Aberdeen Latin American Income Fund has announced its results for the year ended 31 August 2015. During the year the companies NAV total return was -36.8%, which is behind that of the company’s composite benchmark (a fall of 32.2%). Share price total return was -32.3%. The report cites a difficult year for Latin American markets in general and highlights the weak performance of Latin American currencies during the year relative to sterling as severely impacting the company’s capital and revenue returns. The company has also decided to rebase its dividend to 3.5p (the dividend has been held at 4.25p since 2010). The board says that having regard to the challenging economic environment in the Latin American region, they concluded that maintaining dividends at the current level was unlikely to be sustainable in the short to medium term and the weak currency environment exacerbates this. They also consider that maintaining the high level of dividends was inhibiting the investment manager from conviction investing which is detrimental to achieving future capital growth of the company. The board say that it is their intention to declare first and second interim dividends in respect of the financial year ending 31 August 2016 each of 0.875p per share.
In terms of performance attribution, negative country performance was also a significant factor with Brazil standing out in this regard. However, in Mexico, airport operators Asur and OMA were among the best performers in the portfolio, underpinned by growth in traffic and commercial revenues. Beverage and retail company FEMSA also did well, despite the depreciation of the Mexican peso.
Several Chilean holdings made positive contributions to relative performance. Coca-Cola bottler Andina was buoyed by resilient volumes and better profitability. Lender Santander Chile benefited from healthy loan growth and improved asset quality. Mall operator Parque Arauco maintained high occupancy rates, while continuing to expand in the region.
In Brazil, Lojas Renner posted consistently good results, maintaining robust sales growth despite the weak economic backdrop. However Vale and Banco Bradesco were among the key detractors from performance. Vale suffered from lower iron ore prices and concerns over Chinese growth. Bradesco suffered from an impending tax hike on financial institutions and concerns that the weak macroeconomic environment would drag on its asset quality. Peruvian infrastructure company Grana y Montero was a detractor. Its core engineering and construction business was particularly weak in the manager’s view.
With regards to the companies bond portoflio, the off-benchmark exposure to Uruguayan inflation linked bonds was the main source of outperformance. The company says that a combination of high real yields and rebounding inflation partially offset the depreciation of the currency. The underweight exposure to the Colombian Peso, which was hit particularly hard by the fall in oil prices, was also a positive contributor. The underweight exposure to the Mexican Peso detracted from performance. While slow growth and heavy investor positioning has weighed on the Peso, it has outperformed both the Brazilian and the Colombian currencies. The long duration position in Peruvian rates was also a minor drag on performance.
In terms of portfolio activity, the company sold out of Petrobras during the period, on growing worries about its governance shortcomings, rising leverage and deteriorating ability to repay its debt. The position in Soriana was reduced reflecting concerns that its acquisition of stores from fellow retailer Comercial Mexicana would weaken its balance sheet. OMA and Lojas Renner were reduced following periods of strong share price performance. However, three new holdings were initiated. These were Arca Contal, Mexico’s second-largest Coca-Cola bottler; Banco Santander Mexico, a conservatively managed lender with an established domestic market position; and Iguatemi, a leading Brazilian shopping centres owner and operator with a portfolio of well-located malls. The company also added to its positions in Banco Bradesco, Exito and Itau Unibanco, which were trading at attractive valuations.
With regards to the bond portfolio, the company’s exposure to Brazilian rates and currency was moved to an underweight position earlier in the year as the managers expected a sharp deterioration in growth together with inflationary pressures. The sell-off later in the year was used add to the company’s Brazillian bond position, but the currency exposure remains underweight. The underweight to Colombia has also been at the expense of Mexico, as relative valuations moved in the favour of the former. They have also increased exposure to Peruvian rates. Over the year the managers have shifted the portfolio allocation from being overweight equity into overweight bonds. They say that in a slower growth environment fixed income markets tend to outperform the equity markets.
Aberdeen Latin American Income to rebase annual dividend to 3.5p : ALAI