Surprisingly, for its size, Bradesco Asset Management (BRAM) has spent most of its first 50 years as a resolutely local firm. It was 2008 before it went after clients outside of Brazil, in Chile. The following year it broke into Japan. Both were joint ventures, the like of which Bradesco Bank had used to build its asset management capability before BRAM was spun out as an independent business in 2001.
Only in 2010 did the firm begin its play for North America. In Europe and the Middle East, it has started courting institutional investors and pursuing sub-advisory opportunities, and has launched five Luxembourg SICAVs. These are: a hard-currency Brazilian debt fund and a small and mid-cap Brazilian equities fund where the marketing effort is concentrated; alongside Latin American equities, short-dated Brazilian corporate bonds and a Brazilian large-cap ‘megatrends’ strategy.
But who could blame it for focusing at home? There are $1trn of assets to be managed in Brazil, and BRAM has built itself into the nation’s second-largest provider. More than 5,000 points of sale support a strong retail clientbase. Its institutional business includes Bradesco’s insurance company, the largest public-sector pension funds and a 30% market share among corporate pension funds. These are not slowing markets; Brazil’s pension funds have only been allowed to put 10% outside their home markets since 2009, and haven’t been that keen to do so as yet. Meanwhile, more of the potential domestic clientbase is moving from informal to formal payrolls.
Moreover, BRAM comes to Europe just as investors are souring on emerging markets and watching that growing middle class taking to the Brazilian streets. Has it got its timing wrong?
CEO Joaquim Levy says that volatility was to be expected once the Federal Reserve started spelling out its tightening plans.
“This is the type of event, causing huge flows, that can affect emerging markets,” he observes. “Brazil’s economy, based on floating prices, was never going to remain untouched – but it is largely prepared.”
He also reminds us that interest-rate ‘normalisation’ is a vote of confidence in the US economy in particular and the global economy in general. The Brazilian government’s decision, in June, to lift its 6% tax on financial operations (the ‘IOF tax’), reflects the fact that portfolio flows to the US dollar have taken some of the pressure off of the Brazilian real. The central bank’s early signaling of this year’s rate rises had a similar impetus.
“The renewed interest from the government in fiscal contraction was another sign that they knew the storm was coming and they wanted to be ship-shape,” Levy adds.
The “storm” he refers to is the eventual traction of inflationary forces on the global economy. Signs of disinflationary pricing in bond markets he dismisses as more technical than fundamental, pointing to the volume of liquidity just waiting for velocity to pick up, but also the fact that China’s transition to consumption-led growth will mean that it no longer sucks wage inflation out of the world.
“Is inflation around the corner?” he asks. “It’s not clear. I think that it will turn up at some point – it’s part of the arsenal of public authorities for tackling their debt burdens, at least outside of the euro-zone. The way I read the markets is simply to observe that inflation is not anyone’s first concern right now.”
He suggests that because Chile, Peru, Colombia, Brazil and Mexico have all seen their governments “use the commodity-boom period quite wisely”, they are now better prepared for inflation which comes, not from rising materials prices, but from the rising wages that power a consumer economy with full employment. However, just as monetary tightening may have got ahead of growth in the US and Europe, so the result in Brazil has been a tightening in the face of fading growth. That kind of incipient struggle with stagflation can be painful – as the huge protests across Brazil in June, ostensibly against bus-fare rises, indicated. For Levy, who grappled with these issues when he worked for the Treasury a decade ago, the protests are both legitimate and perilous.
“This is a movement for better government and more considered public expenditure,” Levy explains. “In this respect, the focus of the government has been on infrastructure, and after some hesitation in past years they successfully opened things up to the private sector. If they change the focus after the demonstrations, that might turn more difficult to move ahead with increasing productivity, which is what we need to sustain growth and employment.”
In fact, he says, the frustration comes from a sense of simply being ripped off – the infrastructure isn’t up to the job and the daily commute is getting worse.
Levy sees a number of virtuous circles interlinking here as long as everyone sticks with the programme. US and European investors want exposure to emerging markets – and especially their currencies and inflation dynamics – because they sense that debt-busting inflation wave coming. That translates into demand for equities, corporate bonds, real estate and infrastructure, says Levy.
“Family offices in Europe are absolutely into that,” he says. “They see themselves allocating 30% of their portfolios into emerging markets with a view to holding those assets for 30-40 years. We are entering real estate, and in infrastructure we are preparing products, including a closed-end fund. We hope that the second half of the year will be successful because, in principle, as long as the government isn’t diverted from it, there are a number of auctions set to take place, especially for fixed-income financing.”
So, the government needs not to be diverted from supply-side progress, and investors need not to be diverted by emerging market volatility.
For the latter, Levy has a couple of simple messages. First, the age of blind emerging market index allocation is over; it might no longer deliver an excess return or diversification against global markets in the way that a genuine stockpicking strategy in individual markets can. Second, a focus on domestic demand should inform that stockpicking strategy – which is why the small and mid-caps SICAV enjoys most of BRAM’s European marketing effort.
“These are the companies meeting the new sources of consumer demand for education, for healthcare, for infrastructure,” says Levy. “In Brazil today we have two or three times as many college students as in the UK, and a large part of that service is provided by private companies. The successful ones differentiate themselves through sophisticated use of technology to produce homogeneous results for their students, which really help when those students go out into the labour market. Brazil is also a world leader in dental services. And toll roads have been a real cash cow in Brazil, with growth characteristics – because whenever there are new projects these companies have built the experience to get involved.”
He acknowledges that even the most advanced institutional investors tend to allocate to global emerging market strategies at the moment – but the journey towards a more granular, alpha-rich approach seems inevitable. As it unfolds, BRAM seems well positioned, with its 54 professionals at work throughout Brazil. Still very much a local asset manager, it is now simply taking that local expertise worldwide.