Soaring in the Andes
09/28/2010 11:53 am EST
Aberdeen Chile Fund’s handsome yield stems from the world-beating performance of its concentrated portfolio, writes Carla Pasternak in High-Yield International.
Aberdeen Chile Fund (NYSE: CH) is a closed-end fund that invests mainly in Chile-based stocks. Eighty-seven percent of the portfolio is in the top ten equity holdings, including industrial conglomerate Empresas Copec (Santiago: COPEC), electric utility Empresa Nacional de Electicidad (Santiago: ENDESA, NYSE: EOC), and paper and forestry giant Empresas CMPC (Santiago: CMPC).
Both long- and short-term performance of this fund has been outstanding. CH averaged 20% annually over the past 10 years, compared with negative annual returns for the Standard and Poor’s 500 over the same period. (Chile’s own stock market has gained 15.3% annually over the last ten years, according to MSCI, Inc. It’s also one of the biggest winners so far from the global financial crisis.—Editor.)
Quarterly distributions have been on the rise. Over the past year, the fund has paid a total of $1.56, which translates to a solid 8.5% trailing yield based on a $22.04 share price.
Distributions are converted from Chilean pesos, so they will fluctuate with currencies. However, the relative strength of the Chilean economy bodes well for a stronger peso in the future, which would result in higher distributions in dollar terms.
Chile is the world's number-one exporter of copper. Selling copper and other commodities to the growing economies of China and Brazil helped the economy grow 5% to 7% [annually] in the years before the financial crisis. Growth has also been fueled by recent reconstruction efforts after a devastating earthquake in late February caused roughly $30 billion in damages.
In addition, Chile recently elected a pro-business president, who is expected to aggressively pursue pro-growth policies. The country currently has moderate inflation and low interest rates. GDP grew at a whopping 6.5% in the second quarter, compared to just 1.6% in the US. And growth is accelerating: Some analysts [expect it to be] as high as 7% in 2011 and the second half of 2010.
The Chilean stock market is still small and dominated by relatively few companies. As such, the distribution [and] the share price of CH are dependent on the price of the fund's stock holdings, primarily just ten stocks. However, as a managed fund, CH [can] react to circumstances and move these positions. CH ranks in the top 1% of Morningstar's Latin American equity category for recent periods, including [the last] three years [and] one year and [the] year to date.
[Enthusiasm] for Chile's economy may already be baked into the shares, which have run up more than 25% in the last three months. Still, at a 6.4% discount to its net asset value, the fund is attractively priced relative to its 52-week average discount of 5.4%. Income investors with an appetite for the risks involved with country-specific funds may wish to time their entry on a possible pullback to the $19-$20 level.