Latin American asset management: Bram targets US after Japan’s appetite wanes
US demand for LatAm investment expected to hold up; also developing vehicles for Brazilians investing abroad.
Bradesco Asset Management (Bram) has established a US subsidiary and has begun to build relationships with distribution managers in the US and Canada to sell Bram’s proprietary funds to north American institutional investors.
Despite outflows from emerging markets funds in recent weeks, Bradesco expects that Bram US (which was registered with the SEC as an investment adviser in the first quarter of 2013) will be able to tap into US appetite for Latin American assets, especially at a time when the continent’s currencies, which are falling against the dollar as global markets anticipate higher interest rates in the US, are creating an attractive entry point to the region.
"We are going to create funds domiciled for the US and Canadian investors," says Luiz Osorio, head of international business development at Bram. "The idea is to bring funds that we already have in the local market in order to be able to show a track record to investors." The funds are expected to be available to investors in north America in the fourth quarter.
Osorio says Bram US will begin with four fund alternatives: one will be a hard-currency fixed-income fund and the other three will be equity funds. Bram already has a hard-currency fixed-income fund for its European clients, which is 70% invested in Latin American corporates (mainly investment grade) and 30% in sovereign bonds. In the past year the fund returned 9.7% in dollar terms.
Osorio also says the equity funds should attract interest because he believes the sell-off in Brazilian equities generally has been overdone, as well as there still being opportunities for stock-picking fund managers to generate alpha.
The Bovespa has become increasingly split in the past year between consumer- and infrastructure-focused stocks that are performing well and the index, which is dominated by poorly performing commodity-oriented stocks. Despite the high valuations of many of the former type of equities, Osorio says there are still opportunities that should attract US investors.
"The PE multiples are high but there are still companies that our research team thinks will see growth. We have to be really selective – it’s not all consumer-oriented companies – but there are a number that we think will grow 30% this year and maybe 20% next year," says Osorio. "In the next two years we’re expecting 50% to 60% growth that hasn’t yet been priced in." He adds that Bram also has a fund focused on the small-mid cap theme in Brazil.
Bram’s US initiative builds on its growth in Asia, and specifically in Japan, where the Brazilian asset manager has a marketing relationship with Mitsubishi UFJ Asset Management.
However, Bram’s regional diversification is in part a result of the lower growth opportunities in this market in the medium term.
Bram offers only local-currency funds in Asia because the investors in the region have typically liked the currency-risk element of Brazilian investments.
"When we first started going to Japan four years ago I was surprised by the amount of currency exposure there was to the real," says Osorio. "They had about R$30 billion [$13.5 billion] in real assets and another R$50 billion in other assets swapped to our currency. This is one of the reasons why [recently] they have reduced interest in Brazil – they are overweight in Brazil and some have suffered a lot with the [recent devaluation]."
Joaquim Levy, CEO at Bram, says it is important that the asset manager, which has $144 billion under management, can present itself as a genuinely pan-regional institution in order to attract new funds from the international markets.
"Our product is Brazil and Latin America. We understand that we will find it difficult to focus only on Brazil – except in the case of Japan and [those interested in a niche, Brazilian] product," says Levy. "That’s one of the reasons why we are focusing on a Latin American fund (which launched in early 2013). Bradesco has opened and is growing in Mexico, for example, and that is something that will derive a lot of value, because within a Latin American-wide fund there are some things that are not so correlated. You have Brazil, Chile and Mexico. One is driven by the US, another by copper and the other by a lot of other things."
As well as trying to broaden its regional base to capture international capital flows to asset managers in Latin America, Bram is broadening its international assets to appeal to Brazilian investors that want to diversify a portion of their portfolios to assets outside Brazil.
Bram established a Brazilian depositary receipts (BDR) fund in January 2012 that has already attracted R$200 million. The fund gives Brazilians investors (and Bram reports private banking clients have been the early adopters, rather than institutional clients) exposure to US equities through local onshore investment vehicles.
Osorio says Bram had to lobby the CVM, Brazil’s securities regulator, to amend the rule that stipulates that local equity funds are permitted to invest only up to 10% offshore. Now the CVM regards BDRs as local investments but only ‘qualified investors’ (those with Brazilian investments worth over R$300,000) are allowed to invest in them.
Bram has also begun investing outside Brazil through multimercados (multi-strategy funds) based in the Cayman Islands. But now it has a physical offshore presence, Bram’s local funds are buying shares in its Cayman entities, which have exposure outside Brazil. Osorio says this has been a more efficient and cheaper way for Bram’s Brazilian clients to diversify internationally.
"It is potentially a huge market," says Levy. "Bradesco’s private banking division has R$40 billion under management. Even if a small portion of this is invested abroad through these type of funds, then you may be talking about R$10 billion flowing into this area, and that’s a huge amount of money."