By Ben Miller
Asset managers in Brazil have had to work hard in the past two
years. The central bank’s push to lower interest
rates forced them to stay focused. But it also boosted the
performance of the domestic fixed-income and multimercado
(mixed asset) funds that played the adjustment properly.
Now, improving GDP growth forecasts are lifting sentiment
among managers – but a rate hike in April has
complicated strategies once more.
The steady decline in rates that began in 2011 was already
rewarding Brazilian fixed-income fund managers a year ago.
Those topping the LatinFinance 2013 Brazil asset manager
scorecard ranking still say clever anticipation of rates was
the key to excess returns.
Gone are the days when managers could stuff portfolios with
government bonds paying 12% or more. And while
Brazil’s corporate bond market is growing, it will
still take time to match the international one. So active
managers keep putting their chips down to bet on rate
"Throughout the last year there was this massive change in
terms of GDP forecast," says João Scandiuzzi, chief
strategist at BTG Pactual Asset Management. The
firm’s multimercado fund tops this
year’s scorecard, and its debt fund comes in
second. "We always had this bias that the growth would be
slower than the government and the market anticipated. Our main
bet was that the relaxation of monetary policy would go further
than had been signaled by the central bank."
BTG expressed this view by buying 2013 and 2014 interbank
deposit rate (DI) derivatives, Scandiuzzi says. It also picked
up inflation-linked Brazilian treasury notes, NTN-Bs, at the
belly of the curve – between 2015 and 2022.
Now there is a rapidly growing preference from clients for
Fundo de Investimento Imobiliário (FII) real estate
funds, he says. For the multimercado fund, international
investments include high-yield bonds, and rates in the US,
Mexico and Colombia.
Brazil’s central bank, led by governor
Alexandre Tombini, last cut rates in October. Many analysts had
expected a hold throughout 2013, but creeping inflation
prompted a 25 basis point hike, to 7.5%, in April, with more
"There are still pension plans with return targets that are
above the current real rates. So fixed-income is dragging the
returns to below the targets," says Marcelo Giufrida, CEO of
BNP Paribas Asset Management Brasil.
Pension funds must move into riskier securities to keep up,
but it is a long process to prepare investors to face this less
stable environment. BNP’s fixed income fund ranks
fourth in this year’s scorecard.
Bradesco Asset Management, which runs the best-performing
fixed income fund, also made money by betting on falling
"Our strategy is to bet on the rising of the curves more
than the rise in the short-term rates," Reinaldo Le Grazie,
director of fixed income and multimercado funds, says.
The increase in Brazilian rates, and one further down the
road in US rates present an "interesting challenge", Le Grazie
says. It will require more of the active management that he and
other fund managers have had to switch to in the past two
As the fund managers plan for potential interest rate and
foreign exchange moves, they must also contemplate the
inflation outlook. Price rises may not get out of control, but
they nevertheless complicate the picture.
"One of the main mistakes of last year was the government
pressuring the FX rate up, and that helped sustain inflation in
Brazil," says Gerald Medley, partner at Paineiras
Investimentos, whose multimercado fund ranks second in the
scorecard. "The government would prefer not to raise rates, but
inflation is and will be above 6.5% – the maximum of
the band. We believe rates will be increased."
More macro-prudential measures are likely, Medley adds. Like
the successful fixed income funds, Paineiras’s
multimercado made strong returns after playing the interest
rate decline properly. Now, he says, it has taken a lot of risk
off the table.
Brazil’s fixed income market is growing for
more than just sovereign borrowers, something investors agree
is a good thing. But, non-government debt is still a long way
from dominating portfolios. Government securities and
derivatives make up the bulk of investments, as buyers cash in
on changing interest rates.
BNP’s Giufrida explains that bonds represent
about a third of his fund’s alpha, with two-thirds
still belonging to market risks. Perhaps 10% of his
firm’s assets are bank or corporate bonds.
The market for debentures, or local bonds, is also
"Liquidity was almost nothing two years ago," Giufrida says.
"Now it is 150 million to 200 million reais per day. It has
gone from being essentially a loan market to being more of a
Government initiatives to encourage new issuance and
secondary trading are slowly turning things around.
Infrastructure debentures – bonds to fund capex that
offer tax benefits to foreign and domestic retail investors
– are an example of an asset class created by
legislation that is growing steadily.
BNP Paribas and Bradesco are preparing funds of funds to buy
these types of debentures – and pass the tax benefits
on to the individual investors, Giufrida and Le Grazie say.
Other funds are structuring similar vehicles. Fewer than 10
infrastructure debentures have been placed since the
legislation approving them was passed in 2011, but the managers
reckon more will be on the way after investors have reviewed
the first few.
Topping LatinFinance’s Brazilian equity
investor scorecard are absolute return funds free to pick
stocks. Despite international investors trashing the Brazilian
market, based on poor performance of the Bovespa, local
managers insist there is plenty of value to be found. Listed
companies that disappointed the markets before making a
turnaround are a particular favorite. Funds that have performed
best have taken a bottom-up view.
"We are still very bullish on the consumer sector," says
Bruno Baptistella, portfolio manager at Brasil Capital. Like
many other high-performing equity funds, the Brasil Capital
FICFI em Ações at the top of this
year’s scorecard is an absolute return fund. His
team can pick companies, steer clear of the commodities stocks
that weigh down the Bovespa, and hedge positions.
Brasil Capital has simply built up positions in companies it
likes, Baptistella explains. He highlights consumer firms that
were punished by the markets but since turned around their
results. This includes education provider Kroton and consumer
goods producer Hypermarcas. Other picks include International
Meal Companies, Cosan and Brazil Pharma. Real estate developer
Cyrela is another they are betting on improving.
The GDP growth forecast of 3% for 2013 – following
a dismal 0.9% in 2012 – has him optimistic on the
performance of these companies. Baptistella describes 2012,
with its movements in interest rates and exchange rates, as a
"transition year" for Brazil’s economy.
Forecasts this year are much clearer, and more positive,
Baptistella says. "There are unlikely to be large changes in
interest rates. We expect a pick-up in the economy. We expect
much better numbers."
Baptistella also expects inflation to slow in the coming
quarters. The expected interest rate hiking – his shop
expects 100 to 150 basis points this year –
shouldn’t cause major problems.
Brazilian stocks are still flowing out of many international
portfolios. This means lower valuations and greater
opportunity, both in the new issue and secondary markets, he
"We see a low position in Brazilian equities from
international investors, and also from large domestic
institutional investors, which may be an opportunity to build
positions in Brazilian equities," Baptistella says.
BNPP’s Giufrida echoes the view on
international investors’ attitude towards Brazil.
"It was too optimistic in 2007, maybe it is too pessimistic
now," he says.
In the long term, if rates go up in the US, this would
pressure inflation in Brazil, and be tough for the country,
Paineiras’s Medley says.
Next year’s elections could also interfere with
policy and postpone some of the actions that are boosting the
economy. Yet the difficulties of forecasting often flow through
into returns for the local funds. "This volatility brings
opportunity," says Medley. LF