BlackRock Latin American Investment Trust plc share price, company news, analysis and interviews

BlackRock Latin American Investment Trust plc (LON:BRLA) is the topic of conversation when Edison Group’s Investment Companies Directors Sarah Godfrey caught up with DirectorsTalk for an exclusive interview.

BlackRock Latin American Fund is all about maximizing total returns. The fund invests at least 70% of its total assets in the equity securities of companies domiciled in or exercising the predominant part of their economic activity in Latin America. Joining me today to discuss the fund is Edison Group Investment Companies Director, Sarah Godfrey.

Q1: First off, why should investors consider an allocation to Latin America?

A1: That’s really come about mostly because of the incredible rise of tech stocks in Asia, and particularly the Chinese internet-type stocks. Although obviously it’s not good to look at things from something like go down, therefore something would go up by default. The regulatory pressure on some of the Chinese internet stocks at the moment, it means that they might not be quite such an overwhelming part of the index in the future. Actually, Latin America has got some good emerging market fundamentals, young populations, a wealth of natural resources which are actually quite buoyant at the moment.

So, maybe a contrarian view to back a resurgence of Latin Am versus Asia, but it’s somewhere where investors are under-allocated and I think that that should reverse in the future.

Q2: So, what does BRLA offer investors?

A2: It’s very broad exposure to the region, it’s benchmark aware, it follows the MSCI Latin American Index, but it doesn’t track it so its exposures are within ranges plus or minus the index exposures, so that investors know that they’re getting exposure to a broad range of companies in Latin America. But, because it’s an actively managed fund backed up by BlackRock’s very deep research resources, then it gives investors access to some attractive themes in the region that you wouldn’t necessarily get with an index tracking fund.

So, for example, we talked about technology in Asia, in fact, there is some homegrown technology companies in Latin America that are currently a very small part of the index but could grow in the future. And also, healthcare companies, again, quite a small part of the index at the moment but have some attractive fundamentals.

Q3: Why are technology and healthcare companies particularly interesting to you then?

A3: Well, one of the things is they’re not particularly capital intensive, they are more intellectual property-driven or, in the case of healthcare, diagnostics, that kind of thing. There might be an initial investment in plant, but really a lot of it is about having enough people to service the needs of the customer base. Although in the West we’re talking very much about labour shortages and wage pressures being a driver of inflation, actually unemployment in Latin American region is rather higher which means that these companies can attract good people without facing some of those wage pressures that we’re seeing elsewhere in the world.

As I mentioned, they are currently quite a small part of the regional indices, if you look at developed markets, the weighting of technology and healthcare companies in a developed economy tends to be much higher and so, as these areas develop more homegrown solutions there’s arguably a pretty good runway for growth there.

Q4: We’ve talked about what Latin America has to offer, how has the Trust performed recently?

A4: In the rebound from the worst of COVID pandemic last year, it’s put on, over the 12 months to the 30th of September which is the most recent month-end, share price total return of 18.5%, NAV total return of 21%. Now, that is a shade behind the index growth of 22.4%, but it’s broadly aligned with global equity markets and so, slightly behind the benchmark, but that underlines the fact that it isn’t an index tracking fund.

There was a bit of a hit from Brazil, just this morning, there’s news that senators are considering criminal charges a gainst President Bolsonaro in Brazil, his handling of the pandemic. His rather unique style of government has meant that some of the larger companies in Brazil might be seen as a source of funds for the government and therefore, some Brazilian companies have been hit and the fund has taken a bit of a knock there.

But, on the other hand, currently it’s overweight Mexico versus the Mexico allocation in the benchmark, and Mexican stocks have performed quite well and in particular, the Mexican stocks that BRLA owns have contributed positively to performance, which has meant largely offset those headwinds in Brazil.

Q5: Is there anything else investors should know about BlackRock Latin American Investment Trust?

A5: Well, as a closed-end fund, effectively an investment trust, it has the tools in the closed-end fund toolbox available to it, such as the ability to use gearing to borrow, to invest so currently, it’s got a little over 5% gearing. The managers have been putting that to work because company valuations in the region are actually looking pretty attractive at the moment across the region, an average price-earnings ratio of nine times, anything below 10 tends to sound quite attractive, historical average of 12 times, and 13 times for the broad Global Emerging Markets Index currently. So, there are potentially some good value opportunities there, which the managers are using the gearing to invest in and arguably increase their returns quite immediately from that.

The other thing is, it’s got quite an attractive distribution policy, so it pays out 1.25% of its NAV quarterly, so effectively 5% a year distribution policy. Some of that might come from capital, some of it will come from income and, because of recent slight pullback in the share price, which is down around about 10% over the last three months, that actually translates into a dividend yield of more than 6%, at the current share price.

So, regardless of the short-term picture in the markets, investors can look forward to being rewarded with a cash return that will beat anything they’ll get in a bank account or a bond fund at the moment.

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.