With Low Interest and Higher Offer, International Funds Grow Share in Brazilian Market

RIO DE JANEIRO, BRAZIL – Of the approximately R$150(US$29) billion that the fund industry raised in 2020, roughly one-third was directed to global products, according to ANBIMA.

The reduction of the Selic rate to 2% per year was arguably the main reason for the mass migration observed during 2020 from fixed income to the stock market, despite all the uncertainties triggered by the pandemic.

And because of the relatively limited opportunities in the Brazilian stock market compared to the options available in more developed markets, such as the American one, global investment strategies gradually began to take up more and more room in Brazilian investor portfolios.

This occurred in a year when the outstanding performance of U.S. stock markets, driven by technology giants, exposed the power of geographic diversification in assets with little correlation to each other and unmatched locally.

Due to low interest rates and favorable prospects for the global market in a broad sense, whether for technology companies or the “old economy,” international funds have entered the radar of Brazilian investors once and for all, says Fabiano Cintra, an XP specialist.

According to data from the Brazilian Association of Financial and Capital Markets Entities (ANBIMA), of the approximately R$150 billion that the fund industry raised in 2020 up to December 14th, roughly one-third was directed to global products.

Among the classes that received the most money from investors, multi-market investments abroad raised R$37 billion in the period, with assets of approximately R$531 billion. The funds directed to the category have been growing in recent years – it was R$25.7 billion in 2019, and R$11.6 billion in 2018.

Not by chance, the international multi-market accumulated in 2020 up to December 14th, the highest profitability among the class’ subcategories, with profits of around 9.9%, against an appreciation of 6.85% of the free multi-market, where managers typically operate between the stock exchange, foreign exchange and interest.

The local fund industry as a whole totals assets of nearly R$6 trillion, with the highest concentration still in fixed income securities.

Emerging Asia

According to Cintra, a good sample of the increase in investors’ demand for international strategies can be drawn from XP’s own growth in the segment.

In December 2019, the assets under custody of the international funds area of the brokerage house totaled around R$2 billion, a figure that climbed to over R$12 billion in about a year.

XP has launched some 60 international funds in 2020, closing the period with a figure close to 90 products.

After investors begin internationalization with a focus on more global funds or, in many cases, the U.S. stock markets, the specialist begins to observe a growing demand for new strategies and regions, with emphasis on the Chinese economy.

“China is the second largest global economy, there is no way to ignore this market anymore,” says Cintra, adding that XP has been working to increase the supply of products focused on the region, in line with the increased demand from customers.

Among the funds recently included in the platform are Wellington’s “Asia Technology Equity” and “All China Focus Equity” and “JP Morgan China A”, as the names suggest, focused on specific opportunities in the region.

However, these funds are now accessible only to qualified investors due to regulation, which does not prevent retail investors from also being exposed to the growth of the Chinese giant.

According to the XP specialist, there are indexed management products which can be bought by any interested party, such as “Trend Chinese Stock Exchange”, which is attached to the MSCI China index, with an initial investment of R$100,00. “Internationalization is a one way road, which is just starting”, projects the specialist.

Out of the obvious

Fernando Cortez, Schroders’ commercial director, is hopeful of regulatory changes in 2021 to ease investors’ access to all international products, which should add further traction to the internationalization trend.

In early December, the Brazilian Securities Commission (CVM) announced the opening of a public hearing to address the modernization of legislation, with the prospect of funds allocating 100% of their portfolio abroad being accessible to the general public.

“It makes no sense for investors to be able to choose BDRs individually from foreign companies, but not to delegate the service to a specialized professional manager, based on the company’s country of origin,” says Cortez.

One of the manager’s funds currently restricted to qualified investors, the “Schroder Tech Equity Long & Short”, precisely seeks investments that are not as much in evidence, and not available in the Brazilian stock market, but viewed with a high potential for appreciation.

Among the main portfolio bets are companies such as Zillow, a market place focused on the real estate market, or HelloFresh, a food delivery company. “These are strategies that do not hinge on the FAAMG to succeed, with performance coming mainly from less obvious names, from smaller stocks.”

Separation of returns

Despite the restrictions, Brazilian investors betting on internationalization in 2020 did well. Among the highest yields in the local fund industry in the 12 months ended in November, there is a clear predominance of those dedicated to global assets.

In the variable income category, the main highlight is on BDR funds, receivables backed by foreign companies’ shares, but traded at the B3.

Among the multi-markets, the products following the main benchmarks of the American stock market, such as the S&P 500, dominate the list of highest yields over the past 12 months.

These are mostly less complex instruments, which only follow the behavior of benchmarks, which the multi-family office manager Portofino, Mario Kepler, believes to be the most appropriate for investors who are still not very familiar with the subject. “Sometimes the simplest to begin with is better.”

The appreciation of the dollar against the real also worked in favor of global investments in the period, but the specialist alerts that it will not always be so.

Therefore, despite the recent positive impact caused by the American currency, Kepler recommends investors taking the first steps in the international market to include partial protection (hedge) against the exchange fluctuation.

As a result, investors will be able to see more clearly what the return and decorrelation produced by the allocation on international stock exchanges actually is, and not by the dollar, which was and may remain under great volatility, he explains.

Dangerous bet

Although the valuation of Nasdaq, the U.S. stock market in which the shares of the main technology companies on the planet are traded, exceeds 40% growth in 2020, it is hard to believe that the growth trajectory of digital habits will undergo any kind of reversal in the future, says Artur Wichmann, CIO of XP Private.

Nowadays, the market basket contains many more digital goods than 13 years ago, says Wichmann, in reference to the launching of the first edition of the iPhone. In 2033, the trend is that this maret basket will include, in addition to more spending on health, a higher number of digital goods.

“From the investors’ perspective, to bet against this trend can be dangerous, because they will be losing a growth avenue that won’t last 10, but rather 20, 30 years.”