The BlackRock Latin American Trust is grabbing the bull by the horns. Investors should, too.
“Brazil is the country of tomorrow and always will be,” said Charles de Gaulle. Investors appear to agree with him, focusing their emerging markets (EM) exposure on Asia. In the 1990s, there were half a dozen investment trusts specialising in Latin America. Now there is only the £200m BlackRock Latin American Investment Trust (LSE: BRLA) and two tiddlers.
Sam Vecht, who, with Ed Kuczma, took over the management of BRLA last December, thinks the tide is about to turn. “For the first time in a long time, Latin America looks very attractive relative to other EMs,” he says. Latin Americans, he believes, have learned some hard lessons from a succession of disastrous populist governments.
The economic failure of such governments in Venezuela, Argentina, Brazil and elsewhere has ended with them stealing money, killing people, or both. Vecht is confident that the election of Andrés Manuel López Obrador as president of Mexico late last year will have different results; “a lot of the concerns are overdone”, he says. If he is wrong and Obrador conforms to the usual pattern, the US may need Trump’s wall. Meanwhile, there is a risk that Cristina Fernández de Kirchner, who destroyed Argentina’s economy in her eight years as president, will be returned to power later this year as her successor, Mauricio Macri, struggles to pull Argentina out of its nosedive.
The Argentines, however, have always believed that the world, and especially the banks, owe them a living. As the Mexicans say, “if you could buy an Argentine for what he is worth and sell him for what he thinks he is worth, you would make a large profit”. Elsewhere, people expect less from their politicians. In Brazil, new president Jair Bolsonaro has promised reforms, but Vecht’s expectations are low. “Real reform in any EM is very difficult,” he says, “and politicians have a habit of promising reform and then not delivering. But some progress is likely.” With Brazil at 109 in the World Bank’s “ease of doing business” ranking, it could hardly get worse.
The case for buying now
Brazil accounts for more than 60% of the MSCI LatAm index and Vecht, always one to grab the bull by the horns, has 70% of the portfolio invested there. Mexican exposure is also overweight at 28%, with Argentina (not in the index) at nearly 5%. There is less than 4% invested in Chile, and nothing in Peru and Colombia. The Pacific countries have been a safe haven in recent years, but Vecht finds few compelling opportunities there. The trust has borrowed to finance the 6% overinvestment, thereby leveraging performance.
Vecht has concentrated the portfolio, with the top ten holdings accounting for 58% of the total. The focus is on large caps, though Vecht expects to diversify into mid and small caps over time. This would not necessarily be higher risk: he inherited a large holding, still 6.7% of the total, in miner Vale, whose share price fell sharply following two dam bursts at its iron-ore mines in less than four years. The largest holding at 11.3% is Petrobras, the scandal-hit Brazilian oil major. Vecht believes that the sale of non-core assets to focus on exploration and production will be good for the share price.
Vecht’s positive call on Latin America seems premature, but he is a manager who is always worth following and his claim that a lot of bad news is discounted in share prices is unarguable. The 14.1% discount to net asset value (NAV) at which the shares trade and a yield, partly paid out of capital, of 5% of NAV, support the case for buying now.