their emerging markets exposure, and we note that Latin America makes up less than 10% of the MSCI Emerging Markets Index, meaning most investors are unlikely to have much exposure.
In addition to the growth potential in the region, BRLA’s dividend policy means that it pays a high yield on an initial investment. Assuming the markets grow over the long run, the dividends will grow too, although with some variability.
|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