Why consider BRLA?

Although Latin American equity returns were disappointing in 2024, following a very strong 2023, Vecht thinks the region is worthy of consideration as he believes that markets have already priced in an uncertain investment backdrop. The manager invests for the longer term, taking a three- to five-year view given high levels of stock market volatility. Hence, he considers that the historical quote ‘buy to the sound of cannons and sell to the sound of trumpets’ provides a useful reference for investing in the region. Latin America has above-average growth potential and is attractively valued in both absolute and relative terms, trading at around a 50% forward P/E multiple discount to global equities. So far, the region has not been one of the worst affected by US President Trump’s imposition of global tariffs.

BRLA aims to deliver an attractive total return and currently offers a 5.3% dividend yield. The trust has a clearly defined policy, making quarterly distributions equivalent to 1.25% of quarter-end NAV. Dividends can be paid out of income or revenue and capital reserves, ensuring the managers are not forced to seek a higher portfolio yield, which may be at the expense of capital growth.

On 16 April 2025, as a result of changes made to BlackRock’s Global Emerging Markets team structure, Gordon Fraser became BRLA’s co-manager, replacing former deputy manager Christoph Brinkmann.

BRLA: A focus on the longer-term opportunities

Vecht explains that the successful approach for investing in emerging markets over the last 30 years has been to seek opportunities where others are less interested and to avoid areas where investors are excited; he suggests this has been particularly relevant in Latin America. The manager believes that BlackRock benefits from its London-based emerging market investment desk, which focuses on both top-down and bottom-up considerations, as on-the-ground analysts can be biased towards their local markets. Nevertheless, Vecht travels extensively in Latin America, developing a wide range of contacts outside of company management teams, which he considers can provide a competitive advantage in terms of stock selection and geographic/industry asset allocation.

While Latin America is more than just Brazil and Mexico, these countries have, by far, the largest economies in the region. Their stock markets can be volatile; having performed strongly in 2023, Latin American markets were disappointing in 2024. Brazilian investors sold equities as they were able to get an attractive double-digit, risk-free rate on bonds. A larger-than-expected fiscal deficit and concerns about how it would be financed, along with inflationary pressures, caused the Brazilian central bank to move from a looser to a tighter monetary policy. Also, a disappointing fiscal package announced in November 2024 caused another downward move in the Brazilian stock market. In the June 2024 Mexican presidential election, Claudia Sheinbaum, the country’s first female president, achieved a landslide victory. This led to volatility in Mexican financial assets and a significant decline in the Mexican peso, as investors had concerns about reduced government checks and balances and the threat of judicial reforms.

Despite a difficult macroeconomic backdrop, the manager remains optimistic about the prospects for Latin America as he believes that a lot of bad news is already priced into the market. Many Brazilian and Mexican stocks are trading on single-digit P/E multiples, while offering double-digit dividend yields. However, Vecht is mindful of the Brazilian fiscal position. The fiscal package that was announced in November 2024 fell short of market expectations, which may have led to the Brazilian government losing some credibility among global investors. This has resulted in higher interest rates, which investors are demanding to compensate for the increased risk of lending to the Brazilian government.

Looking further out, the manager believes that elevated Brazilian interest rates will lead to a decline in economic activity, which should mean less inflationary pressure and, ultimately, lower interest rates, which could support higher equity multiples. Given the inexpensive valuations of Brazilian stocks, he considers that buybacks will be a big feature in 2025. Vecht highlights Brazilian elections, which are scheduled for October 2026. He believes that there may be a change in presidency given recent polls despite Brazil having very low unemployment and inflation that is under control. In Mexico, so far in 2025, the central bank has twice reduced interest rates by 50bp (from 10% to 9%) and the manager sees scope for further rate cuts this year. The country is continuing to benefit from the trend of nearshoring supply chains and should continue to be a more reasonably priced manufacturing base than the United States.

Latin America: The forgotten region

Latin America has been significantly out of favour with global investors and at the end of 2024 made up around 7% of the MSCI Emerging Markets Index, down from around 17% 10 years before. As shown in Exhibit 1, over the last decade, the region kept pace with emerging markets – albeit with bumps along the way – until a year ago, but then underperformed the high-growth major Asian technology companies. The underperformance versus the world market was due to the strong performance of the dominant US, particularly the ‘Magnificent Seven’ companies that are deemed to be major beneficiaries of the growth in AI. However, the market turmoil in 2025 resulting from President Trump’s tariff policies and the risks to global growth has seen Latin American stocks perform relatively better, with major share price declines for the Magnificent Seven.

Latin America has superior growth prospects versus advanced economies, as shown in Exhibit 2, and is very attractively valued, in both absolute and relative terms, which is highlighted in the front-page chart. There are favourable developments to consider in Latin America, such as the continuing trend towards urbanisation, but drilling down deeper sees more specific themes, including the development of world-class payment systems in Brazil and the rapid rise of e-commerce in Mexico. Latin America is abundant in natural resources, including iron ore in Brazil, copper and lithium in Chile, gold in Ecuador and silver and oil in Mexico. There has been a more responsible approach by Latin American countries to climate change. Meanwhile, the region’s central banks have been ahead of the curve in dealing with inflation.

Current portfolio positioning

At the end of March 2025, BRLA’s top 10 holdings made up 50.0% of the portfolio, which was similar to 50.7% 12 months earlier; five positions were common to both periods. The managers are seeking incremental value by investing in a range of share types, which are shown in Exhibit 3.

It is important to note the unique structure of the Latin American market. The MSCI Emerging Markets Latin America Index is dominated by two countries, Brazil (c 62%) and Mexico (c 26%), with minor weightings in Chile (c 7%), Peru (c 4%) and Colombia (c 2%). Compared with the benchmark, BRLA’s largest variances are an overweight exposure to Mexico (+5.1pp), an underweight position in Chile (-4.3pp).

As shown in Exhibit 6, in the 12 months to the end of March 2025, the largest changes in BRLA’s sector weightings were lower allocations to consumer staples (-6.6pp) and industrials (-4.7pp). Compared with the benchmark, the trust’s largest overweight position was consumer discretionary (+13.0pp), while there were below-index weightings in financials (-10.0pp) and utility stocks (-6.0pp).

Recent transactions

Looking at portfolio activity in recent months, in February 2025, Vecht and Brinkmann re-initiated a position in Argentine IT services company Globant after a sharp decline in its stock price and sold Compañía Cervecerías Unidas, which is a Chile-listed diversified beverage company. In January, they initiated a position in Canadian-miner Ero Copper, whose main operations are in Brazil, in anticipation of copper stocks catching up with the performance of the underlying commodity. Last December, the managers reduced exposure to BRLA’s more leveraged Brazilian companies due to disappointing fiscal news and higher interest rates.

FY24 results (to 31 December 2024)

Performance: in 2023, the MSCI Emerging Markets Latin America Index delivered a +32.7% total return, which outperformed both developed and emerging market indices, and BRLA was ahead of the index. Unfortunately, it was a different story in 2024 when the trust’s benchmark total return was -26.4%, with BRLA delivering NAV and share price total returns of -35.7% and -35.3% respectively (all in US dollar terms).

Revenue and dividends: revenue per share was 23.40c, which was 23.2% lower year-on-year due to a reduction in dividends paid by BRLA’s portfolio companies. The trust’s annual dividend, based on 1.25% of quarter-end NAV, was 24.70c per share versus 28.82c per share in FY23 (-14.3% year-on-year).

Gearing: BRLA’s gearing is actively managed, with the board considering 5% a neutral level. During FY24, the trust’s net debt was in a range of 3.5% to 13.4% and averaged 7.5%.

Discount control mechanism: the board employs a discount control mechanism aiming to reduce BRLA’s discount volatility, favouring a conditional tender offer rather than share repurchases. Subject to the biennial continuation vote in 2026 being passed, a 24.99% tender offer will be triggered if the trust outperforms its benchmark by less than 50bp per year over the four years ending on 31 December 2025, or if BRLA’s average share price discount to cum-income NAV exceeds 12% over this period. In the three years ending 31 December 2024, the trust’s annualised NAV total return was -1.9% compared with the benchmark’s annualised +2.1% total return. The three-year average discount was 11.3%. If the annualised NAV underperformance continues to the end of 2025, or the average discount hits the threshold, the tender offer will be triggered.

Performance: Disappointing 2024 but looking brighter in 2025

BRLA has lagged the performance of the benchmark over one, three, five and 10 years. However, it has outperformed in the first four months of 2025.

Latin America did not perform well in 2024; in US dollar terms the region was down 26.4%, with the two largest markets faring even worse: Brazil -29.5% and Mexico -26.9%. BRLA’s relative performance in 2024 was also disappointing, as it underperformed the benchmark (NAV and share price total returns of -35.7% and -35.3% respectively). Broadly, the managers were too bullish on the Brazilian domestic economy given the change in monetary policy. The largest performance detractors included: Hapvida Participacoes (an integrated healthcare provider), which had to increase financial provisions due to regulatory changes; footwear retailer Azzas 2154, which traded down with the Brazilian stock market and there were concerns about consumer spending in a higher interest rate environment; and Assai, which is a Brazilian supermarket chain, whose highly leveraged balance sheet was negatively affected by higher interest rates. Stocks that added to BRLA’s performance in 2024 included Mexican silver miner MAG Silver and Lundin Gold, which is a Canada-listed miner with operations in Ecuador; both companies benefited from rising precious metal prices and, in the case of MAG Silver, from strong operational performance. Mexican airport operator Grupo Aeroportuario del Pacífico outperformed due to robust traffic numbers and strong earnings.