Hanging tough in rio_ citywire uncovers brazil equity high fliers – citywire msci world local currency

Hanging tough in rio_ citywire uncovers brazil equity high fliers – citywire msci world local currency The Brazilian economy shrank for the fifth consecutive quarter as the government reported on June 1st that GDP fell by 0.3% in real terms during the Q1 of 2016. The country has weathered a stalling economy, allegations of corruption and a presidential impeachment all while being the world’s stage for sports. Our question is how fund managers have fared over the medium term. There are currently 9 managers running dedicated Brazil equity funds for sale in Switzerland with a three-year track record in the Citywire database.

Msci eafe growth index From August 2015 to August 2016, the average


manager returned -17.89%, compared to the MSCI Brazil benchmark’s -6.29%. Citywire Switzerland speaks to the two top performing managers over the past three years to find out what is driving their outperformance and hear their outlook for Brazilian equities. On the front line for Brazilian equity is Aberdeen manager Devan Kaloo who, while still in negative territory, has recorded a performance of over three years above the posted by the average manager. The biggest sector allocation in the fund is financials, which makes up 40.3%, followed by consumer staples at 22.3%. Banco Bradesco Pref is the biggest of the 23 holdings, closely followed by retail company, Lojas Renner at 8.3%. The $21.0 million fund’s senior investment manager, Peter Taylor said: ‘Most importantly to us as stock-pickers, Brazil is home to a large number of well-managed companies, including Itau Unibanco which is a leading Brazilian bank with a good quality loan portfolio that has benefitted from robust growth in retail lending and Lojas Renner, the leading clothing retailer in Brazil.’ On his outlook for the political knock-on effect on equities, Taylor said: ‘The impeachment should bring a further boost to investor confidence on top of the first signs of an earnings recovery among Brazilian companies.

‘Until very recently, Brazil boasted the enviable combination of quality companies trading at depressed valuations. He added: ‘But given the strength of the rally seen in the market this year – Brazil has been the best performing major emerging market this year – we have taken the opportunity to take some profits across sectors.

’ In the lead by a considerable margin is Citywire A-rated Jose Zitelmann, who runs the BTG Pactual SICAV-Brazil Equity Plus fund and has been at the firm for 18 years. The fund is highly concentrated with just 20 positions, while 50% of the fund is held in its top five positions. The Brazilian retail market has taken a hit over the past couple of years in the low interest rate environment, said Zitelmann, however Lojas Renner has outperformed its peers, gaining its place as one of the fund’s top holdings, constituting close to 10% of the portfolio.

‘It has a fantastic management team, a very consistent execution track record and strategy that does not change according to the economic environment, and it has been gaining share in the retail space.’ On valuation, Zitelmann said: ‘We always prefer to invest in sector leaders, premium companies at a reasonable valuation as opposed to investing in companies that may be even cheaper but don’t have the same type of track record, execution and excellence in profile.’ Credit card processor Cielo is another good example of the source of outperformance over the last three years as it enjoys the intrinsic growth dynamic of the credit card industry in Brazil. On his view of the market’s driving factors, Zitelmann said: ‘The stock price appreciation in Brazil this year, it’s all driven by a decrease in discount rates, meaning a decrease in risk perception.

‘A lot of that is not related to Brazil but the global environment, so if you look at all emerging markets and risky assets, with negative interest rates all around and almost all central banks in easing mode, you have plenty of liquidity so there is this very positive global environment for emerging markets,’ he added. Going into 2017, Zitelmann foresees the government regaining legitimacy and credibility, he said: ‘The new government’s economic team is pointing managers in the right direction so I think it’s pretty much a done deal that President Rousseff will be impeached.’ ‘I think recovery for Brazil is a 2017 story, it’s not for 2016.

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