Unmasking improvements in corporate Latin America
With high-profile corporate scandals garnering media attention in Latin America, investors may be hesitant to invest in the region. However, with the adoption of best practices over the past several years, we believe that these incidents are relatively isolated, and mask the improvements throughout the region over the past decade. Our Brazil-based investment team meets with the companies we invest in face-to-face, helping us remain current on corporate events in the region and the regional companies we invest in. The realities of corporate Latin America today are complex, in this team interview, our investment managers address the complexity to unmask the improvements taking shape in the region.
Head of Brazilian Equities
"We believe there is an increasing universe of good quality companies for those willing to develop a clearer understanding of the corporate governance structure."
Many people perceive Latin America to be a region with poor standards of corporate governance. What is the reality of corporate governance in the region today?
Nick Robinson: In the last decade it is pretty clear that governance has improved in the region on the whole. However, there have been several recent high-profile cases where companies have gone bankrupt or suffered heavily due to poor governance which have tarnished the image of corporate Latin America. However, it is important to remember that these high-profile cases are relatively isolated, albeit masking the underlying trend of improvement.
Brazil has been noted as a country with increasing corporate governance standards. Are there any countries that need to play catch-up?
Nick Robinson: In terms of governance, unlike Brazil, Mexico stagnated for many years. It is not clear why, but certainly the local stock exchange did not appear willing to tighten their listing standards for existing or new companies. Mexico remains a market where multiple share classes are very common and control of companies can be maintained with relatively small economic interest—sometimes as little as 10%. However, there are some good signs coming out of Mexico and some more recent listings have been done with much more robust governance structures in place. In fact, two of our newest positions in Mexico have both issued initial public offerings fairly recently, so this perhaps is the beginning of what we hope is a positive trend.
How does Aberdeen’s investment team measure improvements in corporate governance?
Brunella Isper: One thing we have noticed is an increased level of transparency from companies, which is always a clear way to measure good corporate governance. This includes increased access to shareholders, diligence from senior management and board members, and the addition of committees to provide support and better oversight to the board of directors’ activities. Specifically in the case of Brazil, we’ve seen an increasing number of companies listing in the Novo Mercado (NM) segment of the Bovespa stock exchange, a premium listing tier for companies willing to voluntarily adopt stricter governance standards beyond those required by local laws and regulations.
What themes or trends have you seen in corporate governance throughout the region?
Eduardo Figueiredo: Throughout Latin America, there are a higher number of family-owned businesses and companies with defined controlling groups as opposed to the corporate structure you see more frequently in developed markets. This makes the analysis and understanding of corporate governance practices even more important. While many investors perceive this to be a negative, we believe there is an increasing universe of good quality companies for those willing to develop a clearer understanding of the corporate structure surrounding these investments. We are also seeing many companies in the region begin to understand the benefits of adopting best practices, which we see as a positive.
Why is corporate governance important to Aberdeen?
Brunella Isper: We’ve been investing in companies in Latin America for over twenty years and actively target those with sound corporate governance standards. Given our long-term investment horizon, we believe that conducting a thorough fundamental analysis of the companies we invest in, including analyzing corporate governance aspects, is central to achieving strong returns for our clients. We believe that companies that adopt best practices will be more successful in their activities, which should reflect better performance over the long run.
How does Aberdeen’s investment process lend itself to analyzing corporate governance throughout the region?
Eduardo Figueiredo: Our team dedicates a lot of its time to analyzing corporate governance practice before investing. Our team-based approach along with our experience in other markets allows us to compare practices across industries and countries, which enables us to identify weaknesses and areas for improvement. It’s safe to say that our proximity to the companies we invest with also helps us navigate companies’ corporate structures. Once invested, we continue to actively monitor corporate governance practices and make an effort to vote at every Annual General Meeting (AGM). Our frequent engagement with management helps us establish a constructive relationship with our holdings, and we have seen positive results from that.
Can you give an example of how Aberdeen tries to engage companies to enhance corporate governance standards?
Nick Robinson: Yes, we recently attempted to improve the governance at one of our holdings in the airport sector. Essentially, we put it to the shareholders to vote on uniting the two share classes as well as removing the fee payable to the controller. Unfortunately, our efforts didn’t gain enough support at the AGM, but in a significant concession, the company agreed to reduce the annual fee payable to the controller. This is often the nature of engaging with companies; years of effort often yield only gradual progress.
Do you see room for improvement in corporate governance practices in Latin America?
Eduardo Figueiredo: Yes, there is always room for improvement in corporate government practices within Latin America. However, we believe there has been a lot of progress made over the past decade. What we would like to see going forward is more of a joint effort between regulators, corporations, and investors. For example, in Brazil, the development of the Novo Mercado (NM ) was seen as a key event.)The NM segment is a listing segment designed for companies with higher governance standards. This was followed by the improvement in level of disclosure. We believe more initiatives like these are key to improving corporate governance in the region.
Three reasons to invest in Latin American closed-end funds
In today’s volatile market environment, many investors overlook the potential opportunities hiding in the Latin American region. We believe that after taking a closer look at the current trends, the potential for long-term value becomes clearer.
Head of Global
1. Growing consumer demand
Many Latin American governments have succeeded in stabilizing and strengthening their financial and political systems in recent years following the financial crisis. Meanwhile, young and increasingly urbanized populations are advancing the region’s workforce, which has helped drive domestic demand. Latin America has historically benefited from exports and remains one of the world’s principal raw materials suppliers. In addition to this revenue source, the region's expanded focus on domestic consumption could provide a long-term boost for sustainable economic growth.
2. Improved corporate landscape
It’s not just the region’s economies that have improved—corporate Latin America has improved too. The region offers a large and expanding universe of high-quality companies. Many firms have reduced their debt levels, and profitability has improved. Moreover, management recognizes the need to focus on shareholder value and to adopt “best practice” in order to ensure they are equipped to compete in the global investment arena.
3. Long-term potential
With current market events such as a China slowdown, the threat of rising U.S. interest rates and a struggling stock market, many believe Latin America has found itself in a position from which it cannot recover. However, from our perspective, the future looks bright. Latin America's solid fundamentals make it a viable long-term investment opportunity, despite current market conditions.
In a world starved of growth, Latin America's growth prospects look more favorable when compared to developed markets. We are finding a steady flow of well-managed companies coming to the region's market, and the investment pool is growing each year. These companies are also operating in an environment of sound fundamentals where the region's debt relative to gross domestic product (GDP) remains low.
The Emerging Markets Equity team consists of nearly 50 investment professionals located in seven offices around the globe. The entire team is involved in the selection of stocks in the portfolio. We believe this cross-coverage provides enhanced depth and breadth of experience.
Our disciplined approach to asset management allows us to concentrate on companies that offer what we believe are positive prospects for long-term growth regardless of industry trends or market conditions.
Invest in reality; not perception
Watch the replay of our recent webcast featuring Nick Robinson, Director-Head of Brazilian Equities, and discover the compelling realities of investing in Latin America.
Inaccurate assumptions about Latin America could deter investors from potentially valuable long-term investment opportunities. Here are just a few of the realities versus some perceptions about investing in the region.
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