Interactive Investor

Ian Cowie: an investment trust to pique the curiosity of contrarians

This investment trust is the only member of its sector, with others over the years falling by the wayside. However, despite political risk our columnist remains a keen backer. Here he explains why.

23rd November 2023 09:30

by Ian Cowie from interactive investor

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If the Autumn Statement by Chancellor Jeremy Hunt and the response by Shadow Chancellor Rachel Reeves make you despair about our politicians, then just be grateful for small mercies. City cynics used to joke that you had to be nuts to invest in Brazil, but Latin America’s newest political leader is - almost literally - barking.

No, I am not talking about the claim to "non-negotiable" sovereignty over the Falkland Islands by Argentina's new president. Well, not only that. BlackRock Latin American (LSE:BRLA) is the last investment trust left in this Association of Investment Companies (AIC) sector, largely because of political risk.

If that sounds like exaggeration, then take another look at Argentina's new president, Javier Milei. He describes himself as an “anarcho-capitalist”, occasionally wields a chainsaw and claims he was inspired to enter politics by the ghost of his pet dog, an English mastiff called Conan.

According to the Buenos Aires Times and La Nacion newspapers, Milei believes that he and Conan first met in a previous life more than 2,000 years ago as a gladiator and lion in the Roman Colosseum. The pair did not fight because they were destined to join forces in future, which Milei reckons was a prophecy of his presidential campaign.

But this is no laughing matter because Argentina used to be one of the 10 wealthiest countries in the world, largely based on beef exports. Then the Great Depression of the 1930s, hyperinflation and decades of political incompetence - personified by President Juan Peron - wiped all that away.

Now Argentina accounts for less than 4% of BRLA’s net assets, compared to 57% in Brazil, 28% in Mexico and 6% in Chile. Its top holding is the oil giant, Petrobras, which accounts for more than 9% of net asset value (NAV), followed by the miner, Vale, with 7.5%, and the financial group, Banco Bradesco, with 3.4%. Other major holdings include the Coca-Cola bottler, FEMSA, and the brewer AmBev.

These assets, managed by Sam Vecht and Christoph Brinkmann, helped BRLA to deliver total returns to shareholders over the last decade, five-years and one-year periods of 47%, 29% and 21% respectively.

By contrast, the ‘UK All Companies’ sector average returns over the same periods are 71%, 22% and 1%. Income-seekers may also note that the British blue-chip investment trusts yield an average of just over 3.2% dividend income, while BRLA pays out 5.2%.

Vecht claimed: “Latin America should continue to be a beneficiary of higher natural resources prices. It has abundant fossil fuels, which remain in demand as other sources of supply - such as Russia - are cut off.

“As geopolitical tensions mount, Latin America has been seen as a more reliable long-term trading partner for the West. The region is also a major supplier of copper and lithium. These latter commodities are vital for the energy transition, and are widely used in electric cars and batteries.”

Mel Jenner, investment trust specialist at the analysts Edison, also takes a positive view. She said: “Latin America has distanced itself from global geopolitical tensions, hence there is high demand for its exports from both eastern and western nations.

“The region is used to dealing with inflation and so has been more proactive in raising interest rates compared with developed economies. However, it has been overlooked by investors, despite its above-average growth prospects.

“BRLA is also attractively valued, as its 13% discount is wider than its historical average, with scope to narrow if there is an improvement in investor sentiment.”

Whether the rise to power of President Milei will reassure international investors remains to be seen. The New York Times and Reuters report that he paid $50,000 to an American company called PerPETuate to clone Conan using his DNA.

The procedure resulted in several puppies, whom Milei named after the original Conan and the economists Murray Rothbard, Milton Friedman, and Robert Lucas. Milei regularly refers to the current clone Conan as his “son” and the other dogs as his “grandchildren.”

Barking? You decide. Either way, BRLA offers exposure to a variety of economies and commodities which are most likely to be considered by investors seeking global diversification.

That's why I bought shares after a memorable trip to Caracas, Venezuela, and Buenos Aires in the Nineties. The fact that BRLA is the last investment trust left on this vast continent might also pique the curiosity of contrarians.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in BlackRock Latin American (BRLA) as part of a globally-diversified portfolio of investment trusts and other shares.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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