Saturday, December 16, 2017

Looking at potential returns


Mark Fraser


Mark Fraser


Mark Fraser

This week we at Bourse will be discussing the potential returns to investors of investing in the Bourse Brazil Latin Fund (BBLF).

The BBLF has created some excitement in view of the shortage of attractive local investment opportunities for US dollar holdings. The Fund will be the first USD denominated mutual fund to be listed on the USD platform of the Trinidad and Tobago Stock Exchange. The portfolio will be balanced between fixed income and equity instruments with the option of investing in alternatives. Geographically, the BBLF will be primarily focused on Brazil and other dynamic destinations such as Mexico, Colombia, Chile and Peru. The main question that investors are asking relates to the return potential of the Fund. Through this medium we will seek to address some of the key aspects in relation to the potential returns of the Fund.

Fund Performance

Firstly it is important to note that the BBLF does not have any historical performance as it is in the Initial Public Offering (IPO) period. The potential returns of the Fund that will be discussed in this article will be based on an indicative portfolio. Investors however, must be mindful that there is no guarantee of the realisation of these projected returns as they are based on the current analysts’ views on the outlook for the markets, which are subject to revisions as market conditions change. Returns to investors will be measured in terms of the Net Asset Value (NAV) plus distributions. The NAV will be computed once a day based on the closing market prices of the securities in the Fund’s portfolio. Simply put, the NAV per-unit is calculated by dividing the total value of all the securities in the portfolio, less any liabilities, by the number of units outstanding. For the purpose of this article, the projected returns will be based on a 50-50 weighting in fixed income and equity instruments and all potential returns will be net of fees and exclusive of distributions. Nonetheless, provisions have been made to allow for the flexibility to alternate the weightings amongst the asset classes as markets react to external stimuli.

Portfolio Returns

Based on analysts’ projections, Bourse has projected potential returns for the Brazilian equity market of approximately 20 per cent in a best case scenario, 3 per cent in the worst case and 12 per cent for the most likely scenario. The average return expect for the other Latin American regions is approximately 3-5 per cent. On the fixed income side, Real (Brazil currency) denominated bonds with tenors of 4-7 years generate yields of approximately 6-8 per cent versus USD similar denominated bonds yielding approximately 5 per cent.

Using these returns as a most likely base case, the BBLF portfolio (both equity and fixed income combined) is projected to generate a return to the investor of approximately 7.2 per cent after the first year of investment. This return is based on the assumption that currency and interest rates remain stable and that there are no unforeseen market events. However, no market and furthermore no economy operates in a vacuum but is dynamic and reactive to developments that may pose a threat.

Interest Rate Fluctuations

Should inflation persist despite the efforts of the Brazil Central Bank and interest rates increase, the yields on the fixed income portion of the portfolio will be impacted. This would affect the overall return of the BBLF portfolio minimally. For example, if interest rates were to increase by 25 basis points (bps), the return on the BBLF portfolio will fall by approximately 11bps to 7.1 per cent. If interest rates were to fall as a result of a fall in inflation, the opposite effect would be seen. For example, if interest rates fell by 25bps, the return on the BBLF portfolio will increase by 80bps to 8 per cent. Brazil’s Central Bank president has asserted that he is committed to do whatever is required to control inflation, of which measures are already underway. The Central Bank expects inflation to fall to 5.7 per cent from current levels of 6.59 per cent by the end of 2013. Exhibit 1 shows the impact of interest rate fluctuations. A fall in interest rate will be advantageous to the BBLF portfolio. These projections are based on the assumption that equity returns will not be affected by interest rate changes and currency remains stable.

Currency Fluctuations

Approximately 44 per cent of the Fund will be Real (Brazil currency) denominated and 56 per cent will be USD (Exhibit 2).

The Real exposure would arise from the Fixed Income portion of the portfolio. The reason for this is the relatively higher yields available on investment grade bonds. Changes in the Real per USD exchange rate will also influence the return potential of the Fund. As at May 20th the Real/ USD exchange rate was reported at R$2.04/US$. If the Real were to appreciate by 1 per cent, then the projected returns of the BBLF portfolio will increase by approximately 55bps. However, if a depreciation of 1 per cent occurs, a negative differential of approximately 54bps will be seen. In comparison to other top traded currencies, the Real/USD exchange rate appreciated 0.63 per cent year-to-date while the Euro, the Yen and the Pound all depreciated by 2.55 per cent, 15.62 per cent and 6.83 per cent respectively (Exhibit 3).


To reiterate, the potential returns identified in this article are not guaranteed but rather is a projection of what can be expected based on the current situation. The balanced nature of the BBLF portfolio will also provide less volatility when it comes to returns as compared to an all equity portfolio. The offer period for the BBLF began on May 3 and has been extended until May 29, 2013. Listing on the TTSE is expected to take place shortly after closing. For more information on the Fund, investors can access the sponsor of the BBLF, Bourse Securities Ltd, at 628-9100 or e-mail or visit us at any one of our three offices located in Port-of-Spain, Chaguanas and San Fernando.

Further information on the BBLF is also available on Bourse’s website at and Bourse Securities Limited Facebook page.