Ian Cowie: one of my clangers is now cheap and yielding over 5%

One of our columnist’s adventurous trusts has disappointed over the long term, but it has been a star performer over the past year. 

Money markets’ allergic reaction to Chancellor Kwasi Kwarteng’s mini-budget, which prompted the pound to plunge to a record low before the Bank of England’s emergency intervention, illustrates the importance of investing internationally. You don’t want all your eggs in just one single country basket.

So how do you fancy a 5.25% dividend yield from an investment trust focused on a continent far away, untroubled by Britain's dash for growth? Better still, it delivered 16% total returns over the last difficult year and its shares remain priced at a double-digit discount to its net asset value (NAV).

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When you consider that the average share price across all types of investment trust fell by 15% over the last year, then this exception might well sound too good to be true. So I had better ‘fess up straightaway that I am talking about a former long-term Cowie’s Clanger - or a share whose price fell by more than 10% after I invested - which has recently bounced back with good returns. Step forward: BlackRock Latin American (LSE: BRLA).

Yes, I know that South America is not for the faint-hearted but it may be worth considering by investors seeking international diversification, and who are willing to accept higher risks in pursuit of higher returns from emerging markets. BRLA is benefiting from robust demand for hard and soft commodities, from copper to coffee, via a portfolio of shares diversified across commercial sectors and countries.

For example, its biggest single shareholding - accounting for 8.5% of assets - is in the miner Vale, which claims to be the world’s biggest producer of iron ore and nickel. The self-descriptive oil giant Petroleo Brasileiro, probably better-known as Petrobras, is not far behind.

Other top 10 holdings include financial services providers, Bank Bradesco and Itau Unibanco, plus the stock exchange, Brasil Bolsa Balcao, founded in 1890. The Mexican telecommunications group, America Movil, also features and further exposure to consumer spending is obtained through the supermarket group, Wal Mart de Mexico, and the Brazilian brewer, Ambev.

Perhaps surprisingly, asset allocation by commercial sector is led by ‘financial services’ at 27% of the total; ‘basic materials’ with 22% and ‘consumer defensives’ at 14%. By country it is more predictable with Brazil accounting for 60% of assets, followed by Mexico with 25% and Chile with 5%.

This diverse mix delivered BRLA shareholders total returns of 19%, 3% and 16% over the last decade, five years and one-year periods, according to independent statisticians Morningstar. Meanwhile, the shares continue to yield 5.25% income, despite dividends increasing by an annual average of nearly 11% and remain priced at an 15% discount to NAV.

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It is important to emphasise that dividends are not guaranteed and can be cancelled or cut without notice. However, if the last five years’ rate of ascent was maintained, BRLA would double shareholders’ income in less than seven years. Here and now, the company says: “Dividends are funded from current year revenues and brought forward reserves, and then - if need be - out of capital reserves.”

For comparison, its only rival in the Association of Investment Companies (AIC) sector, abrdn Latin American Income (ALAI), produced a return of 1% over 10 years; -2.4% over the last five years and a positive 13% return over the last year.

ALAI’s dividend yield of 6.3% is higher, but it has no five-year record of sustained increasing income. Its yearly ongoing charges of 2% is notably higher than BRLA’s 1.14%.

Returning to where we began, I remember when City suits used to say you needed to be nuts to invest in Brazil. I first bought shares in BRLA after a business trip to Caracas, Venezuela, and Buenos Aires, Argentina, back in the 1990s. Even allowing for above-average income, I am not sure if I have made real gains here - that is, in excess of inflation - as the shares were held with a paper-based broker until 2010.

Back then, BRLA was trading at 310p and I can see I was still buying at 576p in January 2012. This week the shares were changing hands at 381p and there is no guarantee they will ever revisit their previous peaks. As all equity investors - especially those in emerging markets - should beware, happy endings are not guaranteed; even for long-term investors.

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Like Argentina, which was the tenth wealthiest country in the world by head of population in 1913, it is possible for decline to prove so sustained and terminal that even the most patient investor will not live long enough to see recovery. On a brighter note, the general election (taking place on 2 October) in Brazil might bring more encouraging news.

Whether you regard the expected victory by Luiz Inacio Lula da Silva and defeat for President Jair Bolsonaro as a good or bad thing depends on your political point of view. Left-wing Lula was convicted of corruption charges and sentenced to nine years in jail before his release in 2019, while right-wing Bolsonaro has been described as ‘the tropical Trump’.

Cynics might wish it was possible for them both to lose. Some might even feel the same way about politicians closer to home. But this optimist intends to retain my modest shareholding in BRLA and reinvest dividend income, as it arises. On which point, it may be worth noting that this trust will trade ex-dividend from 13 October.

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.