Aberdeen Latin America Equity Fund, Inc. (LAQ)

Fund Manager Interview

September 2011

 

 

Nick Robinson

Head of Brazilian Equities, Emerging Market Equities

Nick Robinson, Head of Brazilian Equities on the Global Emerging Market Equities team at Aberdeen discusses Latin America and explains why this region provides a wealth of interesting investment opportunities.

Key points

• The popular perception of Latin America as a region of weak political systems and economies is changing
• Prudent fiscal and monetary policies have helped many countries stabilize their economies
• The region came through the recent credit crisis relatively unscathed
• Good-quality companies trading at attractive valuations can be found in the region
• A local presence helps bolster our research

 

Can you give us a bit of background to Latin America?

The popular perception of Latin America used to be that of a region riddled with weak political systems, hyper–inflation and economies dependent on commodities and the U.S. for survival. Indeed, Latin America, like many emerging markets, has had its share of crises such as the ‘Tequila effect’ devaluation of Latin American currencies sparked by the Mexican peso’s collapse in 1994, Brazil’s own currency crisis in 1999, and debt defaults in Argentina and Ecuador.

When it comes to the companies themselves, Latin American corporates had a reputation for being inefficient, state-run monopolies or family-controlled companies with opaque management and poor corporate governance. As a result investors were reluctant to acknowledge the long-term investment opportunities in the region – instead looking to Asia as the primary source of returns in emerging markets.

What do you think has changed?

As a result of the many crises, not only in Latin America but elsewhere in emerging markets, governments recognized the need for sounder fiscal and monetary policy. A number of central banks switched from fixed to floating exchange rates and began to follow inflation targeting mandates. The

region also introduced more conservative banking practices: banks did not leverage as much as those in developed economies and they had almost none of the toxic investments that characterized their

developed market counterparts. These measures meant that countries in the region were able to come through the recent global credit crisis relatively unscathed. Governments were able to cut interest rates early and aggressively while banks were able to increase their credit provisions.

It is not just the economy, the companies have also gotten better: levels of corporate debt have been falling and profitability has improved. Companies have, on the whole, recognized the need to adopt global best practice to compete effectively. The combination of more orthodox economic and fiscal policies, better quality corporates and stronger domestic growth has increased investor confidence in the region.

Latin America is in reasonably good shape then – what do you think the future holds

for the region?

Latin America benefits from favorable demographics, young and growing populations, and continued urbanization and industrialization, which in turn is driving growth in domestic demand. Furthermore, we believe this trend will continue which will drive growth in the region for many years as domestic consumption levels increase. We are also seeing a steady flow of well-managed companies coming to

the market, in comparison to companies in developed markets, which bodes well for the future.

How much experience do you have investing in Latin America?

We have been investing in Latin America as part of our wider emerging market equity portfolios since the 1980s. We have also run dedicated Latin America portfolios since 2004, which have performed strongly to date.

Is it important to have a local presence?

Yes, I think so. We have recently opened an office in Sao Paulo, Brazil and I relocated there. I am joined by a locally-hired analyst, Brunella Isper. We work with the team in London researching companies throughout Latin America. We believe it is beneficial to have team members in the region, experiencing the economic environment firsthand and keeping abreast of company developments, particularly for

small and mid-cap companies, as and when they unfold.

Why is a team approach so important?

The entire team is involved in selecting stocks to include in our emerging market portfolios. This is because we rotate coverage of stocks among all the various team members, so that no one team

member is always visiting the same company. Decisions are made collectively – we don’t believe in star fund managers.

We believe cross-coverage of securities increases our objectivity and lessens our reliance on a single view.

Can you tell us a bit about your investment process?

We follow a bottom-up investment process which is based on the disciplined evaluation of companies through direct company visits. We carry out our own proprietary research into each company we invest in, and we never invest in a company without having first met the management of that company. Each stock we invest in has to pass on two key metrics – quality and price. We view risk in the purest form as buying a bad company at the wrong price. We are long-term investors and we view the relationship with each company we invest in as a partnership. We have one approach to investment globally and we stick to this approach no matter what the economic environment may be.

What happens once a company joins the portfolio?

We view buying a stock as a stage of the process, not the end. We visit the companies we hold at least twice a year, review their quarterly or interim result upon release and discuss all large price movements and newsflow for companies at our weekly meetings. Once we find a good company we invest for the long term.

 

What is your investment universe?

Our theoretical universe is all listed stocks within Latin America, since we do not have any limits in terms of market capitalization or any other rigid filters that automatically exclude certain stocks. In practice it is very much smaller, as our experience has enabled us to eliminate a vast proportion of companies that

have failed to meet our key quality criteria.

Do you look at the benchmark in your portfolio construction process?

We are aware of the benchmark but we do not use it as a starting point to build our portfolios. We believe risk is overpaying for a poor quality company, and we don’t believe that the benchmark provides any indication as to the prospects or inherent worth of a company. Therefore, we view following the

benchmark as being a missed opportunity, in that there may be companies outside the benchmark that are good quality with good prospects that are available at an attractive price. We prefer to rely on our

own proprietary research when deciding where we should invest. So our portfolios are constructed on the basis of our bottomup stock selection process.

Do you consider any top-down factors when looking at opportunities?

Our process is bottom-up - we look to identify good quality, well managed companies. However, in emerging markets we recognize that it is important to consider local issues, such as the economic environment and political risks. We build up an economic picture by speaking to the companies themselves, rather than using others’ research. This ensures we focus on those top-down issues that are most relevant to our holdings. We feel a bottomup approach is the best way to take advantage of the growth opportunities available, and to identify companies that will produce good performance whatever the market conditions.

What do you see as your main advantages over your competitors?

The main thing that differentiates us from our competitors is our consistent investment approach that we adhere to, irrespective of market conditions. We are active stock pickers and therefore good stock selection is the main driver of performance, along with tactical top-slicing/adding on weakness within a basic buy-and-hold strategy. Our competitive advantage lies in the quality of our research, the fact that

we provide cross-coverage on our research, our team culture (we don’t believe in star managers) and the experience among our senior members.

About Aberdeen Closed-End Funds

Aberdeen’s subsidiaries (the “Aberdeen Group”) have managed U.S. registered closed-end funds since December of 2000 and is the largest manager of emerging market closed-end funds offered around the

world by both value and number.1 Aberdeen directly manages nine U.S. exchange-listed closed-end funds, one Canadian investment company and serves as investment subadvisor to two other closed-end funds managed by First Trust Advisors L.P. Many of Aberdeen’s closed-end funds available to North American investors include allocations to Asian bonds. Aberdeen’s complete closed-end fund range is:

• Aberdeen Asia-Pacific Income Fund, Inc. (NYSE Amex: FAX)

• Aberdeen Asia-Pacific Income Investment Company Limited (TSX: FAP)

• Aberdeen Australia Equity Fund, Inc. (NYSE Amex: IAF)

• Aberdeen Chile Fund, Inc. (NYSE Amex: CH)

• Aberdeen Emerging Markets Telecommunications and Infrastructure Fund, Inc. (NYSE Amex: ETF)

• Aberdeen Global Income Fund, Inc. (NYSE Amex: FCO)

• Aberdeen Indonesia Fund, Inc. (NYSE Amex: IF)

• Aberdeen Israel Fund, Inc. (NYSE Amex: ISL)

• Aberdeen Latin America Equity Fund, Inc. (NYSE Amex: LAQ)

• First Trust/ Aberdeen Global Opportunity Income Fund, Inc. (NYSE Amex: FAM)

• First Trust/Aberdeen Emerging Opportunity Fund, Inc. (NYSE Amex: FEO)

• The Singapore Fund, Inc. (NYSE: SGF)

 

 

 

For more information

Please visit our website www.aberdeen-asset.us/cef

 

Important Information

The above is strictly for informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the investments mentioned herein.

 

Closed-end funds, unlike open end funds are not continuously offered. Closed end funds generally have a one-time initial public offering and then shares are subsequently traded on the secondary market through one of the stock exchanges. The investment return and principal value will fluctuate so that an investor’s shares may be worth more or less than the original cost. Shares of closed end funds may trade above (a premium) or below (a discount) the net asset value (NAV) of the fund’s portfolio. Shares of closed-end funds frequently trade at a discount from the net asset value. The price of the Fund’s shares is determined by a number of factors, several of which are beyond the control of the Fund. Therefore, the Fund cannot predict whether its shares will trade at, below or above net asset value. There is no assurance that a fund will achieve its investment objective.

Any opinion or estimate contained in this document is made on a general basis and is not to be relied on by the reader as advice. Neither Aberdeen nor any of its agents have given any consideration to nor have they made any investigation of the investment objectives, financial situation or particular need of the reader, any specific person or group of persons. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document. The information herein including any expressions of opinion or forecast have been obtained from or is based upon sources believed by Aberdeen to be reliable but is not guaranteed as to accuracy or completeness. The information is given without obligation and on the understanding that any person who acts upon it or otherwise changes his position in reliance there on does so entirely at his or her own risk. Aberdeen reserves the right to make changes and corrections to its opinions expressed in this document at any time, without notice. Any unauthorized disclosure, use or dissemination, either whole or partial, of this document is prohibited and this document is not to be reproduced, copied, or made available to others.

 

The information presented, was prepared and issued by the Fund based on publicly available information, internally developed data and other sources believed to be reliable. All reasonable care has been taken to ensure accuracy. International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods; these risks are generally heightened for emerging market investments. There are also risks associated with investing in Latin America, including the risk of investing in a single-country fund.

 

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