Brazil plans to allow the country’s mutual funds, which have $525 billion in assets, to invest an unlimited proportion of their portfolios in overseas assets by the end of this year.
This year, Brazil’s equivalent of the SEC, the Comissão de Valores Mobiliários, issued new regulations (rules 450 and 456) that enable multi-market mutual funds to invest up to 20% of their portfolios in assets issued in countries it recognizes, and pure equity or fixed-income funds to invest up to 10% in the equivalent asset classes in those countries.
Brazilian mutual funds had to change their mandates by the end of August to take advantage of the new rules, and the industry expects some new products to be launched in September.
Carlos Sussekind, head of institutional investors’ regulation at CVM, says: “The next change will be to extend these new limits, ranging from 10% to 20%, to 100%. We are in the process of holding hearings on the subject now. I hope we can make the change by the year-end.
“What’s happening is an evolution. For a long time, Brazil had many economic problems and a weak currency. But then companies and individuals started to invest abroad. The only remaining restrictions had been on mutual funds, and these have now been partially removed.”
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“I think more and more investors will look overseas” |
Pedro Bastos, chief executive of HSBC Investments in Brazil, says: “I think multi-market funds will be the first type to take advantage of the new rules. I know a number of our competitors are closely looking at the new opportunities. I hope we will be able to market a new product in the fourth quarter of this year. “I do not expect this to be a blockbuster immediately but I think the changes will become significant within a couple of years. Brazil has one of the highest real interest rates in the world and attractive domestic equity markets. If people need to diversify, there are local-currency hedge funds and plain-vanilla US dollar funds. However, as Brazilian interest rates drop and the market becomes more mature, I think more and more investors will look overseas.”
He says that HSBC’s new product would probably by a kind of mix-and-match fund, combining a local fixed-income fund and an HSBC fund sold overseas, such as a Bric fund (one investing in Brazil, Russia, India and China).
The country’s mutual funds industry has grown rapidly during the past five years, with a total of $525 billion under management, compared with $383 billion in June 2006 and just $148 billion in 2001, according to Brazil’s National Association of Investment Banks (Anbid). About 25% of mutual funds are multi-market, 34% pure fixed income, 11% pure equity, 20% pure money market funds, 2.5% asset-backed security funds, and 8% to 9% funds linked to pension schemes.
The growing importance of equities is demonstrated by the fact that they made up only 7% of the total in June 2006. Fixed income has become less significant (it accounted for 40% in June 2006).
Jose Brazuna, manager of funds at Anbid, says: “Before the changes, it was possible to invest in derivatives linked to foreign markets such as oil, soya or gold. This meant using an international bank – like Citi or JPMorgan – that has an office in Brazil, but Brazilian investors had to pay a premium to do this. Now, the country’s mutual fund managers can be in direct contact with London and New York.
“I think Brazilian investors need to diversify more, they need to invest more abroad, and in the medium term, the rule changes will be very important. Many local fund managers will say ‘why not sell a global equity fund or a global fixed-income fund?’”
Brazil’s main private pensions’ regulator, Secretaria de Previdência Complementar, also issued new guidance in June – rule 3456 – that enables the country’s $212 billion of pension funds to take advantage of the new mutual funds reforms indirectly.
Under the new rule, pension funds – which hold 20% to 25% of all mutual funds under management – are able to invest in multi-funds with up to 10% of their portfolio invested in foreign assets.
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“Pension funds can also invest overseas” |
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Ricardo Pena, director of economic affairs at SPC, says: “As well as that change, pension funds can also invest overseas, with a maximum allocation limit of 3%, in three ways: through Brazilian depositary receipts (BDRs); by buying the shares of companies in Mercosur and through hedge funds.” Antonio Cruz, president of the Brazilian Association of Private Pensions Funds (Abrapp), says: “Pension funds remain prohibited from investing directly in foreign equities. We are in discussions with the regulators about changing this, but I think we must await new regulations which are two or three years away.”
Next year, Anbid plans to make important changes, through a self-regulatory code for portfolio managers, that will make it compulsory for them to exercise voting rights in the companies in which they have investments. Traditionally, portfolio managers have not exercised these rights.
Edison Garcia, the superintendent of the Brazilian Association of Capital Markets Investors (Amec), says: “The activism of minority shareholders, investment funds and their portfolio managers, as well as firm action on the part of companies in terms of good governance practice and the protection of investor interests, are of crucial importance to the improvement of regulatory and legislative framework to strengthen the capital markets.”
Brazil’s mutual funds industry is becoming more sophisticated, as these new rules on foreign investment and shareholder activism are introduced.
