A slowdown in Brazil and the announcement that the US Federal Reserve will further taper its monthly $75 billion bond-buying programme has slowed the flow of capital into the country from abroad. Meanwhile, Brazil’s institutional investors and private wealth clients are looking for diversification outside their home market. The two trends taken together have led to a narrowing of the capital flows in and out of Brazil and a balancing of the opportunity for – and the dynamics or relationships between – international and domestic asset managers.
In the year to the end of July 2013, statistics from securities regulator CVM show that foreign investors’ net inflows were $21 billion (outflows of $181.1 billion and inflows of $159.2 billion), with inflows depressed because of the country’s weakening macroeconomic situation and outflows compounded by the withdrawal of the IOF tax on international investors’ fixed-income assets, which led to a spike of capital repatriation.
At the end of July 2013, international assets under management in Brazil totalled $353.2 billion, of which 54.8% is invested in equities and 41.7% in fixed income. In comparison, Brazilian investors have just $40 billion out of a total fund industry of $1.2 trillion invested outside the country – the vast majority in sovereign and corporate debt. However, while the totals are still heavily skewed towards inward investment, the rate of growth of Brazilian investors going abroad is much faster. In 2012 the net growth was about $7 billion, and another $7 billion is expected for 2013, despite increasing interest rates being a short-term disincentive to look for returns abroad.
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| Andrea Cattaneo, head of asset manager solutions at BNP Paribas Securities Services |
Andrea Cattaneo, head of asset manager solutions at BNP Paribas Securities Services, says there is an established but growing trend of Brazilian asset managers establishing foreign-based subsidiary funds to capture investors’ interest in diversification into Brazilian assets. Meanwhile, there is now greater focus on Brazilian asset managers looking to develop relationships with foreign asset managers to capitalize on Brazilian institutional investors’ desire to invest outside Brazil.
"Brazilian institutional investors used to invest in very liquid instruments, but those high-return, low-risk products have gone [with the lower interest rates paid in Brazil in the last couple of years]," says Cattaneo, who provides services for both types of fund and, as such, has a good perspective on the development of these flows. Pension funds have, to date, been the source of a small proportion of these flows, with the Brazilian Pension Association (Abrapp) reporting that just $398 million of Brazilian pension fund assets are invested outside the country. However, Cattaneo says this should increase in the coming years: "The economic situation is not allowing asset managers to achieve their investment targets in the domestic market, and we have seen a tripling of flows leaving Brazil in the last couple of years. So we have seen foreign investment managers entering the market because they can clearly sell their asset class and their capabilities to Brazilian investors who want to get more exposure to developed markets."
Cattaneo says this is triggering foreign asset managers’ attempts to create partnerships with local asset managers. Recent examples of this include Italian asset manager Azimut Holding, which bought 50% of Brazilian asset manager Legan Administração de Recursos in September 2013. In June of 2012, Swiss-based Edmond Rothschild Group and Brazilian asset manager BBM Investimentos signed a strategic cooperation agreement to build on flows in and out of Brazil. The strategies needn’t be exotic: for example, Azimut is considering using its joint venture with Legan to replicate its existing deposit-fund strategy based for international investors in Brazil. Azimut already has renminbi and Turkish lira funds that take advantage of higher real interest rates available in these markets for developed markets investors who face zero or negative real interest rates in their domestic markets. Meanwhile the asset management divisions of the largest Brazilian entities – such as Bradesco, Itaú and BTG Pactual – have all established Ucits-registered funds in either Luxembourg or Ireland in recent years to provide offshore vehicles to capture these investment flows.
The growth in investments into Brazil through CVM resolution 2689-compliant structures continues, albeit at a slower pace. BNP Paribas began offering offshore 2689 services in early 2012 and it has grown to have assets under custody worth R$15 billion ($6.47 billion). The bank is now focusing its custody service offering around the region and has just opened a fiduciary trust company in Bogotá to capture flows into Colombia, but also to take advantage of recent Colombian regulation that obliges all domestic mutual funds operating in the country to appoint a custodian bank by June 2014.
"The main local players are not going to develop this capability by themselves – they are going to outsource to a third-party provider," says Alvaro Camunas, head of Spain, Portugal and Latin America for BNP Paribas Securities Services. "Colombia for us is going to be the next Euronext for Hispanic Latin America. We are already working to be able to cover Peru and Chile on a remote basis out of Bogotá."
