Ian Cowie: this ‘too hot to touch’ trust is now booming again

Our columnist concedes that with this trust his long-term buy-and-hold strategy has not been much fun, but so far in 2022 it has been a star performer.

It’s easy to mock extravagant military parades led by pompous dignitaries festooned with medals, unearned in any battle, plus their offspring in pantomime uniforms, leading big band processions through cheering crowds. But I have a soft spot for Latin America.

You can keep your ‘banana republic’ clichés, and perhaps pop them in a gold braid tricorn hat closer to home. Because I don’t buy the City cynics’ jibe that you have to be nuts to invest in Brazil.

It’s more than a decade since I transferred BlackRock Latin American (LSE:BRLA) investment trust into my ‘forever fund’ and what a roller-coaster ride it has been. An initial boom was followed by bust and, just three years ago, BRLA was still a Cowie’s Clanger or share whose price had fallen by more than 10% since I invested.

Then, more recently and thousands of miles away, Russia’s invasion of Ukraine sparked global food and fuel crises, squeezing supply and putting a rocket under prices for Latin America’s commodities. After years under a cloud, the sun has come out for Argentinian, Brazilian and Chilean producers of grain, metals and oil.

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Almost incredibly, BRLA was briefly one of the top-performing investment trusts in the world with shares soaring by 30% since the start of the year, before calming down to currently trade 24% up in 2022 now. It’s an ill wind that blows no good.

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Better still for bargain-seekers who don’t mind a walk on the wild side, Latin America remains too hot to touch for most wealth managers and investors. That’s reflected in both the investment trusts in this Association of Investment Companies (AIC) sector trading below their net asset values (NAV).

For example, abrdn Latin American Income (LSE:ALAI) is priced 16% below its NAV, while BRLA trades on a more modest 3.7% discount. Both are cheap for a reason - rotten medium and long-term performance.

While ALAI has delivered a total return of 3.2% over the last year, its five-year return is a feeble 6.3% and not much better over the last decade at less than 11%.

Meanwhile, BRLA is up 15% in a year; 32% over five and 33% over the decade.

No wonder Square Mile cynics joke that Brazil is the country of tomorrow - and always will be. My long-term buy-and-hold strategy has not been much fun here.

Never mind the past, though, what about the future? Ed Kuczma, co-manager of BRLA, told me: “Latin American equities are bouncing back with a focus on rising commodity prices and local interest rates.

“The prices of oil, soybeans and iron ore, Brazil’s main commodity exports, have increased since the start of the year. There is also a strong outlook for pulp and paper, with resilient demand.”

Exchange rates have also switched from being a problem to an advantage, according to Kuczma: “Brazil, Chile and Peru are the top three performing emerging-market currencies this year, a sharp turnaround from 2021 when Latin America represented four of the six worst performers.

“Latin American central banks were among the first to raise rates in preparation for Federal Reserve tightening. This has seen international investors gravitate to their currencies in search of higher yields.”

By way of icing on the cake, BRLA’s underlying assets are led by high-yielding ‘value’ shares - including the mining giant, Vale (NYSE:VALE), and the oil group, Petroleo (NYSE:PBR) - which have come back into favour with investors, seeking income to protect us from rising inflation. Cash in hand is also compensation for the opportunity cost of forgoing rising interest rates, available elsewhere on bonds and deposits.

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Less happily, charges are hefty. ALAI levies 2% ongoing yearly charges on its tiny £43 million fund, while BRLA charges of 1.14% on its modest assets of £149 million.

It’s more than a quarter century since the ‘emerging markets world tours’ of the 1990s took this financial journalist to Caracas, Venezuela, and Buenos Aires, Argentina. What fun that was and I still have silver cufflinks, given to me by the Bolsa de Comercio de Buenos Aires - or stock exchange - after a splendid lunch on the River Plate.

Which reminds me of a probably apocryphal tale about the bibulous former British foreign secretary George Brown. He is said to have fallen in lust with a vision in red at a Latin American party before lurching over to ask for a dance, only to be told: "I will not dance with you for three reasons. The first is that you are drunk. The second is that the band is not playing a samba, but the Peruvian national anthem. The final reason is that I am the Cardinal Archbishop of Lima.”

Back to business, that Latin American trip prompted me to invest in BRLA via a paper-based broker before transferring the shares into my ISA at £3.10 in January 2010. This week they traded around £4.15, which isn’t a lot to show for a dozen years’ investment, but healthy dividends helped, and I hope the samba band will get going again soon.

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.