Latin American Equities

TCA

I'm considering a small portfolio allocation specifically to Latin America (as opposed to an EM play) and would be interested to hear any opinions on the sector.

I'm thinking along the lines of Aberdeen Latin American Income Trust (ALAI) and given the large Brazil exposure, I'm keeping an eye on this one as the Brazilian elections approach in October.

I'm looking at this as another contrarian purchase seeing as this sector has taken a battering recently. ALAI has largely been on a downward trajectory since inception (with the exception of a good run from mid 2012 to mid 2013 before an almighty plunge), as has its main investment trust rival BlackRock Latin American Investment Trust, when looking over the same period. Both have recovered a little bit of ground since March this year.

So is this a good entry point or catching the falling knife?

Any and all views appreciated.

alexanderalexander

I've recently bought ALAI due to a similar contrarian rationale as you -- I thought it looked like it'd found its bottom. Obviously I don't know anything you don't about it, but at least I'm one person who agrees with you....

jimjames

I've been topping up my holding in the unit trust Aberdeen Latin American for same contrarian reason.

When all comments are that shares are overvalued it feels more reassuring to buy one that's at a low. But no guarantee it won't go lower before rising again.

bowlhead99

My only LA- specific fund is an ishares tracker which I bought for a little more cheap and lazy geographic exposure to the region alongside my other EM funds.

However, it does go against my ethos that trackers are probably not the best way to access emerging markets, particularly with the very different economic circumstances faced by some of them. I have some EM tracker exposure within a Lifestrategy fund, and this little holding on the side tilts it a bit towards LA which I think is a better bet than some other areas.

But most of my EM exposure is through funds / ITs with active management, and includes a bit more on the Asian side, so this cheap and easy tracker pulls my overall EM exposure back across the globe a bit. I'm not so bothered about, say, Russia or South Africa, as I think the economic growth prospects there are unspectacular for the risks and in Russia's case are pretty resource heavy and I have enough resources. But there are parts of LatAm I wouldn't want to miss out on, so I added the tracker.

As a sweeping generalisation, Latin America's stock market fortunes seem to be more in line with U.S. (which itself probably has higher/more stable economic growth for the next half decade from here than some developing countries) ; while emerging Asia is a little closer to the fortunes of China (which is facing lower growth over the next 5 years, around 7%pa, relative to the 10% annualised that it did in the last few decades... ).

So EM Asia is still where a lot of the growth is happening, even if tapering off. But markets can move in cycles so it's worth having a bit of everything. If you have an Asian EM fund and a LatAm EM fund, you can rebalance a bit between them. If you have a generalist EM fund you need to find a manager that knows both sides of the world really well. It stands to reason that you ought to be able to find a good active LatAm specialist fund and i will try to look for one and replace the ishares tracker at some point.

One of the reasons to not just get a dumb tracker for the region is that just like in parts of Europe and Asia, neighbouring countries can often have quite different levels of economic growth. IMF expects Brazil to grow only a little more than USA; Argentina's may be even lower, closer to Germany. But neighbours Bolivia and Paraguay should do 3x that. It is not just one big homogenous region.

Having said this, we've all seen in the past that a country's growth does not perfectly track its stock market fortunes. In fact, because growth and projected economic fortunes are priced in, the markets can differ wildly once you get the final figures for inflation and exchange rates, interest rates etc. Throw elections and whatnot (and the world cup aftermath, and the Olympics etc) into the mix, and who knows whether those funds which were getting cheaper will start to get more expensive - or will get even cheaper?

My standard suggestion if you don't know if something will go up or down next, and you don't already have anything like it, is, why not buy some? If you do already have some of it, you can sit on the fence and do nothing. Then in either case, if it goes down some more, you can go and buy some more. If it goes up, such that you end up with a lot of it, you can sell some to leave an acceptable mix.

TCA

alexanderalexander wrote: »

I've recently bought ALAI due to a similar contrarian rationale as you

jimjames wrote: »

I've been topping up my holding in the unit trust Aberdeen Latin American for same contrarian reason

Thanks. Hopefully great minds think alike.

bowlhead99 wrote: »

But most of my EM exposure is through funds / ITs with active management, and includes a bit more on the Asian side....

My standard suggestion if you don't know if something will go up or down next, and you don't already have anything like it, is, why not buy some?

Thanks. I'm also heavy on EM Asia and still thinking about more in that area too. I have some Latin America exposure via Murray International but not enough. I still plan to buy TEM and perhaps JEMI, both of which have Latin American exposure, but I like the idea of a specialist fund, so have added that notion to my thought process.

As you mentioned in another thread, I'm also not keen on buying so much in the way of UK/US equities right now, so looking a bit further afield for some unloved sectors.

bowlhead99

TCA wrote: »

I'm looking at this as another contrarian purchase

TCA wrote: »

alexanderalexander wrote: »

due to a similar contrarian rationale as you

jimjames wrote: »

for same contrarian reason.

Thanks. Hopefully great minds think alike.

Sorry, had to stop and laugh at this - sure, "great minds think alike", but all of you have a plan that you think is the non-mainstream view and are describing as contrarian. Can we get someone in here that *doesn't* think that emerging markets offer value ??!

Actually as a side note I have seen some commentators say in recent months that with the UK and the US appearing to offer solid 2.5-3% GDP growth over the next few years (significantly above 'emerging markets' like Russia, and not far behind Brazil), a contrarian play could be to avoid the volatility of EMs altogether, and the developed world smallcaps which massively outperformed last year, and focus more on the well known Western blue chips which traditionally have lower plodding growth but are well placed to do this reliably.

I still plan to buy TEM and perhaps JEMI, both of which have Latin American exposure, but I like the idea of a specialist fund, so have added that notion to my thought process.

I've had TEM as a core holding for a while. You mention it has Latin American exposure, which it does, but at the last count (May 31) it had 16% LA of which nearly all was Brazil (14%) with 2% in Peru.

When you look at the holdings, 2 of the top 5 holdings in the whole portfolio were Brazil - they were both banks, Itau and Bradesco. So with 8% of the portfolio in two large Brazilian banks you might think has a decent exposure to the Latin American economy but that is not particularly diversified exposure and see my earlier points above where I noted the IMF have rated Brazil's GDP growth rate as only marginally better than USA for next 5 years, rather than the levels you get in Bolivia or China or Thailand.

Whether that is enough to produce spectacular growth in the share price of those two banks, is not immediately apparent.

If you did like Brazil, I have a holding in Hansa Trust (HAN, HANA) which is a bit of an eclectic mix - about a third of its assets are a holding of Ocean Wilsons Holdings, which is an investment company which in turn has a variety of fund holdings plus a very large stake in a Brazilian maritime services business. Hansa also have other non-mainstream holdings including a private UK realestate fund, some BG plc (BG has some exposure to Brazil) and other funds and direct holdings.

I picked HANA up on quite a good discount and it has done quite nicely over the last year, I quite like the quirky mix of holdings although they are not for widows and orphans. It doesn't have enough LA variety to call it a Latin American fund - just thought I'd mention it as I think of it as a bit of a Brazil play, with Wilsons running ports and logistics down there.

jimjames

bowlhead99 wrote: »

Sorry, had to stop and laugh at this - sure, "great minds think alike", but all of you have a plan that you think is the non-mainstream view and are describing as contrarian. Can we get someone in here that *doesn't* think that emerging markets offer value ??!

Good point!

I guess the "thing" that doesn't think EM is good value is the market as a whole or the prices would be peaking like they are in the US.

It's interesting to define what makes a play contrarian. Is it that others aren't doing the same or you're going against the market? I saw private equity in the same way in 2009. Trusts sitting on 90% discounts just screamed value to me but was that contrarian if others did the same. It might have been following others but it was certainly going against the market view based on price.

bowlhead99

jimjames wrote: »

It's interesting to define what makes a play contrarian. Is it that others aren't doing the same or you're going against the market? I saw private equity in the same way in 2009. Trusts sitting on 90% discounts just screamed value to me but was that contrarian if others did the same. It might have been following others but it was certainly going against the market view based on price.

I guess contrarian means you are taking a view that the widespread optimism or pessimism for a sector is misplaced. If markets are being pushed up to new higher highs based on sentiment, it means calling that sentiment into question and deciding it is better to sell out early and use the proceeds to buy unloved assets, rather than getting off the train too late.

Or doing what you did - being one of the earlier buyers of deep discounted illiquid assets which could have in theory gone bust by being unable to meet their commitments but in reality you reckoned they could probably have fire-saled their assets for half of NAV instead of the 30% of NAV you were able to buy them for. Some of them really struggled but many got away pretty much unscathed and the discounts unwound over the years. I jumped aboard that particular ship quite a bit later as I didn't really have any spare money in 09, but another dip in 2010/2011 helped me pick up some good assets for a nice price.

Having a few like-minded individuals agreeing with you doesn't stop you being a contrarian, it's just generally about what 'the market' thinks - broker recs and media comment and market direction - versus what you think.

TCA

bowlhead99 wrote: »

Sorry, had to stop and laugh at this - sure, "great minds think alike", but all of you have a plan that you think is the non-mainstream view and are describing as contrarian. Can we get someone in here that *doesn't* think that emerging markets offer value ??!

Indeed, but I like to think of my fellow MSEers as the learned few! For me, I'm looking at stuff that's possibly undervalued or has had substantial periods of poor performance. I'm not really bothered what others are doing and am more interested in what the market's doing, but I suppose I did ask the question!

bowlhead99 wrote: »

Actually as a side note I have seen some commentators say in recent months that with the UK and the US appearing to offer solid 2.5-3% GDP growth over the next few years (significantly above 'emerging markets' like Russia, and not far behind Brazil), a contrarian play could be to avoid the volatility of EMs altogether, and the developed world smallcaps which massively outperformed last year, and focus more on the well known Western blue chips which traditionally have lower plodding growth but are well placed to do this reliably.

Interesting viewpoint but I'm not buying it. Literally!

bowlhead99 wrote: »

I've had TEM as a core holding for a while. You mention it has Latin American exposure, which it does, but at the last count (May 31) it had 16% LA of which nearly all was Brazil (14%) with 2% in Peru. When you look at the holdings, 2 of the top 5 holdings in the whole portfolio were Brazil - they were both banks, Itau and Bradesco. So with 8% of the portfolio in two large Brazilian banks you might think has a decent exposure to the Latin American economy but that is not particularly diversified exposure

Agreed completely. Hence my thoughts turning to Aberdeen's Latin American Income Trust or the likes. It's back to what you said about having a little bit of everything.

bowlhead99 wrote: »

If you did like Brazil, I have a holding in Hansa Trust

Thanks, I'll check it out. Although "liking" Brazil is a bit strong. I'm just more amenable to it because the market perhaps doesn't like it!

gadgetmind

TCA wrote: »

ALAI has largely been on a downward trajectory since inception

Is that TER really the 1.99% quoted by Citywire?

http://citywire.co.uk/money/investment-trusts/investment-trust-factsheet.aspx?FundID=3476

bowlhead99

That looks about right going off last interim accounts.

The management fee is 1% of net assets. But then they have c.£100kpa for secretarial/administrator, £85k for Directors fees, £90k for custody/overseas agents charge, 56k for marketing (to Aberdeen re participation in the trust share plan and ISA facility) and so on.

As the fund net assets fell to £51m this Feb from £59m at last August year-end and £65m in 2012, the various fixed costs of doing business are getting bigger as a fraction of net assets.

Every £50k a year of cost is ten basis points at their current size. So it makes for a high cost of doing business on a small fund - albeit it's easy for them to deploy capital, because outside the top 10 investments they don't have a million pounds in any one company.