At the start of 2011, Alexandre de Zagottis, CEO at Advis
Investimentos, and his two co-heads of investment, Eduardo
Bodra and Julio Marote, saw an opportunity to buy options that
would come into the money if Brazil reduced rates. This was a
contrarian view and the options were cheap.
"The yield curve was pricing in rate hikes, which we too
thought might happen, but we also believed that if the external
environment deteriorated, this would be a cheap hedge," says de
Zagottis, in São Paulo.
"Options were an intelligent way to hedge against the
Armageddon scenario in Europe," de Zagottis explains. The bet
paid off in spades. The Central Bank aggressively reduced rates
from August when the European crisis was worsening. The Enduro
fund rose by 11.0% in a month, he notes.
Advis’ multimercado – or mixed asset
– fund was up 10.3% in the year and is the best
performing multimercado fund in the LatinFinance Brazilian Fund
Management Performance ranking. The ranking, complied by
LatinFinance and Economatica, is based on a weighted
measurement of one-year and three-year performance to year-end
2011, in the debt, equity and multimercado classes. Funds must
meet minimum size and asset allocation requirements for
Last year was a tough one for Brazilian funds, as the
LatinFinance survey shows, though the three-year returns are
much healthier. Only one equity and one bond fund in the
ranking were in positive territory for 2011. Multimercados
fared better with 15 generating positive returns, but only one,
Enduro, hit double digits. It’s not surprising,
given the US dollar lost 12.6% against the real while the
Bovespa index fell 18% in local currency terms.
Weak performance is leading to painful, secular change in
the industry. The fat years when managers could rely on
sky-high real interest are over, with real rates less than 4.0%
today and falling.
"Investors are looking for more performance," says Alberto
Jacobsen, executive director at advisor Risk Office in
São Paulo. "We saw a lot of redemptions last year. As
markets have come back this year, investors have been putting
money to work in higher volatility funds."
"Today, you need to set a higher target over the interbank
rates of at least 1.0-1.5%," agrees Ronaldo Patah, head of
fixed-income at Itaú Asset Management.
Last year was dominated by rate movements. First, the
Central Bank ran up rates before taking an axe to them from
August. That led to a bumpy ride for bond investors. In
equities, managers really need to add alpha as treacherous
markets saw index huggers get poleaxed by the slide in larger
cap and commodity stocks.
It’s very much fixed-income that dominates the
local industry, including for most multimercado funds.
The first eight months of last year were poor for bond
investors as the Central Bank raised rates, which peaked at
12.50%, before the bank reversed direction from August. Since
then, rates have come down to 9.75%.
"That has helped the whole asset management industry and
investors have piled into fixed-rate bonds, primarily through
futures, and started to perform much better," says
One of the bond managers that navigated these choppy waters
with most aplomb is Itaú Asset Management. It has three
funds among the top 10 in LatinFinance’s
fixed-income category, the only manager to pull off this feat.
Itaú is a heavyweight in the asset management area with
300 billion reais under management, of which fixed-income
accounts for 120 billion reais, says Patah. The top performing
Itaú fixed-income Active fund holds 1.5 billion reais
and assets have been growing at close to 20% per year for the
last three years, he notes.
Patah’s performance in bonds has been driven by
a combination of factors including yield curve plays,
inflation-linked bond exposure, and a buy-and-hold strategy for
corporate credits. Recently, he has been more successful in
trading inflation than the yield curve, he admits.
Patah says it has been difficult to read government and
Central Bank policies since the start of the Rousseff
government. The bank has used macroprudential measures and
seems to be incorporating economic growth in its policy mix, he
"Given Brazil’s history of inflation, it is
very sensitive for the bank to admit that it is no longer
pursuing a pure inflation-targeting mandate," Patah says. The
bank has stated that it will bring rates down to 9%, but he
wonders if it will stop there.
Patah is buying bank deposit certificates and debentures and
even some structured bond products for some portfolios. Today,
some 35% of some fixed-income portfolios is invested in
The problem is that "other managers are thinking the same
way and corporate spreads on the best names have collapsed
thanks to demand, with many yielding just 1% or even less," he
says. To boost returns, he plans to launch more aggressive
fixed-income funds, taking more corporate risk, being more
active in FX and trading more inflation-linked instruments.
It Pays to be Flexible
In the long-only equity space, absolute return funds, which
can avoid stocks in the commodities-heavy Bovespa index, are in
vogue. Some small and mid-cap funds have done well as have
those betting on domestic consumer stocks, which are badly
under-represented in the index. It is the nimble and
free-thinking fund managers that were the top performers last
BNY Mellon is one of them. The manager runs three equity
strategies, value, growth, and a small and mid-cap value fund.
The BNY Mellon ARX Long Term equity fund that was launched in
2008 belongs to this last group, and is one of the top
performers in the LatinFinance equity category.
The small and mid-cap fund can invest up to 20% in larger
stocks. That provides flexibility and allows Alexander Gorra,
senior investment strategist in Rio de Janeiro, to exploit the
valuation opportunities in the discount premium for smaller
caps. At times, that can be as much as 60% as it was in late
2008 and early 2009.
"Today the risk-reward picture is tougher and the premium
has been shutting down," says Gorra. Indeed, this
year’s market rally has Gorra and others wondering
how much value there is left in stocks. Today, he has 18% in
cash, much higher than the typical 5%. Gorra is tweaking
exposures, selectively slicing domestic consumer names, which
have performed, and adding commodities, which have taken a
"Retail stocks were up 30-50% over the first couple of months
of the year and some are trading at rich multiples of 20-25
times," Gorra says. "We are constructive long term but more
cautious on the short term."
For him, credit card companies and shopping malls continue
to offer "a top combination of reasonable valuations, good free
cash flow and strong dividend yields, at 5% on credit card
processors," he says. Gorra sees sweeping changes ahead.
"Brazil is developing a two-speed economy –
industrial production should continue to underperform while the
service economy should continue to grow strongly," he says.
Octávio Magalhães, partner and CIO at Guepardo
Investimentos in São Paulo, runs another successful
long-only equity fund that is small and mid-cap focused but has
some significant large-cap positions too. The Guepardo
institutional fund came fifth in the LatinFinance equity
category last year. The absolute return, pure long-only fund
uses bottom-up analysis that blends quantitative and
qualitative inputs, he says. Since inception in 2001, the fund
has annualized 37% performance, versus 18% for Bovespa. The
secret lies in very deep analysis of companies and very
conservative estimates, he says.
"We purchase only businesses that offer substantial
discounts and keep positions on average for 28 months,"
Magalhães says. The fund blends large caps such as
Itaú, which it snapped up on the cheap last August, and
BR Foods which it bought in the first half of 2009.
Magalhães also buys small caps, such as medical
equipment supplier Kremer. When it bought into the stock at the
start of 2008, Kremer had a market cap of 200 million reais
with 180 million reais in cash, valuing the company at just 20
million reais compared to Ebitda of 40 million reais in one
"We stayed with the company and improved management and
today it is generating annual Ebitda of around 100 million
reais," Magalhães says.
Multimercados in general performed not far from the CDI
benchmark. Foreign investors often erroneously translate
multimercado as hedge funds, but mostly are conservative, using
fixed-income with just a dash of currencies and equities to pep
Today, they are having to hedge more intelligently, push
deeper into global rates and currencies and add equities. Macro
funds have been the top performers in the multimercado space as
the dire performance of equity markets hits the generally
long-biased universe of long-short funds.
Advis Investimentos’ Enduro fund leads the pack
on a one-year basis (the fund does not yet have a three-year
record). The boutique manager emphasizes a global approach,
strict risk controls and a limit to downside, says de Zagottis.
Long positions are hedged, typically through the options
market, and the fund arbitrages both inter and intra-asset
classes and geographic markets, he notes.
Correct calls on markets and downside limits are behind
performance, says De Zagottis. Not surprisingly, the manager
has quickly built up assets and today has 5 billion reais
across three strategies, global macro, Brazilian macro and
equities. Multistrategy Enduro is a Brazilian macro fund.
De Zagottis questions the market consensus on higher rates
today with the Brazilian forward curve pricing in hikes at the
start of April of up to 200 basis points from the start of
"It’s possible that inflation picks up and
rates do go up ," de Zagottis says. "But the Central Bank is
dovish and there’s a political commitment to
reduce rates and boost growth so it is hard to see such a rapid
If the external scenario worsens, the bank may even reduce
rates, he thinks. As his dovish position is contrarian, he is
finding options cheap and has been buying.
"You have to be patient as an investor. We have made money
on the curve but sometimes you have to wait for a year," de
Advis is also long Brazilian equities and the MSCI emerging
markets index while the manager has been reducing short
positions on Spanish and Italian stock indices. In currencies,
de Zagottis is long the US dollar against the euro and long the
real and other commodity currencies against the US dollar.
Managers are increasingly having to look for alpha as markets
have become so free of trends. "It has been difficult to spot
beta trends over the last year," he says.
At the other end of the size scale lies BTG Pactual Asset
Management. It is the leading asset manager in the multimercado
space with 45 billion reais in such assets under management,
and the sixth largest asset manager in the country, says
João Scandiuzzi, its chief strategist. The BTG Pactual
Local Multimercado fund came fifth in the LatinFinance
The BTG fund is a freewheeling instrument that plays on the
curve and increasingly with corporate and structured credits, a
growing array of currencies and dabbles in equity markets
BTG has been moving into private credit but, "exposure tends
to be very conservative and in very liquid names, including
deposits of first line banks, which yield 107% of the overnight
CDI. Returns are largely played out through the reduction in
spreads," Scandiuzzi says.
He agrees with de Zagottis that the futures market is too
hawkish on the Central Bank. The bank may take rates down
further than the 9% it has already signalled, he believes.
Sovereign trades are generating less upside. At the same time,
the curve is becoming very sensitive to macro news and even
shadows the US Treasury curve, he says.
He has been more opportunistic than strategic in FX
exposures. The capital control interventions by the Central
Bank allow short-term gains but make reading trends difficult,
he says, echoing the comments of Itaú’s
Patah. Overall, he expects a stronger US dollar but "this is
not the environment we had between 2004 an 2008 where you
really had trends to play with," he notes.
In the equity portfolio, Scandiuzzi says he is more willing
to bet on the reacceleration of the economy.
"It might take a while as credit growth is slower because
delinquency rates are higher and banks are not yet passing on
lower rates to customers, but they will," Scandiuzzi says. He
sees faster GDP growth in the second half with domestic names,
retail companies and some financials stocks benefitting.
"Our philosophy in equities is to have very concentrated
portfolios that are not correlated to the Bovespa index and are
focused on alpha generation," Scandiuzzi says.
The relentless decline in interest rates means the
low-hanging fruit has been picked in the asset management
industry. Low volatility funds are passé.
The new appetite for risk is shaping the development of new
products. Brazilian managers are turning to more illiquid areas
such as private equity and real estate, says Joaquim Levy,
chief strategy officer at Bradesco Asset Management. The new
generation of products will look more like those in developed
markets. Private equity, credit, agro and infrastructure are
all proving popular with investors, says Levy. Pension funds
are also increasingly prepared to look at higher volatility and
illiquid instruments, he says.
That is forcing fixed-income funds deeper into the corporate
market and some are even starting to dip their toes into
Brazil’s fast-growing structured products market.
Equity managers are having to move away from the
commodities-heavy Bovespa index and identify pockets of alpha
and overlooked value. Multimercados need to use a combination
of these strategies, soup up equity holdings and step up
fixed-income and FX risk.
Finally, Brazilian markets are sorting out the wheat from
the chaff. LF