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Brazilian high net-worth and institutions set to invest into alternatives, and offshore - Opalesque Roundtable

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The last five years saw large interest toward investing in the Brazilian markets from foreigners and local clients alike. Brazil was a hot spot. The driver was the foreign money that was created in the past decade coming into the country in search of high interest rates. But recently, things have changed drastically. The offshore environment is slowly improving, with signs that foreign economies are moving away from their darkest periods. Meanwhile in Brazil we are seeing the opposite, as conditions are worsening. The Brazilian government’s mismanagement of its creditworthiness, the strengthening of the dollar, and the moves of FX rates this year against the Brazilian real, are all converging to push Brazilians to the awareness that they should now diversify to offshore markets. Some local wealth advisers recommend to put 30 to 50% of assets into investments domiciled offshore instruments for the next 12-24 months.

The pension fund industry in Brazil has around $500bn under management. On top of that comes the PPS sector, which are state and municipalities pension schemes. Brazilian real rates will be much lower than they were for the previous 25 through 40 years. The pensions' actuarial targets will not be fully achieved by continuing to invest in plain vanilla fixed income funds or buying government bonds directly, which is basically what those pension funds did for 40 years.

Currently, pension plans can allocate up to 10% of their portfolio into hedge funds. They can choose products that have been discussed here today, like Multi-Mercado, and they also have an additional 3% which is completely open. Now is a very important time for those institutional investors, and they need help. The Multi-Mercado funds, the Brazilian equivalent of hedge funds, are gaining a lot of attention now, but we are just at the tip of the iceberg for inflows into those. Most investors are still trying to understand what they should do about investing abroad.

The case for active management

Simultaneously, international investors have become more skeptical of investing in Brazil – in the earlier part of 2013, inflows into the Bovespa and Brazilian credit have come to a halt and outflows have continued. However more recently, rates have returned to a more attractive point, bringing foreigners back in the game a little bit, especially in fixed income more than in equities. While conditions are considered to be challenging for some time, they are not seen as catastrophic, and Brazil will still offer sound opportunities. The country has a deep financial market with very strong institutions, and, according to the participants of this Roundtable, still offers good investment opportunities in infrastructure, healthcare, education, and credit.

A lot of flows still go towards Brazil ETFs and other “very inefficient” vehicles. The Bovespa is an index that is weighted by liquidity and market cap, so it has the problem of always having a large weight on companies that represented the last decade. Petrobras, Vale, and banks and steel producers account for almost 50% of the index, but they won't represent the part of Brazil that has grown with a lot of interesting dynamics in the last few years.

Pensions investing in passive index funds missed a lot of those smaller stocks and many of the opportunities in high growth companies, and underperformed significantly in the last few years. Foreign investors tend to like the story of a local Warren Buffett who will buy into a company and stay invested for 20 years. But in Brazil, that approach makes no sense. The long term track records show that those money managers underperform. For example, Quest, represented in this Roundtable, has for nine years managed to beat the market by a significant margin: 505% net versus a 102% return from the Bovespa during that same time period. This shows how much value a local Brazilian manager can add to the portfolios of institutional investors.

The Opalesque 2013 Brazil Roundtable was sponsored by Litwak & Partners and Eurex, and took place in October 2013 in Sao Paulo with:

  1. George Wachsmann, Partner, GPS Investments
  2. Martin Litwak, Founder, Litwak & Partners
  3. Nathan Shor, Co-Founder, Galloway Capital
  4. Thalius Hecksher, Global Managing Director of Business Development, Apex Fund Services
  5. Wagner Murgel, Founding Partner, NEO Investimentos
  6. Walter Maciel, CEO, Quest Investimentos
The group also discussed:
  • Why Brazil and perhaps Chile are the only countries in South America where people tend to invest their money first in their own country’s markets
  • Which offshore structures are starting to become more popular within the Brazilian market
  • What is a “Corralito-type” regulation?
  • The discrepancies between the local and offshore Brazilian bond markets
  • An analysis of political risk in Latin America

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