Buy growth at a discount with BlackRock Latin American

Specialist areas that seem to have potential include Latin American equities, which were volatile in 2018. But “the prospects for Latin America look brighter for 2019, as the key Brazilian economy looks more robust with data points indicating a broad-based recovery, and the political environment in the region is more benign [for investors],” comment analysts at Edison. “Valuations in Latin America are also supportive: equities are trading on a forward price/earnings of 12 times – a 16.7 per cent discount to the world market – which is much wider than the 3.6 per cent average discount over the last 10 years.”

Ways to get exposure to Latin American equities include BlackRock Latin American Investment Trust (BRLA). This is trading at a discount to net asset value (NAV) of over 15 per cent – one of the widest levels relative to its own history – for reasons including negative sentiment towards Latin America. But if Latin American equities do better and investor recognise this, the discount could tighten.

Last year BlackRock Latin American introduced a new dividend policy so it now pays quarterly dividends equivalent to 1.25 per cent of the trust’s US dollar NAV. If the trust’s revenue and reserves do not cover them they may also be funded from its capital. Since the policy was introduced the trust has paid three dividends which amount to $0.2355 per share and it yields over 4 per cent. This could also help the discount to narrow because income paying investment trusts often trade on tighter discounts or premiums.

Long-term growth investors could reinvest the dividends.

The trust also has a discount control mechanism. It will offer a tender for 24.99 per cent of its ordinary shares if its annualised total NAV return does not exceed MSCI EM Latin America index’s annualised US dollar total return by more than 100 basis points over the four years to 31 December 2021, or the average daily discount to NAV exceeds 12 per cent during that time. 

At the end of last year the trust’s long-standing manager, Will Landers, stepped down as he and two Latin America analysts are leaving BlackRock. But he has been replaced by highly regarded manager Sam Vecht, who has made good returns with BlackRock Frontiers Investment Trust (BRFI). He has experience of investing in Latin America via this trust and BlackRock Emerging Markets Equity Strategies Fund (LU1715605942).

Edward Kuczma, who has over 15 years' experience of investing in many sectors and countries in Latin America, also became manager of BlackRock Latin American. He had worked closely with the trust’s previous manager for a number of years. And they continue to be supported by BlackRock’s well resourced global emerging markets equities team.

Mr Vecht and Mr Kuczma aim for long-term capital growth and an attractive total return by investing in companies with good managements and corporate governance, that treat minority shareholders well. They favour good long-term earnings growth, strong cash flow generation and robust balance sheets. And they prefer companies that they think have attractive valuations and are trading at a discount to their underlying value.

BlackRock Latin American also has one of the cheapest ongoing charges of all Latin American funds available to UK private investors, of 1.1 per cent.

There is no guarantee that the trust will do well under its new managers or that its wide discount will tighten. Latin American equities are also a high-risk emerging markets assets and potentially very volatile.

The trust is fairly concentrated with its 10 largest holdings accounting for 55 per cent of its assets. If one of these does badly it would have a significant effect on the trust’s overall return, although conversely if one does well it should be fairly beneficial. Concentration in a few holdings can also increase a fund’s volatility.

However, the fundamentals for Latin American equities have improved and this trust is run by managers with a strong record of picking companies that do well. So if you want to diversify a large portfolio, and have a high risk appetite and long-term investment horizon, BlackRock Latin American Investment Trust looks like a cheap way to tap into growth at a discount. Buy.