The long-term case for investing in Latin American countries such as Brazil, Mexico and Chile is well documented, but poor corporate governance often puts people off of the volatile region.

The average Latin America fund in the IMA universe has an annualised volatility of more than 30 per cent over five years, compared with 22 per cent from the FTSE All Share, and a maximum drawdown of around 57 per cent, compared with 45 per cent from the UK index. 

All 11 of these funds have significantly outperformed the All Share over this period, but with the numerous macro headwinds facing many of the economies – including high double-digit inflation, political instability, and of course the knock-on effects of the eurozone crisis – for many the potential for upside isn’t worth the risk.  

There is, however, a fund that looks to mitigate these risks by investing in a basket of assets exposed to the region – the Aberdeen Latin American Income trust. 

In keeping with Aberdeen’s emphasis on capital protection, the fund targets high-quality dividend-paying companies with strong balance sheets and good corporate governance, but volatility is reduced further by its significant weighting to fixed interest, which makes up at least 25 per cent of assets under management (AUM). At present, it has a 42 per cent weighting to this asset class. 

Fiona Manning, portfolio manager of the trust, says the multi-asset dimension allows the team to focus on the quality of its equity exposure.

"One of the things we wanted to make sure before we launched the trust was that we didn’t sacrifice quality for the sake of yield," she commented.

"Latin America is more mature as a bond market than many give it credit for, particularly Chile and Brazil, and so getting some of the yield from there means that we don’t have to compromise the equity portion of the portfolio." 

Manning says significantly higher yields on local government debt compared with those denominated in dollars has enhanced the amount the trust pays out, giving the team even greater flexibility over its equity exposure. 

The trust, which is currently yielding 4.8 per cent, has been significantly less volatile than the MSCI EM Latin America index since its launch in August 2010, and marginally less than the FTSE All Share – 16.12 per cent compared with 16.49 per cent.

It has underperformed the UK index though, with losses of 1.13 per cent compared with gains of 20.25 per cent. 

Performance of trust vs indices since August 2010



Source: FE Analytics

A big reason why Latin America is typically volatile is because of its dependence on the commodities market, which brings with it inherent risks.

However, Manning says few companies make it through Aberdeen’s strict screening process, which is why the trust is so underweight the asset class. 

"The Latin American benchmarks are skewed towards the energy and materials sector, making up around 30 per cent overall," she said. "Since we focus on quality rather than our benchmark, we don’t own a lot of these companies." 

"Our benchmark has a 21 per cent weighting to materials, but we own just 9.8 per cent. We’re actually a little overweight energy, but these companies – like Ultrapar – tend to be less cyclical and volatile than the norm." 

Manning’s biggest regional position by some distance is Brazil, which has a 53.3 per cent weighting, followed by Mexico, which has a 29.1 per cent weighting.

The Aberdeen Latin America Income trust is one of the very few income-focused portfolios currently trading below net asset value (NAV). According to data from the AIC, it is currently on a discount of 4.8 per cent. 

"High volatility and currency depreciation have weighed heavily on the portfolio, but we feel the discount is excessive given the yield we have been able to generate," Manning said. 

The trust has a total expense ratio (TER) of 1.9 per cent.