Latin Yields That Won't Spill

06/30/2010 12:01 am EST


Andrew McHattie

Editor, Investment Trust Newsletter

UK investors burned by the BP disaster may seek safer dividends in South America, writes Andrew McHattie of the Investment Trust Newsletter.

We have some early news of the new JPMorgan Global Emerging Markets Income Trust, offering a mix of income and growth from emerging markets. The trust may be aiming to raise up to £200m from the launch of ordinary shares at 100p each, tempting investors with an initial yield of 4%. The timing of the launch is excellent, capturing a moment when UK investors are highly sensitive to the vulnerability of domestic dividends.

The diversification argument is fairly powerful, and JPMorgan is able to take advantage now of a maturing of management behavior in emerging markets. Where dividends were once thought of as wasteful diversions of capital, emerging markets companies are willing and able to return capital to shareholders nowadays, maintaining robust payout ratios (in excess of 30% on average) during the most stressful periods of the economic crisis.

The point here is that emerging markets have emerged and are no longer the high-risk growth markets they once were. In many respects these countries with lower debt burdens, better growth prospects, far superior demographics, and better capital discipline seem to be lower risk than the UK.

Aberdeen is also planning to tap into the same thread with the launch of Aberdeen Latin American Income Fund, the first UK-listed Latin American closed-end fund with an income bias. The initial target for the annual dividend yield is 4.25% with the aim of growing it over time. Dividends will be paid quarterly.

The fund will be jointly managed by Aberdeen’s highly regarded emerging market equity and debt teams led by Devan Kaloo and Brett Diment respectively. Initially the portfolio blend will be approximately 60% invested in listed equities and the balance invested in sovereign bonds. The equities will be focused on growth-orientated stocks, with the bonds expected to provide much of the income.

Aberdeen says that over the past ten years, Latin America has made huge strides to become an important current and future contributor to global growth. A commitment to orthodox fiscal and monetary policies from governments and central banks has seen inflation fall significantly in countries such as Brazil, Chile, and Mexico, demand for commodities has led to trade surpluses, and tax reforms, and prudent government spending policies have led to current account surpluses as well. Fiscal deficits are lower in most cases among the region’s countries than in the eurozone, Japan, UK, and US.

Aberdeen is focused on the rise of domestic consumption. Growing, youthful populations with burgeoning workforces are enhancing earning and spending power in the region, and this in turn is driving domestic growth. Consequently, local retailers, banks, and drinks companies are of particular appeal. Many of these businesses are often ignored by investors unwilling to undertake on-the-ground research and analysis.

Devan Kaloo, head of global emerging markets at Aberdeen, comments “these uncertain times serve to highlight the need to avoid highly indebted entities, whether countries or companies, and focus instead on those with strong balance sheets, sound businesses, and proven management. In this regard, the outlook for Latin America is compelling.”

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