BlackRock Latin American Investment Trust plc (LON:BRLA) is the topic of conversation when Edison Investment Research’s Investment Trust Analyst Sarah Godfrey caught up with DirectorsTalk for an exclusive interview.
Q1: Given the well documented impact of COVID-19 in the region, why would an investor want to consider Latin America now?
A1: They’ve had a bad time with COVID, particularly in Brazil, which is the region’s largest economy by far, but as they begin to recover and those vaccines are starting to roll out now, there’s a lot of stimulus around the world. So, there’s fiscal stimulus, government spending a lot of its focus on infrastructure and Latin America is a big producer of raw materials that can feed into that global infrastructure spend, iron ore and things like that.
In addition, as a collection of emerging economies, they are increasingly focused on domestic spending and the domestic economy and in common with the rest of the world, as things reopen people are going to be spending and things like shops and banks will start to do well.
In addition, Latin America has been very out of favour for quite a long time, it tends to run in pretty long cycles and so, it could be that the now is a reasonable time to get in, probably not at the bottom, but with the potential of an upswing that could last for several years.
Q2: What does BlackRock Latin American Investment Trust offer that you couldn’t get from say an ETF?
A2: Well, as I’ve already mentioned, Brazil is by far the largest economy in the region and it’s also very much the largest stock market so anybody who buys a Latin American index fund is going to be getting a lot of Brazil, 60% of the index, and a lot of Mexico.
As an actively managed fund, it does have some constraints in terms of how far over and underweight it can go versus the index but they’re that broad, they’re plus or minus 20 percentage points to the large markets and 10 for the smaller ones. So, you’ve got active managers who can express views on individual economies by holding more or less, just looking at the end of March figures, which I’ve got in front of me, they’re currently 5 percentage points underweight, Brazil, they’re overweight, Mexico, Chile, Argentina, which has just come back into the index.
They’re bottom up investors, they’re investing in profitable companies that aren’t necessarily the big index names, they base everything they do on really deep fundamental analysis. Also, the portfolio is quite concentrated, it’s only got 45 stocks so they can really focus down on what they feel are their best ideas in Latin America rather than holding everything and perhaps having some pretty low quality companies in there.
Q3: Is there more then to Latin America and indeed BRLA than commodities?
A3: Yes, absolutely, as I already kind of alluded to this earlier, the fund, they do focus on commodities, so their process is informed by the macro and and where they look at the macro, they look at what they call the four C’s and commodities is one of those. Iron ore, as I already mentioned, copper, lithium, which lithium has got strong demand from the battery electric vehicle market, pulp, and paper, they’re all big things, but not just commodities, but consumption, the rising disposable incomes across the region currencies. One thing that’s quite noticeable about Brazil in particular is a massive slide in the currency versus the US dollar and even more so versus Sterling because Sterling has been stronger over recent years, um, so they take that into account when they’re allocating their portfolio.
The four C’s is credit, as I say, they’re focusing on profitable companies with low debts but also looking at interest rates, which has come down hugely across the region. This leads into some themes that they’re currently looking at and so, very much away from the commodity space. There’s structural growth trends so there’s things that you wouldn’t necessarily think of e-commerce and software companies – there’s a software company in Argentina, which has done very well, healthcare, convenience stores, normal shopping – not high-end shopping.
Reinvestment opportunity leaders, that’s quality companies that generate economic value, there’s things in there, again, like technology digital payments, in a region where people aren’t necessarily close to the bank. Digital payments are rapidly growing in emerging markets, probably to a bigger extent than they are in developed markets because in a lot of cases, it’s not a shift it’s my first interactions with the formal banking network. Because I’m not used to going into a bank, but I’ve got a mobile phone, that’s a growing area.
Yes, material stocks, as I mentioned earlier, the global infrastructure spend is positive for the region, the region has got a lot of resources and it’s a low cost producer so cement, that’s big in particularly Mexico, copper in Chile, lithium, as I mentioned, so batteries, pulp, and paper, that’s a Brazilian area and iron and steel.
Finally, mobility, mobility winners with positive asymmetry, they say, so that’s travel and so forth, cyclical companies that have been hit really hard during the pandemic and should benefit hugely from the reopening, as the vaccines roll out. So, things like airlines, real estate, and consumer discretionary so I mentioned earlier, convenience stores, this will be more, perhaps, the higher end shopping.
Q4: So, now really is a good time to look at Latin America?
A4: Yes, I should also mention that BlackRock Latin American Investment Trust pays a dividend of 1.25% of NAV every quarter so that’s effectively 5% a year and although it is set as a percentage of the NAV, it’s not simply a return of capital,
It’s paid dividends for many years and only adopted this particular policy quite recently so now the dividends are paid in US dollars and in the most recent financial year, the dividend was 23.06 cents per share. Just to reiterate, that’s not all return of capital because the revenues in that year were 1486, so nearly 15 cents per share so it is generating a decent income as well as rewarding its shareholders with that yield.