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 more on CH: Chile Fund Reports