Results analysis: BlackRock Latin American

• BlackRock Latin American (BRLA) has reported strong results for the financial year ending in December 2022, as Latin American markets were a rare bright spot globally. In USD terms NAV total returns were 6.6% and share price total returns 4.7%. In dollars, the MSCI EM Latin America Index benchmark was up 8.9%. In sterling, BRLA’s share price total returns were 18%.
• BRLA pays 1.25% of NAV in dividends at the end of each quarter. The trust enjoyed a significant increase of 59% in the income it received from its portfolio in 2022, thanks in part to special dividends. This allowed the board to pay 25.87 cents of ordinary dividends during the year, as well as a special dividend of 13 cents. Revenue reserves remain which are sufficient to cover 4.5 times the last ordinary dividend paid (6.29 cents).
• The discount to NAV averaged 8.9% over the year. There were no buybacks during the period excepting those repurchased under the May 2022 tender offer.
• This tender saw 24.99% of the share capital repurchased, the tender having been over-subscribed, with 58.2% of shares tendered. A new discount control mechanism is in place, with a performance-linked tender offer to be assessed with reference to the four years ending December 2021.
• During the year, Ed Kuczma stepped down from his role as co-manager, with Sam Vecht taking on lead management responsibilities and Cristoph Brinkmann being appointed deputy manager.
• BRLA ended the period leveraged, given the managers’ highly positive outlook, and overweight Brazil and Mexico with off-benchmark exposure to Argentina and Panama. At the sector level, key overweights were real estate and financials and key underweights materials and utilities.
• Chairman of the board Carolan Dobson said: “ Central banks in the region have been ahead of the curve during this tightening cycle and most countries in the region are now offering some of the highest real interest rates in the world. The region is rich in natural resources, including fossil fuels of crude oil and natural gas, creating favourable supply and demand dynamics. It is also a major source of copper and lithium, critical materials for the green energy revolution. With the removal of Russia from western supply chains, the importance of Latin America in these markets has increased.”

Kepler view

With the recent decision by the board of Aberdeen Latin American Income (ALAI) to wind up their trust, BlackRock Latin American (BRLA) is now the sole option in the investment trust space for dedicated exposure to the region. We believe the region has a lot to offer in terms of growth and diversification potential, as illustrated by the good returns during 2022 as global markets in general suffered. The wealth of commodities is an important driver for growth, particularly as the world economy decarbonises, requiring vast amounts of a number of metals in which Latin America is rich. Additionally, there is a growing, sophisticated middle class across the region driving demand for goods and services. Key Latin American countries have also been able to maintain economic links with the US and with China, which puts them in a strong position as the world economy reorganizes.

Over the course of 2022, BRLA’s portfolio was tilted to the latter rather than the former, and as a result underperformed the index. However, Sam and Christoph believe the market has been indiscriminate in selling stocks seen as exposed to rising rates as they were hiked by the central banks. They retain their conviction in some key growth stocks such as healthcare insurer Hapvida Participações and AMBev, both of Brazil. They have added to both stocks on weakness, and also increased their portfolio’s exposure to cyclical growth stories. In the short term, they expect rate cutting cycles to begin in Brazil and potentially elsewhere in the region which should encourage a recovery in the economy and in stock prices. They argue there is the potential for the Brazilian market to attract foreign capital once a rate cutting cycle is underway and contribute to rallying markets. Additionally they are overweight Mexico, arguing it is attractively positioned globally thanks to stable politics and a rising share of exports to the US.

We understand that under the new management team, the aim is to try to deliver more alpha from stock selection, which may involve running a more concentrated portfolio or more significant over or underweights. In our view the BlackRock team is in a good position to deliver alpha from the diverse region, with extensive resources available to the manager and good access to local company management and political decision-makers.

BRLA’s discount has widened since the end of 2022 to 12.1% at the time of writing. This is while many sectors have seen narrowing discounts. In our view this offers value and could prove a good entry point. We also note there is potential downside protection to the discount through the performance-linked tender offer scheduled for 2025.

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