Brazilian Investment Flows

March 4, 2015

It’s been a busy few weeks for Bradesco Asset Management (BRAM). First its CEO gets poached by the government and leaves to become Brazil’s Finance Minister. Then it launches its first factor fund – a new type of product for BRAM aimed at winning more business in Europe. So all the more kudos to new boss, Reinaldo Le Grazie, for finding the time to sit down with LatAm INVESTOR.

The first, most pressing, question is: what’s behind BRAM’s big push to Europe? After all, the latest fund is its eighth Luxembourg-domiciled UCTIS fund. “European investors represent a large pool of investment and invest globally”, says Le Grazie. “So as a regional Latin American player with experienced research and management teams located in the region we think we can add value to European investors seeking investments opportunities in Latin America.” Of course BRAM isn’t the first investment manager to have this idea, so why does he think it will succeed? “We’ve fine-tuned a robust, fundamental investment process which relies on a detailed and constant screening, modelling as well as monitoring of the investment universe by the investment research team.”

Tough market to sell?

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Reinaldo Le Grazie, CEO BRAM

These skills have been used to develop a new product with FTSE, which you can read about below, but first we ask Le Grazie about the challenges of selling Latin America to Europe. The fact is, Latin American markets have had a rough few years. Falling oil prices, the end of the Federal Reserve’s quantitative easing programme and stalling economic growth have all weighed upon Latin American capital markets. Le Grazie feels that the “normalisation process in the developed countries” is “the main source of uncertainty” but is optimistic about the future outlook. “2015 will still show slow growth, in particular in Brazil owing to the necessary fiscal adjustments and realignment of prices the new economic team will implement. [But] we forecast stronger growth for Peru and Colombia even for 2015 [and] going forward we expect the growth to resume from 2016 on in a sustainable manner.”

As a result he’s not reaching for the panic button just yet. Moreover Le Grazie feels that the success of BRAM’s push to Europe should be measured over the long term. “We believe investors may from time to time reduce exposure in specific regions due to macroeconomic concerns but in the mid to long term Latin America will always be part of most portfolios. BRAM is committed to staying for the long term and believes there will always be investors seeking opportunities in Latin America.”

BRAM’s new toy

If you want to crack a new market it helps if you have something different, which is why BRAM has developed a new product – a ‘Smart Beta’ Sicav equity fund that is aimed at European and Latin American investors. Unlike a conventional fund, which is weighted by market capitalisation, this follows a FTSE index – that’s based on ‘factors’ – namely low volatility, quality and relative value. When it comes to value the index looks at a mix of price-to-equity, price-to-book and price-to-sales ratios, as well as cash flow and dividend yields. As for quality, that is determined by measuring factors such as profitability (in the form of return-on-equity), leverage (debt-to-assets) and operational efficiency (by measuring revenues against turnover of assets). The universe for the index is made up of almost 150 companies from Brazil, Mexico, Chile, Colombia and Peru. Of course it’s heavily weighted towards the first two, which make up more than 80%.

FTSE is expanding into Latin America and client partners like Bradesco represent a great card of introduction…

It’s a radical move away from a traditional BRAM product, which are typically ‘plain vanilla’ fixed income funds but Le Grazie believes it will be a hit with investors. “These three factors combined offer an expected excess return versus a traditional portfolio of companies typically weighted by market capitalization. The new fund invests in good quality companies at a reasonable price allowing the investors to be exposed to upside participation with downside protection.”

Increasing sophistication

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Brazil is welcoming investors with open arms

Fernando Lifsic, FTSE Managing Director, LatAm, is also optimistic about market uptake. “These are certainly not new ideas; they have been around for years but it is only now that large pension funds have started to rethink their investment processes to look towards multiple factors.  Brazil and the LatAm region have sophisticated players and institutional investors have been increasingly interested in new ways of creating indexes.”

The partnership between BRAM and FTSE also makes sense. In the same way that the former is keen to grow in Europe, the latter is embarking on a big push in Latin America. “FTSE is expanding into Latin America and client partners like Bradesco represent a great card of introduction”, explains Lifsic.

Lifsic, who is keen to roll out more factor indices across Latin America, recognises the need to be patient and look at the big picture. “We are already working on individual, multi-factor country models, where we have detected potential demand from both local and international investors. Latin American markets are increasingly becoming more sophisticated and we have a long term view, so we are willing to grow with the markets while at the time we can introduce innovation and facilitate discussion on new ideas.”

For Bradesco and FTSE only time will tell if this new product partnership pays off. However, for UK-based investors looking for new ways to play Latin America the extra choice these new products bring can only be a good thing.