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Brazil’s Top Asset Managers Play the Yield Game Again

With recession and scandal hitting equities and prompting Brazilians to look offshore, firms are courting investors with high-rate products.

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To investors around the world who are complaining about low interest rates, Brazilian asset managers might be tempted to advise, be careful what you wish for.

Recession, political scandal and rising inflation have hammered Brazil’s capital markets over the past year and prompted many wealthy Brazilians to seek to place more money overseas. The only thing preventing wholesale capital flight is the country’s sky-high interest rates, industry executives say.

On June 6 the central bank’s monetary policy committee raised its benchmark Selic rate by 50 basis points, to 13.75 percent, the tenth rise since the start of 2014. With inflation running at a rate of 8.47 percent, well above the central bank’s target of 4.5 percent, investors are enjoying high real interest rates of 5 percent or so. Such rates have attracted investors to local products such as tax-exempt bonds, agribusiness credit bills (known by their Portuguese acronym, LCA) and real estate credit bills (LCI) offered by commercial banks.

“Investors, even sophisticated ones, have gone back to basics and are investing in these types of products,” says Flávio Souza, head of wealth management services at Itaú Unibanco. The bank takes second place in the Brazil 20, Institutional Investor’s ranking of Brazil’s top asset managers, with $128.1 billion under management, behind Banco do Brasil Gestão de Recursos, with $182.8 billion. “However, despite the high interest rates, they still want to invest overseas because of the challenging local scenario, and to protect against currency devaluation.”

Weak commodity prices and domestic woes have tipped the economy into recession, with output expected to contract by 1 percent this year. Investigations into kickbacks and corruption at state-owned Petróleo Brasileiro have rocked the government of President Dilma Rousseff. And the real has dropped by 27 percent against the dollar over the 12 months to mid-June.

Many local investors have been fleeing those problems. Wealthy Brazilians hold 20 to 40 percent of their assets overseas these days, roughly double the level of five years ago, says Otávio Vieira, a senior partner at Rio de Janeiro–based Fides Asset Management.

Souza says banks need to become more efficient to thrive in today’s environment. “Fierce competition exists between the banks to attract clients to their LCA and LCI products,” he says. “That has led to attractive rates for clients, but banks are learning to be very cost-conscious.”

Economic troubles have dried up the flow of initial public offerings, but the real’s plunge should spur a rise in mergers and acquisitions by making Brazilian companies cheaper in dollar terms, says Rogério Pessoa, co-head of wealth management at BTG Pactual in Rio de Janeiro. The firm ranks sixth in the Brazil 20, with $41.3 billion in assets. •

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