Ian Cowie: the niche trust winning big this year

Emerging market investment trusts tend to do best when everybody is looking elsewhere.

So it has proved for one of my longest-held shares in the world’s wilder exchanges, BlackRock Latin American Ord (LSE:BRLA), which has soared 46% higher this year and pays 4.9% dividend income, according to Morningstar.

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That beats every fund in the Association of Investment Companies (AIC) China/Greater China sector, which I fled after learning about the oppression of more than a million Uyghurs, who are confined to forced labour camps.

This former shareholder in Fidelity China Special Situations Ord (LSE:FCSS), which is the top performer in its sector after 44% gains over the last 12 months, would rather invest his life savings in democracies than dictatorships.

Rising tensions between these opposing political systems also caused me to bail out of Russia seven years ago, after being a shareholder in the now disappeared BlackRock Emerging Europe trust for more than a decade.

Back then, quite a few investors believed in “Wandel durch Handel” - the  German phrase for “reform through trade” - but subsequent events dashed those hopes.

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News of the attempted murder of Sergei and Yulia Skripal at Salisbury in 2018 caused me to make my excuses and leave but some world-weary observers argued my reaction was emotional, because “business is business”.

Even so, I am glad I got out before the full-scale invasion of Ukraine. Sometimes doing the right thing turns out to be the right thing to do.

Not that democratic emerging markets are any guarantee of good returns.

JPMorgan India Growth & Income plc (LSE:JIGI) will always be close to my wallet, because it was my very first 10-bagger after I paid 63p in 1996 for shares that cost £10.36 this week, but it lost 0.86% over the last year. The smaller companies specialist, India Capital Growth Ord (LSE:IGC), did even worse, shrinking by 13%.

Which brings us, by a process of elimination, to the last investment trust left standing in the AIC’s deeply unfashionable Latin America sector; BlackRock Latin American.

While few international investors were watching, BRLA shares surged 46% higher over the last year, helped by a weak US dollar and booming trade with China.

It’s an ill wind that blows no good and the US President Donald Trump’s punitive tariffs on imports prompted retaliation by the Chinese president Xi Jinping, creating new opportunities for other trading partners.

For example, China’s massive pig herds must eat somehow and more of them are fed on Brazilian soybeans now, with fewer soft commodities being bought from America.

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Sam Vecht, co-fund manager of BRLA with Gordon Fraser, explained: “Over the past decade, Brazil’s exports to the US have declined, while trade with other partners, most significantly China, has increased, limiting the impact of tariffs.

“China has become Brazil’s main trading partner, benefiting Brazil’s export sector, with purchases reaching about US $94 billion last year, driven largely by demand for soybeans and beef.

“The relationship has also expanded through Chinese investment, including funding to upgrade the Port of Santos and finance major rail projects aimed at improving Brazil’s export infrastructure and facilitating greater agricultural trade.”

Vecht also pointed to growing exports of hard commodities, such as copper - which is vital for electrification - and iron ore, the main ingredient in steel.

BRLA’s biggest asset is the Brazilian mining giant, Vale SA ADR (NYSE:VALE), formerly Companhia Vale do Rio Doce, and Peru’s self-descriptive Southern Copper Corp (NYSE:SCCO) also features in its top 10.

A diversified portfolio also features the Mexican airports company, Grupo Aeroportuario del Sureste SAB de CV ADR (NYSE:ASR), and the Brazilian oil and gas group, Petroleo Brasileiro SA Petrobras ADR (NYSE:PBR).

Against all that, it is disappointing to report that none of BRLA’s four directors appears to have invested so much as a single year’s fees in this fund.

According to the stockbroker Investec’s ‘Skin in the Game’ research, even the chairperson, who has sat on the board since 2016, holds shares in this fund that are worth less than half a year’s fees. Not exactly a resounding vote of confidence.

Another reason to be wary is the risk of war, with the largest US fleet ever seen in the Caribbean, gathering to deter the drug trade and put pressure on the Venezuelan president, Nicolás Maduro. The fleet includes the world’s biggest aircraft carrier, the USS Gerald R Ford.

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But Brazil remains by far the biggest economy on this continent and there are hopes that its presidential election, due next year,  might bring more political stability. The right-wing Sao Paulo governor, Tarcísio de Freitas, was leading the opinion polls and favourite to replace the left-wing president, Luiz Inácio Lula da Silva, who has served a jail sentence for corruption.

Then, this week, de Freitas backed Flavio Bolsonaro, a senator from Rio de Janeiro, for the top job. Flavio is a son of the former president, Jair Bolsonaro, a former army captain who began a 27-year jail sentence last month after an attempted coup.

It all makes our own economic and political problems seem relatively mundane but the last thing most investors crave is excitement.

Many who seek a quiet life might still consider commodity-rich emerging markets for diversification away from the ‘Magnificent Seven’ technology companies and fears of an artificial intelligence (AI) bubble.

Investors who accepted high risks have achieved high rewards in Latin America over the last year and there might be more to come.

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

Ian Cowie is a shareholder in BlackRock Latin American (BRLA), India Capital Growth (IGC) and JPMorgan India Growth and Income (JIGI) as part of a globally diversified portfolio of investment trusts and other shares.