I had the opportunity to meet with top Brazilian money managers while in Rio, and I came away impressed with their knowledge, expertise, and sophistication. For compliance and competitive purposes, they asked that I keep our meetings “off the record.” I was welcome to share insights from our discussions as long as the individuals and firms were not named. I can certainly appreciate this, especially given the challenging environment for money management that currently exists in Brazil. Here are a few insights:
It is a challenging time to manage money in Brazil, especially when the Bank of Brazil’s interest rate of nearly 14% acts as your greatest competitor. Also, the government guarantees mortgage backed securities in Brazil. Why should a local investor take equity risk? Certainly the 25% drop this year in the Brazilian Real motivates some, but this might simply push assets offshore for those that have access. Some managers are focused on managed volatility products, as some local investors do not want to take risks with rates this high. Only the largest and the strongest local Brazilian money managers will survive—there certainly will be more mortalities.
Several top Brazilian money managers run “deep value” strategies, but the conversation always returned to the importance of understanding the macro environment. Clearly, the macro issues can overwhelm the micro in Brazil. Political scandal, high inflation, economic recession, and a currency in freefall are not the ingredients that inspire confidence among investors. With interest rates at more than 13%, it becomes almost cost prohibitive to hedge the currency risk.
Brazil’s equity markets have approximately 200 investable names that can be divided up among 3 broad categories: global cyclicals (commodity-related companies), domestic cyclicals (retailers and homebuilders) and domestic defensives (telecom, staples). Managers spoke optimistically about the dispersion that exists across Brazilian equities. It certainly reminded me that our Lunt Capital investment theme is validated across the world—segmenting by factors (like volatility), sectors, or regions offers investment opportunity.
I came away with great admiration for those managing money in Brazil. Those that have survived this difficult downturn will be positioned to offer value at the point in time that Brazil rebounds from its current challenges.
Special thanks to Brennan Staheli, Michael Willden, Joshua Cooper, and the Lunt Capital team for their contributions to this report.