‘Never let a good crisis go to waste,’ was supposedly Sir Winston Churchill’s pithy response to the post-war conditions that led to the creation of the United Nations. For investors today, it can also apply to Brazil where political turmoil has created an opportunity in investment trusts exposed to Latin America’s largest economy.This includes Hansa Trust (HANA), one of the more quixotic funds listed on the London Stock Exchange.
Until May it looked like Brazil was pulling out of a deep two-year recession, with the country stabilising under President Michel Temer who took power last year after his predecessor Dilma Rousseff was ousted and impeached for breaking budgetary laws. However, its financial markets plunged when Temer was accused of agreeing to hush money payments to a witness in the country’s vast ‘Car Wash’ corruption probe.
Since then the Bovespa stock index, Brazilian bonds and the country’s currency, the real, have all recovered as President Temer, who denies the allegations, has resisted calls to resign. Although unpopular, his position is strengthened by the lack of any credible successor.
The long-term investment case for Brazil is that it is a resource-rich nation with a rapidly growing and increasingly educated population. Investors were initially worried that Temer would be unable to push through the pension and labour reforms he promised to cut the country’s big budget deficit. However, most now believe that while the pace of change will slow, the reforms will be made.
Investor optimism was buoyed this month by another astonishing twist as former left-wing president Luiz Inacio Lula da Silva – once described as ‘the most popular politician on earth’ by US leader Barack Obama – was sentenced to nearly 10 years in jail on corruption and money-laundering charges. Lula, 71, remains free pending an appeal but is unlikely to make a comeback in next year’s election to challenge the reform programme.
Brazil has been a tough place for UK investors in the past 10 years but the rebound in the real since January 2016 has improved matters. Investment trusts offer routes in, starting with JPMorgan Brazil (JPB), the only trust dedicated to the country. Its shares trade at a discount of 18% below asset value, potentially attractive to bargain hunters but reflecting the fact that performance has lagged Brazil’s stock market for several years with a 3.7% gain over one year and an 18% decline over five years (source: Association of Investment Companies). As a small fund with just £26 million invested, its expenses are high with annual ongoing charges of nearly 2%.
For a regional approach, Aberdeen Latin American Income (ALAI), with 46% invested in Brazil, and BlackRock Latin American (BRLA), with 62%, also look cheap on discounts of around 14%. Both captured the one-year rally with respective gains of 22% and 19%, although their more modest five-year returns of 6.5% and 6.9% show how tough emerging markets have been. BlackRock, managed by William Landers, is bigger and less expensive with 1.2% ongoing charges versus Aberdeen’s 2%.
For a broader tack, Austin Forey’s JPMorgan Emerging Markets (JMG) invests 12% in Brazil, nearly half its weighting to Latin America. Its shares have returned 64% over five years and trade at a 13% discount. Rival Templeton Emerging Markets (TEM) has 10% in Brazil: its five-year return of 42% is less impressive but new manager Carlos Hardenberg has revived performance with a one-year gain of 33%. Its shares stand on a 14% discount, which also looks good value.
Utilico Emerging Markets (UEM) offers a different approach, specialising in infrastructure and utilities to tap into the urbanisation of the developing world. It has 20% invested in Brazil, over 4% of which is a stake in Ocean Wilsons Holdings (OECWL), owner of one of Brazil’s largest port and marine services operators. Manager Charles Jillings has run Utilico since its 2005 launch and is unfazed by developments. ‘We think there’s enough momentum to continue the changes. It’s hard to see how much more bogged down it could be,’ he said.
Utilico has produced a 61% five-year total return and its shares offer a 3% dividend yield on a 9% discount. A fly in the ointment though is a performance fee which lifted investors’ ongoing charges to a high 2.8% last year.
My favourite for an out-of-the-way bet on Brazil is Hansa Trust (HANA), an eclectic £310 million global fund that combines a diversified portfolio of specialist funds and shares with a 30% position in Ocean Wilson, the company that owns Brazilian port operator Wilson Sons, and in which Utilico co-invests. Hansa trades on a whopping 32% discount, a dismally low rating that partly reflects the weight of its big Brazil exposure. Moreover, the Salomon banking dynasty controls all the voting shares, which means non-voting ‘A’ shareholders have no power to effect change.
As a result long-term performance looks awful with shareholders making just 5% over ten years. However, a 24% leap in the past year indicates a dramatic turnaround could be possible if Brazil makes a sustained recovery and if changes to the funds portfolio by chief investment officer Alec Letchfield, who joined three years ago, bear fruit. If you’ve money and the patience to spare, this could be a long-term winner as wide discounts like this rarely last forever.
A version of this article was published in the Telegraph on Friday.