Our columnist sizes up the attractions of having investment trust exposure to far-off countries around the Pacific Rim.
News that the United Kingdom has joined a Pacific free trade zone this week re-ignited the row about Britain’s departure from the European Union but might prompt more profitable considerations by investment trust shareholders.
Two closed-end funds close to my wallet give exposure to far-off countries around the Pacific Rim and one has generated eye-stretching total returns of 35% over the past year, while the other is currently 9% down.
Both these investment trusts pay rapidly-rising streams of income but, despite decent dividends, both trade at double-digit discounts to their net asset values (NAVs).
So bargain-seekers should take another look at opportunities for growth and income created by the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), signed by Business and Trade Secretary, Kemi Badenoch, last Sunday, 16 July. The UK is the first European country to join CPTPP, which is made up of 11 Pacific nations including Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.
These countries currently generate a total of £12,000 billion - or £12 trillion - in gross domestic product (GDP), a measure of economic output. That prompted one Brexit-supporting newspaper to herald the CPTPP deal as a “£12 trillion boost for Britain” while Remainers attempted to pour cold water on the deal by arguing it will only add 0.08% to the UK’s GDP.
Both claims illustrate the misleading use of statistics which characterised much of the Brexit/Remain debate. Joining the CPTPP will not add all the existing 11 members’ GDP to that of the UK but, equally, the 0.08% calculation is based on historic statistics, some of them nine years old, rather than any economic opportunities ahead.
So investors keen to generate growth and income in future, rather than revisiting the Brexit row, should consider gaining some exposure to the CPTPP zone. For example, BlackRock Latin American (LSE:BRLA) is below-the-radar for most British investors but, according to independent statisticians Morningstar, delivered 35% total returns over the last year. The explanation is strong demand for many local raw materials, ranging from iron ore to lithium salts and from coffee to corn or maize.
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Rising tensions between America and China - plus Russia, since its invasion of Ukraine - are prompting many international importers to source raw materials closer to home. Oil is another commodity where North American and other consumers are keener to buy from South America than former suppliers in Russia. This week the EU signed a deal to buy hydrogen and liquefied natural gas (LNG) from Argentina.
Coming down from the clouds of macroeconomics, I have been a shareholder in BRLA for more than a decade and am delighted to see it is currently yielding 5.15% dividend income after increasing payouts by a remarkable annual average of 17% over the last five years. Dividends are not guaranteed and can be cancelled without notice but, if that rate of ascent is sustained, shareholders’ income would double in less than four years and three months.
BRLA allocates 60% of its £144 million assets to Brazil; 26% to Mexico; 6% to Chile; 4% to Argentina and 2% to Columbia. It currently has no exposure to Peru and trades at a 10% discount to its NAV.
Petrobras (NYSE:PBR), the Brazilian oil giant, is BRLA’s biggest underlying holding, accounting for more than 9% of the investment trust’s assets. Femsa (NYSE:KOF), the Mexican retailer and Coca-Cola bottler, plus Vale (NYSE:VALE), the Brazilian miner, also feature in BRLA’s top 10 assets.
Contrarians may also be encouraged to see that this continent on the east of the Pacific has fallen so far from favour with investors that BRLA is now the sole member of the Association of Investment Companies (AIC) ‘Latin America’ sector - even though BRLA is no longer a member of the AIC. You can’t accuse me of only talking about funds that are fashionable.
Vietnam, another of the CPTPP members, did enjoy a period in vogue when investors thought it might be the next China or Japan, albeit on a smaller scale, as a low-cost exporter. I first bought shares in Vietnam Enterprise (LSE:VEIL) in July 2018, for £4.04 but got fed up with the absence of income and sold them for £5.42 in October 2022.
Then I rolled the money over into VinaCapital Vietnam Opportunity Fund (LSE:VOF), paying £4.26 per share last October. They haven’t made much progress since then, trading at £4.38 this week, but pay just over 3% dividend income that has risen by an annual average of 12.2% over the last five years. With the usual caveats about dividends not being guaranteed, it is noteworthy that - if this rate of increase is sustained - then shareholders’ income would double in six years.
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Both VIEL and VOF are much bigger than BRLA and also trade at bigger discounts to their NAVs. VIEL has total assets of £1.4 billion and is priced nearly 14% below its NAV. Meanwhile, VOF has £844 million assets and trades at a 17% discount to NAV.
Now might be a good time to consider medium to long-term opportunities in Vietnam because VOF has shrunk shareholders’ funds by 9% over the last year but is 56% up over five years and 263% up over the last decade. Meanwhile, VEIL is down by nearly 8% over the last year, 44% ahead over five and lacks a 10-year track record.
Whether or not you believe that CPTPP is an adequate substitute for the UK’s former membership of the EU, individual investors should consider some exposure to Pacific Rim economies. As BRLA, VEIL and VOF demonstrate, they can all deliver growth and income.
Ian Cowie is a freelance contributor and not a direct employee of interactive investor.
Ian Cowie is a shareholder in BlackRock Latin American (BRLA) and VinaCapital Vietnam Opportunity Fund (VOF) as part of a globally diversified portfolio of investment trusts and other shares.
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