While the rest of the world focuses on its beaches, fiestas and sports extravaganzas, Brazil’s funds industry is feeling a little starved of attention

Having hosted the 2014 World Cup, and with the 2016 Olympic games just around the corner, Brazil is no stranger to international scrutiny. In the asset management and hedge funds space, however, it’s a lack of interest that’s becoming notable. As the economy flags and growth predictions remain lacklustre, the industry is suffering a drought that’s not looking to ease up any time soon.

According to Darius McDermott, managing director of Chelsea Financial Services, investment is South America is on the up, and Brazil is a large part of that, making up 42 percent of the Morgan Stanley Capital International Latin American index. Despite this, many investors still consider Brazil funds as too high-risk.

“We have yet to see large flows into single Brazilian funds,” says McDermott.

“There have also been considerable tailwinds for the Brazilian economy and political upheaval which has deterred some investors.”

The effects are clearly more profound for Brazilian firms. Ernesto Leme, COO at São Paulo-based Claritas Investimentos, has not only seen a lack of investment coming in to Brazil, but also Brazilian investors looking elsewhere.

He says: “Foreign flows to Brazilian funds have diminished in the past two years. This is due, mainly, to of the political and economic challenges that the country has recently faced.”

“On the contrary, we are experiencing additional interest from Brazilian investors in foreign assets.”

Leme has seen an increase in Brazilian investment in global fixed income and equities, while new regulations to be implemented in July will make investment in international assets easier by reducing the minimum investment. Funds are leaving Brazil at an alarming rate, without the inflow required to balance it out.

McDermott says: “Investment from outside of Latin America is vital for the growth of the markets. The injection of foreign capital investment drives employment, productivity, and helps to build more sustainable societies, while lifting many out of poverty as economies improve.”

The implication is that it’s not the markets that are causing the problem, or a lack of demand for funds in the region as a whole, as some South American markets are seeing an almost uncharacteristic uptick.

Culturally, however, this a hugely diverse part of the world, and its almost impossible to compare countries. It becomes particularly difficult when talking about the financial sector, and even more so when discussing investment.

McDermott says: “Latin America is a very diverse set of countries. For example, while Mexico may be booming, Venezuela is virtually un-investable.”

Leme suggests that, at least partially, these are simply struggles that come hand-in-hand with a developed and sizable market. He says: “While some countries like Argentina, Venezuela and Brazil face important challenges, Colombia and Peru—despite being much smaller markets—are doing better. If we consider only sophistication and market liquidity, the Brazilian market is much more developed than the other regional markets.”

It is this size that makes Brazil so hard to analyse on its own. Leme calls it “a country of continental size”. At just over 8.5km square, it is larger than mainland US, and the fifth largest in the world in terms of both land mass and population.

It is, however, well positioned to receive investment from outside the Latin American region. Claritas sold 60 percent of its equity to Prinicpal Financial Group (PFG), a Fortune 500 company based in Iowa, in 2012. The company prides itself in its protection of its investors, and its experience in Brazilian investment.

“We have always prepared our company to receive foreign investors. The due diligent process that happened prior to PFG´s acquisition reassured that. We have a sound investment process in every asset class that we participate.”

He added: “We are strong believers in diversification, not only in asset class diversification but also international diversification.”

Through hedge funds, Leme argues, clients can achieve this diversification, creating a well-balanced and therefore safer portfolio. They are by no means risk-free, though, and, as McDermott says, until the Brazilian economy gets back on track, any investment at all comes with an element of risk.

Inflation in Brazil is expected to reach 7.8 percent this year, while growth is predicted to be non-existent a -0.7 percent.

“Brazil’s stubborn high level of inflation has been a major concern,” says McDermott.

“Brazil’s economy has been shrinking for years, but the key risk is the newly re-elected government’s failure to get economic progress back on track. Corruption and corporate governance remain a constant concern.”

Leme echoes this, saying: “The main risks today are political and economic. Both of these risks have a direct impact not only in the currency valuation but also in the asset prices.”

It seems that, for the time being, there is little that asset managers and fund administrators can do to encourage investment in Brazil, without the economy to support them. Perhaps though, such high-risk and questionable markets could actually lead to a new kind of investment.

McDermott says: “Brazil’s exposure might now interest value investors, who will see the region as unloved. I think there are opportunities and some valuations look tempting.”

“But, I would be cautious, as the region is so vulnerable to shifts in investor sentiment and the outlook is so questionable. The only way to make money will be to pick the right individual stocks, and there are some good Latin American equity managers out there doing just that.”

Country profiles
The latest country profiles from Asset Servicing Times
The Asian market may be improving on the harmonisation front, but the situation is still far from ideal. Experts discuss what there is still left to do
Brazil is hogging the limelight from its South American neighbours. But, although reforms are in full swing, there is still work to be done
Securities Lending Times

Visit our sister site
for all the latest securities lending news and analysis
No nation is an island, and the Polish CSD has post-trade services to cater to all of Central and Eastern Europe, says KDPW’s Iwona Sroka
In a region as geographically, culturally and economically diverse as Asia, funds passports have a tricky road ahead if they’re to redefine the industry
Amid cross-border restrictions and tightened belts, Luxembourg’s kingdom of real estate investment won’t be crumbling any time soon
The Chinese market has taken a knock to its confidence, but despite its size, it is still merely an emerging market, and must take these setbacks in its stride
Rich in sunshine, cork hats and tired clichés, Australia’s funds industry doesn’t buck the trend, boasting record levels of assets under custody
As the Saudi Arabian stock exchange finally opens its doors to foreign investments, the influx from abroad will be in baby steps, not leaps and bounds
View country profiles section
The latest features from Asset Servicing Times
Gerard Bermingham and Madhu Ramu of IHS Markit explain how firms can avoid the pitfalls of bad corporate actions data
With the industry in perpetual change, it’s important for firms to work together to take advantage of big data, according to Roy Kirby of SIX
Join Our Newsletter

Sign up today and never
miss the latest news or an issue again

Subscribe now
As technology developments shape the world around them, financial services firms are starting to adapt. This year’s Sibos conference outlined where the industry is settling in, and where there are still milestones to pass
Rocky Martinez considers how AI can help improve post-trade processes, and how SmartStream’s new reconciliations solution is moving a step in the right direction towards helping firms keep costs at sustainable levels
New regulations, new competition and new cost pressures mean custodians and sub-custodians have more balls in the air than ever before
Mark Aldous, head of managed services for Delta Capita, discusses product governance and the need for more cooperation between manufacturers and distributors before the 3 January 2018
The past decade has seen significant change in securities services, but some challenges lead to lessons learnt, says Deutsche Bank’s Satvinder Singh
Artificial intelligence is already a reality in daily life, and it has a place in financial services, says Matt Davey of Societe Generale Securities Services
View features section
The latest interviews from Asset Servicing Times
The UK’s pensions industry is facing challenges from all angles, but KAS Bank’s cost transparency dashboard is here to lend a helping hand, says Pat Sharman
Real Estate Investment Times

Visit our sister site
for all the latest real estate investment news
View interviews section