Much of the worlds focus on Brazil these days centers on the drama of the World Cup and on the domestic protests over the billions spent to host the tournament. For the countrys asset managers, however, the main preoccupation is a weak economy and its impact on investors.
Latin Americas biggest economy is facing formidable challenges. Growth slowed from 7.5 percent in 2010 to 2.3 percent last year and ran at a pace of just 0.8 percent virtually stall speed in the first quarter. Banco Central do Brasil is struggling to contain inflation that is now just below the authorities 6.5 percent ceiling; the central bank has hiked its benchmark Selic interest rate to 11 percent, up from a record low of 7.25 percent last year.
The economic difficulties, in turn, are helping spread political uncertainty by eroding popular support for President Dilma Rousseff, who was once regarded as a shoo-in for reelection in October but has seen her opinion poll lead shrivel.
Dampened growth and heightened political risk make a toxic cocktail for companies in the worlds seventh-largest asset management industry, which are finding it harder to raise and retain client funds. According to the Brazilian Financial and Capital Markets Association, known by its Portuguese acronym, ANBIMA, investor redemptions from funds amounted to $4.96 billion in the first five months of this year, the most for the period since at least 2002.
The pressure is evident in the Brazil 20, Institutional Investors exclusive annual ranking of the largest asset managers in Brazil. All but two of the firms in the ranking Credit Suisse Hedging-Griffo Asset Management, the Brazilian money management arm of the Swiss bank, and J. Safra Asset Management, part of Brazilian lender Banco Safra saw their assets under management decline in the 12 months ended March 31, in dollar terms. For most managers, the declines were smaller in scale than the reals 11 percent fall against the dollar during the same period. Even so, the industrys fortunes have fallen back to earth compared with the robust growth rates of a few years ago.
At the end of the day, there are many concerns about the outcome of the election in the second half of this year and what government will be in place in the next year, says Alcindo Canto, chief executive officer of HSBC Global Asset Management, Brazil, which maintains its seventh place in the Brazil 20, with $39.8 billion in assets. There is not just the momentum from the inflation and interest rate increases but also expectations about how the government will look and how itll impact the investment sector in the next two or three years.
BB Gestão de Recursos DTVM, the fund management arm of state-owned Banco do Brasil, keeps its spot at the top of the list, with assets of $228 billion at the end of March. The asset management arms of the countrys other big banks Itaú Unibanco Holding, Banco Bradesco and Caixa Econômica Federal also hold steady in second, third and fourth place, respectively.
Industry executives say that economic and political developments have made many investors more conservative and risk-averse, prompting them to opt for traditional fixed-income and money market funds and to turn away from equities, real estate and multimercado funds, as Brazilian hedge funds are known.
The biggest challenge for Brazilian investment managers is to find a profitable investment in an environment so full of uncertainty, says Luciane Ribeiro, executive director of the Brazilian fund management arm of Spains Banco Santander, which returns in the No. 6 slot with $56.6 billion under management. The subdued growth and high interest rates, combined with the specific issues like higher governmental intervention in some sectors, have reduced investors appetite for riskier assets.
The slowdown has battered Brazils stock market, with the benchmark Ibovespa index shedding 16 percent of its value last year, although it had rebounded 7.17 percent this year as of June 18.
Some firms are responding to the weak market by looking to diversify their investments and add more assets through expansion abroad. They are creating panLatin America funds and pursuing distribution partnerships in other Latin countries, Europe and the U.S.
Bradesco Asset Management, the No. 3 firm, with $129 billion in assets, launched its first Latin American fixed-income fund in June. The offering will focus on investment-grade corporate and sovereign bonds issued in dollars and is aimed at European institutional investors, private clients and family offices.
In the short term, Europe is where we would love to see growth, says Joaquim Levy, chief executive officer of Bradesco Asset Management. The pool of capital in Europe is much bigger. Bradesco currently gets less than 2 percent of its assets from outside Brazil. The firm has modest goals of growing those foreign assets by 15 to 20 percent a year, Levy says. Bradesco is seeking to expand in Latin America too, teaming up with partners in Peru and Colombia to distribute its funds and considering creating local funds in Mexico, he notes.
The new Latin fixed-income fund also should appeal to Brazilian investors looking for international exposure, another area where Bradesco is aiming for growth. Brazil is a large country, so even asset managers have had an undue domestic bias for too long, says Levy. This is changing. Its very small, but its good because it shows that people should not be worried about capacity constraint.
BB Gestão de Recursos DTVM is also targeting the wider regional market. The firm is in talks with potential partners outside Brazil about launching and distributing a new fund across Latin American countries, says Carlos Massaru Takahashi, the firms chief executive. The region is attractive because many Latin American countries have very narrow markets, but at the same time the local rules allow them to invest abroad, he explains.
When you talk about business abroad, its more to distribute Brazilian assets in other regions than to put more global assets in our portfolio, Takahashi says. We believe that in the long term Brazil will continue to be a very interesting opportunity.
At home, Brazilian asset managers are bolstering their marketing tactics to retain clients amid the slowdown.
Itaú Unibanco Asset Management, with $163 billion in assets, last year created a new department called the Investor Communication Area that publicizes articles in the media and dispatches investor newsletters on topics such as local consumptions impact on investment or promoting the use of new indexes in assessing various investment options.
The Brazilian market until two or three years ago was very basic it was pretty much a fixed-income market, says Marcelo Fatio, head of international asset management and distribution at Itaús money management unit. This will change. We need to be prepared for that. That means bringing education to investors. They will be facing new products and offers, and they need to understand them.
Bradesco Asset Management has increased the number of telephone conferences with investors and webcasts featuring its economic team and company executives discussing economic and market conditions. In recent months the firm began airing short videos at its parent banks branches explaining how volatility can affect funds, what we expect from the economy and how this affects companies, Levy reports.
And in a bid to draw more assets from wealthy Brazilians, he says, the firm is also holding evening meetings every quarter, with presentations on the economy and on Bradescos funds.
Levy remains optimistic about Brazils economic prospects. We strongly believe the Brazilian economy has sound fundamentals and the slowdown will be reversed in the mid-term, he says. The slowdown in Brazil is not substantially different from the one in most emerging markets except for China in a slow world economy.
Itaús Fatio says that although interest rates are unlikely to drop in the coming year, which should sustain demand for fixed-income funds, his firm is preparing for much lower rates in the long run.
We will have real interest rates that are comparable to other countries, so local investors will look for more sophisticated alternatives like investment abroad, hedge funds, real estate and private equity, for example, he says. We need to be ready for that environment.