City cynics say Brazil is the ‘country of tomorrow’ and always will be. They sometimes add the observation that you would need to be nuts to invest there.
Caveats or warnings prominently in place, this long-term shareholder in BlackRock Latin American (BRLA) investment trust is tackling a tricky decision. On the face of it, BRLA’s proposal to increase income distributions by means of enhanced dividends would appear to be a good thing, especially now that rising numbers of investors – including your humble correspondent – aim to fund retirement from our stock market portfolios.
Not so long ago, emerging market funds solely focused on capital growth with little or nothing in the way of dividends. Henderson Far East Income (HFEL), JP Morgan Global Emerging Markets Income (JEMI) and Schroder Oriental Income (SOI) are three examples of investment trusts in my portfolio that show we can enjoy a mixture of both income and growth.
Unfortunately, higher income payments can prove to be a way of bribing investors with our own money if the price of a higher dividend today proves to be capital erosion or depressed returns tomorrow. For example, Aberdeen Latin American Income (ALAI) currently offers more than twice the yield of BRLA – or 4.9% compared to 2% - but total returns from the higher yielding fund have persistently lagged behind the lower income provider.
According to the Association of Investment Companies, BRLA’s total returns of 10.3% over the last year alone more than compensated shareholders for accepting its lower dividends when compared to ALAI’s total return of 2.3%. BRLA’s outperformance was even greater over five years, albeit in a least-bad sort of way, with shrinkage of 2% while ALAI lost 18% of shareholders’ money.
Despite these facts, the lure of higher income means ALAI trades at a smaller discount to net asset value (NAV) of 11%, compared to BRLA’s 14% discount. Jam today will always be more popular than jam tomorrow.
Even so, the proposal to nearly triple BRLA’s pay-out by means of dipping into capital reserves could have a major impact on total returns and has divided expert opinion. Alan Brierley at Canaccord Genuity pointed out: ‘Subject to shareholder approval, the company intends to pay a quarterly dividend equivalent to 1.25% of the US dollar NAV. At the current discount level, this would equate to an annualised dividend yield of 5.8%.
‘For many investors, Latin America has fallen off the radar screen and, although there has been an improvement in returns, there is still value for the contrarian. On balance, the discount is attractive, and we remain comfortable with our “buy” recommendation.’
Emma Bird of Winterflood Investment Trusts was more cautious: ‘Despite BlackRock Latin American’s good long-term relative performance record, it has struggled to narrow its discount, which has averaged 12% over the last five years.
‘The hope is that its latest proposals for an enhanced dividend and a deferred 25% tender offer triggered by a failure to meet a four-year performance target or discount levels, will lead to a re-rating.
‘We suspect that the reality may be different. While institutional investors are happy to make specific allocations to the region, we believe that most wealth managers and retail investors are more likely to use globally-orientated vehicles to allocate to emerging markets.’
That is certainly true but may miss the point. BRLA and ALAI will always appeal to a minority of investors but online platforms have made the world a smaller place and so this minority is likely to grow over time.
Most immediately, I expect Latin America to be a major beneficiary of an imminent ‘melt up’ in the North American economy. This is already underway with strong earnings growth and is likely to be boosted further when cuts in corporation tax prompt the repatriation of profits held overseas, funding special dividends and share buy-backs.
Latin American economies, many of which hold large amounts of dollar-denominated debt, would benefit from continued weakness in the greenback. They may also be spared the worst of president Donald Trump’s talk of a trade war with China and or Europe.
Better still, BRLA’s proposed enhanced dividends would push the yield up to where it was when I first invested more than a decade ago, so this would be a case of ‘back to the future’ – and in a good way. All things considered, I intend to hang on to BRLA for the long-term, whatever the cynics may say.
Here is a complete list of Ian Cowie’s stock market investments. It is not financial advice nor is any recommendation implied.