The Chile Fund: A Play on a Nascent Global Economic Recovery

The Chile Fund (CH) may represent an attractive investment opportunity for investors more optimistic regarding the prospects of a nascent global economic recovery. The Chile Fund provides investors a “two-for”: an attractive way to play the recovery in emerging Latin American stock markets and a participation in a key global industrial commodity: copper.

According to the Economist magazine, “Chile has long been held up as a model of policymaking for other Latin American countries.” Chile is a commodity driven economy with copper being its main export (mining comprises 13% of Chile’s GDP). Copper is considered a key industrial commodity and is often associated with economic expansion. It is also considered an inflation hedge and sometimes moves inversely with the US dollar.

In response to the global recession, Chile has taken steps to revive its domestic economy through fiscal measures worth $4 billion USD and the slashing of its benchmark interest rate to 4.75%. The Chilean stock market as measured by the IGPA is up 10.9% in local currency and 21.6% in USD equivalent, YTD.

The chart below compares the adjusted share price (adjusted for distributions and splits and indexed to the October ’02 cyclical stock market trough) of the Chile Fund (CH) and the Dow Jones Chile Index (USD) (^CLDOWD). Overlaid is the indexed PPI for copper prices.

As can be discerned, copper prices generally influence the Chilean stock market and the Chile Fund. (It is important to note that without adjusting for distributions, the Chile Fund would have underperformed the DJ Chile Stock Index on a share price comparison alone. Because the Chile Fund is required by law to distribute its income as a closed end fund (CEF), it has made distributions annually since its full year of operation in 1990.)

Attractive Metrics: Currently, CH is trading at a 14.4% discount to its NAV and at a 4.2% spread to its average historical nominal discount of 10.2%. However, on a time-weighted discount basis, the spread is 7.2%. Its distribution yield is 2.8% based upon investment income. Additionally, it also distributes short and long term capital gains.

One of the biggest knocks on CH is its low average daily trading volume of 32,000 shares. For those investors looking to participate in a more direct play on copper, there is a small ETN: iPath Dow Jones-AIG Copper Total Return Sub-Index ETN (JJC).

For those interested, the following is a link to a more detailed report on CH: Chile Fund Report

Disclosure: Long CH.

Comments

[Granville:]

A technical note: the Chile Fund (CH) on the daily chart has risen above the 50DMA, and is approaching the declining 200DMA.
On the weekly chart, it is rising to meet the declining 50MA, which is below the 200MA.
CH also has a gap around the 10.75 level which may need to be filled before a recovery in price.

Apr 22 08:46 AM

[Alan Young:]

Chile is a good destination for investment. Hwever, CH under-performs the index fund ECH by about 10% annually. IMO the only reason to buy it is if you think the discount will be closing, giving a temporary price advantage.

Apr 22 10:50 AM

[jse17:]

As the world enters the Lithium Ion Era aggressively, Bolivia leaps to the fore. Chile reportedly is a small player ATPIT with the potential for more directed exploration and recovery capacity existing.

Each vehicle carrying a lithium ion battery requires approximately 400 lbs. of the somewhat difficult to deliver element. Future needs here are obviously enormous vs. today’s demands and he holding the element should substantially profit!

In that a Bolivia Fund is a non-starter, “love the one your with” and consider CH as Joe recommends!

Apr 23 09:16 AM

[Joe Eqcome:]

Alan Young

On a monthly basis I think you'll find that adjusted for distributions and splits that in fact ECH has underperformed CH since its inception.

If you indexed the adjusted prices of both ECH and CH for ECH's short operating history (Jan '08), CH is down 40% while ECH is down 46%.

Again, this is because a portion of CH's return is distributed to CH's shareholders over the period and is not reflected in its share price—yet still constitutes a return to the investor. I know this concept is a problem for rookies in this market segment and that's why I took pains to point it out in the article.

You can't effectively compare CEF returns with other stocks without taking into consideration distributions either through an adjustment, as I did in this case, or by comparing them on a total return basis.

Joe Eqcome






On Apr 22 10:50 AM Alan Young wrote:

> Chile is a good destination for investment. Hwever, CH under-performs
> the index fund ECH by about 10% annually. IMO the only reason to
> buy it is if you think the discount will be closing, giving a temporary
> price advantage.

Apr 24 10:14 AM