Joaquim Levy likes to compare running Bradesco Asset Management, Brazil’s third-largest investment manager, to the business of making cars. “You have a base chassis,” the CEO says, “but you tweak the product — say, with tougher suspension or a more sporty exterior — to produce different products in an efficient, cost-effective way.”
An unusual analogy, perhaps, but for a polymath like Levy, who earned a bachelor’s degree in naval architecture before getting a Ph.D. in economics from the University of Chicago, it comes naturally. More to the point, his tweaking of the firm’s product lineup has traditionally stodgy BRAM humming like an Audi sedan.
Over the past three years, BRAM has broadened its mainstay fixed-income portfolios with a variety of new credit funds, expanded its modest range of equity offerings and begun to add quantitative strategies and pan-Latin funds. The results have been impressive. Last year the firm attracted 28.9 billion reais ($14.8 billion) in new assets, more than any other Brazilian manager and nearly one third of the industry’s total, according to the Brazilian Financial and Capital Markets Association, known by its Portuguese acronym, Anbima. By contrast, No. 2 Itaú Asset Management pulled in a more modest 12.6 billion reais, while Banco do Brasil DTVM, the country’s largest manager, had outflows of 12.9 billion reais. With 287 billion reais in assets under management, BRAM is closing the gap with Itaú (330 billion reais) and Banco do Brasil (434 billion reais).
“My clients have been expressing more satisfaction with BRAM,” says Alberto Jacobsen, executive director at Risk Office, a São Paulo–based investment consulting firm. “Performance is stronger, and the manager is rolling out more products.”
Levy still has plenty of work to do to get BRAM up to speed, though. Even after its recent diversification moves, the firm’s asset allocation is decidedly conservative. Fully 89.14 percent of assets are in fixed-income securities, and just 8.58 percent are in equities. BRAM’s fixed-income assets actually grew by 30.2 percent last year, while equities increased by just 8.2 percent.
For years that fixed-income bias made sense because of Brazil’s historically high real interest rates, a legacy of the country’s hyperinflationary past. But the macroeconomic background has changed dramatically over the past few years, with interest rates tumbling as growth has slowed. The Brazilian central bank slashed its key overnight rate, the Selic, by 5.25 percentage points in a bit more than one year, to 7.25 percent last October. Assets linked to overnight rates, long the bedrock of the fund management industry, have little appeal at a time when the country’s inflation is running at close to 6 percent. It’s not quite the zero-interest-rate dilemma that vexes investors in the U.S. and Europe, but the rate environment is encouraging moves into riskier assets in a search for yield.
BRAM lags its rivals in catering to the new risk appetite. BTG Pactual, a São Paulo–based investment bank and the leading alternatives manager, has 51.1 percent of its 133 billion reais in assets in multimercados, a hedge-fund-like multiasset product, and 8.6 percent in real estate, according to Anbima. BRAM has only 7.4 percent of its assets in multimercados and nothing in real estate. Brazil’s universal banks lag generally in alternatives, but Itaú has 9.6 percent of its funds in multimercados. (Banco do Brasil trails with just 1.8 percent.)
BRAM’s conservatism is a reflection of its parent, Banco Bradesco. The bank is Brazil’s third largest by assets, with 879 billion reais. It owns Bradesco Seguros, the country’s No. 1 insurer; this helps explain why BRAM is the top manager of institutional funds. It also boasts the second-largest branch network and caters to the domestic mass market, both retail and corporate. The decision to use BRAM is often made not solely on the basis of investment performance but on the discounts the bank offers on service packages, which can make a big difference to a client’s overall costs, executives acknowledge.
When Banco Bradesco bought state-owned Banco do Estado do Rio de Janeiro for 1 billion reais in May 2011, BRAM at a stroke received more than 4 billion reais in assets from the bank’s employees, money that had previously been managed under contract by Itaú. Not surprisingly, BRAM gets 80 percent of its assets from governments, corporations and pension funds; the last account for 41 percent of the firm’s assets, making BRAM the largest pension manager in the country. Of the 77 new funds the firm launched last year, all but ten were segregated funds for institutional clients, says Ricardo Mizukawa, BRAM’s head of products. The bulk of those funds have traditionally been invested in low-margin money market and fixed-income instruments.
These low-fee products haven’t prevented BRAM from growing at a healthy pace. Fees and commissions rose 11.4 percent last year, to 2.2 billion reais, or one eighth of the total fee and commission income of the Bradesco group. The contribution was welcome at a time when Brazilian banks were experiencing slower credit growth, pressure on net interest margins and a rise in loan delinquencies because of the economic slowdown. Bradesco’s net income rose just 2.9 percent last year, to 11.5 billion reais.
To sustain growth, CEO Levy wants to carefully expand the product lineup and encourage Brazilian clients to gravitate toward higher-risk investments. He is slowly building up BRAM’s modest international network in a bid to attract more foreign clients. He seeks a steady and deliberate expansion, not a breakneck dash for growth. “The most important things are consistency, consistency, consistency,” he says.
For such a sizable asset manager, BRAM is a relative newcomer. Banco Bradesco created the unit in 2001 by amalgamating a group of small, separately managed asset management businesses.
Brazil’s 1994 introduction of the Real Plan, which introduced the currency and vanquished hyperinflation, triggered rapid consolidation of the country’s fragmented banking sector. Banco Bradesco bought Banco de Crédito Nacional and Banco de Crédito Real de Minas Gerais in 1997, Banco do Estado da Bahia in 1999 and Banco BoaVista Interatlântico in 2000. Each of these banks ran a modest amount of assets, which Bradesco added to its internal fund management arm; at the time, that unit offered mostly money market investments. In addition, in 1997, Bradesco formed a joint venture with Franklin Templeton Investments to manage funds for institutional clients; it quickly reached 800 million reais in assets.
By the turn of the 21st century, the bank was faced with an alphabet soup of fund managers, each with its own team, recalls Luiz Osório, head of international business development. To reduce duplication, Banco Bradesco consolidated those operations by creating BRAM in 2001. The venture with Franklin Templeton would continue to operate separately for five more years.
Banco Bradesco continued its buying spree. BRAM purchased Deutsche Bank’s local investment management arm, which had 2.16 billion reais in assets, in 2002, then picked up the Brazilian operations of J.P. Morgan Asset Management, and some 7 billion reais, the following year. More assets came in when Banco Bradesco acquired Brazil’s Banco Cidade and Banco Mercantil de São Paulo in 2002, and when it purchased all the Brazilian operations of Spain’s Banco Bilbao Vizcaya Argentaria in 2003.
Robert John Van Dijk, who headed BRAM during that period, says the firm took time to integrate all of those managers, with their widely different cultures and systems, but he notes that the deals “created a unique company with a breadth of people and a wide skill set.”
BRAM grew steadily over the rest of the decade, but it was overtaken by rival Itaú when the latter acquired Banco Unibanco in 2009, creating Brazil’s largest private sector bank.
Levy came to BRAM in 2010 after a globe-trotting career in the public sector. The 52-year-old Carioca, or native of Rio, worked as a researcher at the International Monetary Fund in the late 1990s, then as a visiting economist at the European Central Bank at the time of the euro’s launch. He went back to Brazil for stints at the Finance and Planning ministries before becoming secretary of the National Treasury. In 2007, after a year as vice president for finance and administration at the Inter-American Development Bank in Washington, Levy returned to Brazil as secretary of Finance for the state of Rio de Janeiro, where he played a key role in financing Rio’s successful bid to host the 2016 Summer Olympics.
After joining BRAM as chief strategy officer, Levy was promoted to CEO in January 2012, succeeding Denise Pavarina, a former investment banker who had begun to shake up the fund manager. Levy brings an academic air to the job. When discussing the business, he is as likely to cite Tolstoy as Modern Portfolio Theory.
For BRAM, as for all Brazilian fund managers, business has become more challenging. The days of being able to offer risk-free, 5 percent real returns on simple fixed-income products are long gone. A sharp slowdown in the economy and volatility in the stock market mean that equities offer no easy solutions.
Levy intends to generate organic growth by diversifying BRAM’s offerings and carefully taking clients out on the risk curve. “Clients have to understand risk, and we have to offer what we know they can understand,” he says. “That’s at the heart of our strategy.” At the same time, he recognizes that BRAM is a volume business with fees that average less than 1 percent. That means economies of scale are important. “You need funds that are scalable,” he says. “It’s nice to have a boutique, but here we want a fund that we can take up to 500 million reais.”
In fixed income, BRAM’s predominant segment, the firm is working to get clients used to products that don’t have the liquidity of overnight instruments, says Reinaldo Le Grazie, head of fixed income and multimercados. In some funds, for example, BRAM is extending investor lockups to 90 or even 180 days. “The premium for holding longer bonds is increasing,” Le Grazie explains. “Applications in overnight instruments will be ever more penalized and disincentivized.”
BRAM, like its rivals, has responded to the new rate environment by turning to inflation-linked bonds and credit plays. Inflation-linked debt is one of the fastest-growing fund areas, and the Bradesco FI RF IMA-B, with 2.87 billion reais in assets, gained 27.24 percent in 2012 and was up 46.13 percent over three years, according to NetQuant Financial Technologies, a Rio de Janeiro–based investment adviser. By comparison, the 887 million-reais Itaú Institucional RF Inflação fund posted gains of 26.13 percent and 44.54 percent, respectively.
Lower rates have allowed Brazilian companies to tap debt markets in unprecedented numbers, Le Grazie notes, and have created a much more fertile credit sector for investors. A typical BRAM fixed-income fund increased its exposure to corporate bonds by 60 percent in 2012, says product chief Mizukawa.
The firm has also introduced dedicated credit funds. In 2011 it launched the Bradesco Private FIC RF Crédito Privado Rating 90 fund, which has already amassed 1.6 billion reais in assets. The fund returned 9.83 percent last year and 0.66 percent in January. By contrast, the 78 million-reais Itaú FI Allocation RF Crédito Privado fund returned 8.55 percent last year, and the 410 million-reais HSBC Renda Fixa Crédito Privado Multi IV was up 9.70 percent, according to NetQuant.
BRAM has been hiring analysts to support its shift into credit, but Le Grazie complains that good researchers “are very difficult to find. It’s much harder than it was two years ago.” The firm has pulled in credit officers from Banco Bradesco and reallocated staff from equities in addition to making new hires. The shift to credit products is reflected in the work of BRAM’s investment committee. Five years ago the committee spent 90 percent of its time talking about macro strategy and 10 percent on credit and companies. Now it devotes roughly 50 percent of its time to each.
The fund manager will have to keep up the pace of innovation in fixed income. Returns from corporate strategies are already threatened, as corporate spreads have plumbed historical lows recently. So BRAM is gearing up for a push into infrastructure. The firm plans to launch a bond infrastructure fund in the first half of this year and hopes to raise as much as 1 billion reais, says Mizukawa. The Brazilian government is doing a road show in February and March to attract foreign investors to infrastructure investments; executives believe this will generate interest in the fund. The product will be a 15- or 20-year closed-end fund focusing on new government concessions for roads, railways, ports, airports and oil and gas. It should be attractive to foreign investors because bonds of more than four years’ duration are tax-exempt. Mizukawa reckons the fund could yield consumer price inflation plus 4 to 5 percent a year.
Levy is eager to build up equities and restore balance to BRAM’s lineup, but stocks are a tougher sell these days because of the market’s choppy performance. The benchmark Ibovespa index fell 18.1 percent in 2011, rose 7.4 percent in 2012 and was down 7 percent this year as of February 22, when it stood at 56,697 — 22.9 percent below its May 2008 peak.
BRAM has moved away from pure index funds to those that promise returns above the benchmark. Today, of 70 or so large institutional clients, just a handful are purely passive investors. More stock picking should help the firm sell to foreign investors. “They want specific themes like small- and midcaps, dividends, infrastructure and consumption,” Levy says.
Under equity director Herculano Anibal Alves, BRAM has developed 15 thematic equity funds. “For the past five or six years, I’ve been saying ‘Listen, the market’s changing; we need to adapt,’ ” says Alves. “Now when we bring an innovative product to the investment committee, it’s very well accepted. We are not looking to follow our competitors; we are looking to be up ahead of them.”
A dividend fund, the 727 million-reais Bradesco FIA Dividendos, slashed its exposure to energy companies from 30 percent to 12 percent before a badly mishandled government intervention in contract renewals hammered the share prices of energy companies last September. The fund posted a 27.09 percent return last year. A similar dividend fund from Itaú gained 18.7 percent last year, while Banco do Brasil’s 756 million-reais fund, BB Ações Dividendos, was up just 6.7 percent.
Outsiders admire Alves and his track record, but some wonder if he couldn’t be doing more. “He reduced his weighting to 12 percent in energy companies, but an independent manager who feared an upset in the market could have zeroed their weighting,” says one investment consultant.
The equity sector is getting more competitive in Brazil. Independent managers are proliferating and getting comfortable with absolute return. These focused managers lack the distribution clout of the top four managers — BB DTVM, Itaú Asset Management, BRAM and Caixa Econômica Federal — which enjoy great penetration because of their parent banks’ branch networks and control more than half of the 2.26 trillion-reais industry, according to Anbima. But as investors become more adventurous, BRAM and its rivals will have to fight harder for their business and become more innovative.
BRAM is starting to use quantitative techniques for some funds. Its Bradesco FIA Fundamento puts fundamental research through a quant screen that uses algorithms to give added weight to future earnings. The 15.7 million-reais fund, launched in December 2011, returned 23.99 percent last year. Bradesco was the first of the major banks to launch a Brazilian depositary receipt fund, Bradesco FIA BDR Nivel I, a rare opportunity for Brazilians to get exposure to foreign stocks, mostly U.S. blue chips. Launched at the end of 2011, the BDR fund has slightly more than 55 million reais and posted an 18.82 percent return last year. Levy sees the fund as a first step in helping Brazilian individuals and institutions get their feet wet in foreign investing. But it’s a baby step.
BRAM is weaker still in hedge funds, real estate and securitized assets, where fees are fatter. Product chief Mizukawa expects multimercados to be one of the biggest growth areas. Funds need flexibility to move among asset classes as Brazilian markets become more volatile, he reasons. “There are 2 million Brazilian equity investors and just 300,000 in multimercados,” he notes.
So far, though, BRAM shows no inclination to match some of the bolder moves of its rivals in alternative asset classes. BTG Pactual has focused on specialist areas and built up Brazil’s largest multimercado business as well as a thriving 7 billion-reais private equity business. It saw chunky inflows of 9.3 billion reais in the first 11 months of 2012. Even Banco do Brasil has been launching real estate funds with panache, raising 1.6 billion reais last year with one such fund.
Itaú has a stand-alone vehicle dedicated to less liquid markets. In 2008 the firm bought the Brazilian private equity business of American International Group and renamed it Kinea. The unit currently manages 3.7 billion reais in private equity, hedge funds and real estate. In October, Kinea raised 1 billion reais for a private equity fund; it has been involved in deals alongside the likes of giants Vinci Capital and Gávea Investimentos, buying a 47 percent stake in car rental company Unidas, for example.
Mizukawa, however, questions the Kinea model. He believes that mixing hedge fund and private equity strategies is akin to blending water and oil. Running a hedge fund requires knowledge of financial markets and a trading approach, while private equity demands management experience and a long-term view. BRAM has no intention of creating a separate entity, and banks such as Santander have not done so either, Mizukawa notes.
One area where Levy is determined to grow is in managing international money. He is starting from a very low level: Foreign investors provide less than 2 percent of the firm’s assets today. The CEO wants to raise that to between 6 and 10 percent over five years.
Many of BRAM’s international assets come from a partnership with Tokyo-based Mitsubishi UFJ Asset Management Co., for which the Brazilian firm runs $720 million. BRAM is looking to establish similar partnerships in South Korea and Hong Kong. In Europe and North America, the manager will distribute its own funds.
Foreign investors may be a tough sell. Levy is a big advocate of the Brazil story, but last year the country’s growth rate limped in at about 1 percent (official figures are due to be released this month), making it one of the laggards of Latin America. The Ibovespa index remains well below the highs reached in 2008, and the market for IPOs has been quiescent. The government has quixotically intervened in the economy and specific companies, making stock returns unpredictable. Other Latin countries, such as Colombia, are more in vogue.
BRAM’s domestic market advantages evaporate when it comes to foreign clients. “People don’t know so much about Bradesco abroad,” admits Levy. Banco Itaú and BTG Pactual have been buying banks in Latin America and gaining entrée in overseas markets through the deal making of their investment banking arms.
“We do not see BRAM as much as Itaú and even Banco do Brasil when giving presentations to international managers,” says one fund-of-funds manager in São Paulo. BRAM’s biggest challenge is the lack of a physical presence abroad. “I wish I had as strong an operation in New York as I do in London, and I wish even more we had presence in Southeast Asia and Australasia,” Levy says.
The CEO has received approval to build up staff in Asia and New York. BRAM has one professional in Tokyo and plans to hire at least one more this year, focused on distribution. In Hong Kong the firm aims to hire two more, but it doesn’t have a deadline. In the U.S., BRAM has just one professional in New York but intends to increase staffing and launch funds later this year.
Europe is the firm’s main overseas beachhead. BRAM has five Luxembourg-registered funds — three equity and two fixed income — that have attracted a total of nearly $250 million in assets. The largest is the $95 million Brazilian Equities Mid Small Caps fund. Launched in August 2011, the fund returned 6.4 percent in the 12 months through January. “We are at the cusp of really starting to harvest very interesting results in Europe,” Levy says.
BRAM has created an internal pan-Latin fund and is waiting to establish a track record before opening it to outsiders. The fund is allocated 65 percent to Brazil, 15 percent to Mexico and the remainder to Chile, Colombia and Peru. Roberto Sadao, an international equity fund manager with ten years’ experience, runs the Latin fund. The firm has hired one analyst to cover Mexico and plans to add a second this year.
But this is a game in which BRAM is behind. Itaú picked an established Latin America manager in Scott Piper, formerly with Morgan Stanley Investment Management, to run its Latin assets. The firm launched its Latin America Equity fund in 2006; it currently has a modest $46.2 million in assets. The fund returned 19.9 percent last year after losing 22.7 percent in 2011. BTG Pactual has a more recent Latin America fund listed in Luxembourg.
Levy has plenty of work to do to get BRAM up to speed in overseas markets and alternatives. His methodical nature and the traditional conservatism of the Bradesco group virtually rule out any radical change. Yet the careful expansion of BRAM’s product range is starting to pay off: The firm’s asset-gathering engine is running more smoothly than it has in years. BRAM may not be the sportiest investment manager in the Brazilian market, but Levy has the firm moving in the right direction.
