The Brazilian retail opportunity is starting to shift to broader asset coverage, though investors like simple products, finds Andrew Short, who looks at how some local and international fund managers are developing.
Latin America’s biggest economy has entered a nervy patch with investors trying to gauge where it is headed next. With elections looming, these are uncertain times for Brazil.
The current period has become like a no man’s land between what could potentially be the last few months of Dilma Rousseff’s presidency and victory for Marina Silva (a candidate who wasn’t even part of the race until her running mate Eduardo Campos died in a plane crash recently).
The first challenge for who wins will be how to reignite growth that has all but ground to a halt in Brazil. In 2010, GDP hit a peak of 7.5%, shrinking last year to 2.5% and in 2014 growth will virtually stall and is predicted to close at a meagre 0.5%.
The second big challenge is controlling inflation: up until now the central bank has been struggling to do this and inflation is just below the 6.5% ceiling. The central bank has hiked its benchmark Selic interest rate to 11% – up from a record low of 7.25% last year – to try and contain inflation.
For asset managers, the uncertainties are causing headaches as the weak domestic economy is having an impact on investors. For domestic managers, the key to increasing and retaining assets is improving services and coverage; for foreign managers, offering international products and expertise could be where they win some business away from these larger domestic fund houses.
The retail distribution channel is dominated by the top ten banks in Brazil, which have 75-80% of the market share.
It makes it virtually impossible for foreign asset managers to get a toe-hold, as these banks have a captive audience and use branches to sell products. To continue to hold on to its clients and offer more products and services Banco do Brasil’s asset management division, BBDTVM, has been working to step up cross-selling – the selling of different products to the same customer in the branch network.
Other fund houses have been following suit and are also investing in marketing solutions to retain and win new clients amid the slowdown. Itaú Asset Management created a department called the investor communications area that sponsors articles in the media and dispatches investor newsletters informing investors about what opportunities the current environment could also bring.
”Traditionally, Brazil has been fixed income centric and investors here like simple products,” says Itaú Asset Management’s head of institutional asset management and distribution, Marcelo Fatio.
“This is going to eventually change and we need to be ready for this. That means educating investors about the new products and offerings they will receive, this will also retain and win new business in the future.”
Fatio is also adamant that rates – although not falling in the near-term, which should keep appetite for fixed income funds strong – will fall in the long term. “Rates will become comparable to developed markets, and local investors, from pension funds to retail clients, will be looking at new ways to make healthy returns and we need to be ready for this.”
Similarly, Bradesco, a Brazilian bank, will focus on distributing more financial services in a cost-effective way to weather the flagging Brazilian economy.
This underscores the lender’s efforts to recoup some of the ground lost in recent years to its larger rivals (such as Banco do Brasil and Itau).
Bradesco will focus on offering a platform of lending and financial services products to leverage growth in Brazil, Bradesco chief executive Luiz Carlos Trabuco said at an event in São Paulo.
Boosting distribution, or the bank’s ability to reach different clients for different services using its branches, relationships and digital networks, “will give us a competitive advantage for the coming years as we expand nationally,” says Trabuco.
Bradesco Asset Management (BRAM), the fund management arm of Bradesco, has also been screening videos in branches on how volatility can affect funds, according to BRAM chief executive officer Joaquim Levy.
Also, to draw more assets from wealthy Brazilians, his fund managers are holding meetings about the opportunities in Brazil.
THE FUTURE IS ABROAD
Some Brazilian managers are responding to the slow market by looking to diversify investments and attract more business by expanding abroad. BRAM is setting up investment grade corporate and sovereign bond funds issued in dollars and aimed at European investors. The funds will also be offered and appeal to Brazilian investors looking for international exposure, an area where BRAM is aiming for growth.
“Brazil is a large country, so even asset managers have had an undue domestic bias for too long, but this is slowly changing,” claims Levy.
This is also an area where foreign asset managers can step in and offer services. Foreign investment houses are still being pulled to a market where there is little or no culture of buying equities, minimal demand for international assets and a bank-dominated distribution market because of the opportunity. This, however, comes down more to the raw potential of Brazil as opposed to the current situation. Like many Latin American countries, Brazil has a young and rising population with a swelling middle class.
As Ashmore Investment Management’s global head of distribution, Christoph Hofmann notes: “People are evolving from a situation where they can’t feed their families to having significant amounts of discretionary income. And because people have grown up without government safety nets, the savings rate is high.”
These savings are starting to be put to work: assets under management in Brazil have grown at a compound annual rate of 19% over the past 15 years, and even faster over the past three years.
However, the industry is concentrated in fixed income funds and dominated by of few distributors, meaning there is room for diversification. Brazilian investors have started slowing diversifying into offshore assets, says Hofmann. As demand for international assets picks up, the international players are likely to grab a market share.
However, asset managers from abroad need to be wary of local regulation. Luiz Sorge, BNP Paribas Asset Management chief executive officer for Brazil, says local regulations do not allow offshore instruments to be directly sold to local clients. It is not possible to offer Sicavs directly in Brazil for these reasons.
Luiz Sorge says: “Brazilian investors can access international funds through the creation of a local vehicle, compliant with all local regulations related to investment in international funds.”
Asset managers operating in the country hope the spoils will be shared among those who stayed the course. “These are long-term opportunities and you have to be committed for the long-term,” says Hofmann.
“For our São Paulo office, it is not make or break in the next 18 months. We have a history of 20-plus years investing and operating in emerging markets and we know they can take time to develop.”
©2014 funds global latam