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Brazil is one of the biggest fund markets in the world – and one of the most closed.
The country’s investment market is the sixth-biggest in the world, according to Morningstar data, with $1.1tn (R$5.8tn) in assets under management. Most of that money is in domestic funds. Ask the average Brazilian manager about allocations to Europe or Asia, for example, and they would look at you blankly. It is either Brazil or the rest of the world. And often the world just means the US.
Most Brazilian wealth is in funds that invest in Brazilian companies. And Brazilians prefer to do that through local asset managers too. Groups are regulated by Anbima, the Brazilian Financial and Capital Markets Association. There are 861 groups under Anbima, and while there is no list of firms that originated overseas, it is possible to list most of them just by name.
I took a look at the 60 biggest fund management groups in Brazil, as defined by Anbima These groups manage a total of R$6tn, accounting for 85% of the market.
In the top 20 are Santander Asset Management Brasil (the fifth-biggest player), Credit Suisse (ninth) and BNP Paribas (17th) – and all of them are best known locally for their Brazilian strategies in fixed income, equities and multimercado (Brazil’s version of hedge funds, which represents 21% of the market).
Moving down the list, you find groups whose offerings in Brazil are mostly international: Western Asset (24th), Schroders (37th), BlackRock (43rd), Morgan Stanley (44th) and JP Morgan (60).
Broadly, all these names have been in Brazil for the past decade. They have taken long bets on the country. If a group opens a structure to operate under in Brazil, it is regulated as a local group. It is a solid commitment: it will have offices and local representation.
That differentiates them from another set of offshore fund groups, which have established partnerships with local groups, and use these to launch a feeder fund of an offshore strategy. The biggest Brazilian groups to do such deals include XP, BTG, Itaú, Bradesco and Banco do Brasil. The funds will typically bear the Brazilian group’s name alongside the international partner.
Since the website’s launch in July 2021, Citywire Brasil has been reporting on these partnerships. In 2021, companies such as Aviva, Virtus, Invesco, Jupiter and Electron (with Franklin Templeton) all entered the Brazilian market. In 2022 came Seilern Investment, Nomura, Columbia Threadneedle, Lord Abbett and more.
This occurred when interest rates in Brazil were at their lowest ever, and international markets were riding high. Foreign groups spied an opportunity and deals were gaining pace. Interest rates are higher now, and markets have fallen. But these groups have had a taste and are staying involved. They expect rates to eventually fall and want Brazil to be a structural part of their growth ambitions.
There is a third group of offshore firms, which had just a couple of funds in the local market and took the opportunity of the last two years to expand their Brazilian footprint by launching new strategies. Names include Bridgewater, Janus Henderson and Ninety One. Most of the new strategies are in equities: global, US or Asia. And they are targeting private banking clients, multi-family offices and the emerging financial advice industry, both retail and ultra-high-net-worth.
Finally, there are Brazilian pension funds, which only invest in fund groups that have a structure in Brazil. The current legislation allows them to invest only up to 10% of their assets abroad. Some of them are almost at the limit, but most of the rest do not have anything.
As an emerging market, the country has become used to double-digit interest rates. Without question, interest rates are the reason international investment was not necessary. Rates were gradually going down, reaching single-digit territory in 2018. They hit a historical low of 2% during the pandemic. This time, more global players entered the market, as mentioned. But by April 2021, the central bank started raising rates to control inflation; the base rate is now at 13.75%.
While the UK, recently branded as behaving like an emerging market, is being forced to hike interest rates faster, Brazil – an actual emerging market – is slowing those increases down. The central bank held interest rates last month after 12 consecutive increases.
If interest rates start lowering, it would be a signal for offshore groups to restart their growth in the region. The consensus is that Brazilian investors could allocate between 10% and 20% to global assets within the next few years. That would be a huge increase from the current 3-5% allocation.
After all, Brazil is the world’s 12th-largest economy; it was the seventh in 2010 and could reclaim this position in the coming years. Diversification is extremely important in any portfolio, and to access the biggest economies and their opportunities is essential. And asset managers would all love a piece of that growing pie.
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