BlackRock Latin American: Pay The Right Price For Growth
Edison | Aug 21, 2014 07:14AM ET
The Blackrock Latin American Inv Trust (LONDON:BRLA) is a regional specialist offering diversified exposure to companies in Central and South America, with a significant weighting to Brazil and Mexico (c 90%). Although a stock-picking fund with a focus on valuation, BRLA’s manager acknowledges the importance of macroeconomic factors: the Brazilian election is a key swing factor in the near term, and the resource-rich region also faces an adjustment as slower growth in China dents demand for commodities. The trust currently yields an attractive 3.8%, boosted by writing covered call options on some holdings. LatAm markets have re-rated since the start of 2014 and BRLA’s wider-than-average discount may present an attractive entry point for those who feel this will continue.
The trust narrows its investment universe with a liquidity screen, and the managers eliminate countries with capital controls and sectors where they are not happy to invest before conducting fundamental analysis and company meetings to arrive at a portfolio of 50-75 companies. Country and sector allocation are largely a residual of stock selection, although top-down views have an impact. While most investors in LatAm are looking for growth, lead manager Will Landers stresses the importance of not overpaying for growth prospects, and valuation is an important factor in stock selection. The portfolio is tilted to consumer-facing and financial stocks, with under-weight positions in areas of significant governmental involvement, such as utilities.
h3 Outlook: Bumps in the road but long-term story intact/h3Having fallen 27% in the 12 months to the end of January, the MSCI EM Latin America index has bounced back somewhat, returning 16.6% in the six months to 31 July. Near-term fundamentals do not necessarily support this improvement, with the IMF cutting its 2015 GDP growth forecast for the region by 0.3 percentage points to 2.6% in its July update. However, aggregate valuations are in line with long-run averages and, while the resources and materials sectors have been affected by the slowdown in China, LatAm stock markets now offer exposure to a wider range of domestically focused stocks that could benefit from the region’s favourable demographics, particularly in a less interventionist political environment.
h3 Valuation: Potential for discount to narrow/h3
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At 20 August BRLA’s cum-income discount to NAV of 12.0% was wider than the average over one, three and five years, having widened on short-term volatility following the death of a Brazilian presidential candidate. A change to the policy on tender offers could result in a 25% tender offer in 2016 if the average remains above 5%, but better performance from the region and the prospect of political change in Brazil could see the discount narrow over the short to medium term.
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