Brazilian pension funds go global

May 7, 2013 7:11 pm

Brazilian pension funds go global

By Joseph Leahy in São Paulo

As little as a year ago, Brazil’s greatest concern was the currency war – a tsunami of international funds that it believed was threatening to inundate its financial markets and those of other emerging countries.

Now, Brazilian real interest rates have fallen so low that, in a dramatic reversal, the country’s own pension funds are looking abroad. While their initial offshore investments will not amount to anything like a tsunami, it marks the start of what may prove to be an important step in the maturing of Brazil’s financial industry.Global asset managers, investments banks and international private equity funds are flocking to the country’s pension funds to try to win a share of the potential outward flows, which are estimated to be between $25bn and $45bn.

“Pension funds are very interested in doing this kind of diversification as they have very tough actuarial targets,” says Carlos Massaru Takahashi, chief executive of Brazilian fund manager BB Gestão de Recursos DTVM, which has more than R$400bn in assets under management. “Probably this investment will happen this semester.”

Not only are Brazilian pension funds looking for higher returns potentially offered by developed markets such as the US but they are also seeking to broaden portfolios centred on Brazilian government bonds and local equities.

“There is a part of this that is a search for returns and that will continue to be our objective, but there is also a part that is about global diversification from the perspective of risk management,” says Mauricio Wanderley, director of investments and finances at Valia, the pension fund of the world’s largest iron ore exporter Vale.

The sudden move towards diversification marks a turning point for a country that until now has been batting away foreign fund inflows by implementing currency controls and other defensive measures.

Brazil’s government was worried that hot money inflows, fuelled by loose monetary policy in developed markets, were driving up its exchange rate against the US dollar and weakening the ability of domestic industry to compete.

But then followed a historic fall in Brazil’s benchmark interest rate, the Selic, from 12.5 per cent in mid-2011 to an all-time low of 7.25 per cent. At the same time, inflation has crept up, reducing the real interest rate sharply.

For Brazilian investors, addicted to the easy pickings offered by the country’s high interest rates – a legacy of its earlier period of runaway inflation – the sudden decline has come as a shock. Rather than keeping most of their money in liquid government treasuries or other fixed income instruments, they now must look for alternatives if they are to meet their targets for returns.

Brazil’s pension fund industry body, Abrapp, said the country’s funds had 61.7 per cent of their money in fixed income as of December 31 last year and the remainder in shares and mixed funds.

With interest rates low and the local market underperforming – the Bovespa index is down 9 per cent this year compared with a 14 per cent gain in the S&P 500 – the incentive to begin investing abroad is compelling.

“What we are seeing is these big pension funds are going global,” says André Laport, partner at Goldman Sachs in São Paulo.

The tentative moves by the industry to begin looking overseas are provoking a feeding frenzy among foreign asset managers, pension funds and investment banks looking for a share of this new and unexpected source of money.

With assets estimated by JPMorgan at up to about $450bn, there is potential under the present law for 10 per cent of this, or up to $45bn, to flow into overseas markets.

“There is a lot of interest here in the US from private equity players,” says Sanjiv Kapur, a lawyer at Jones Day. He says he will be organising a seminar for private equity groups and pension funds in the US alongside a Brazilian law firm.

However, fund managers in Brazil caution the process will be gradual. Not only does the law require fund managers to form groups of four or more institutions, which would then invest in one Brazilian fund that in turn places that money abroad, they also need to familiarise themselves with offshore investment strategies.

Bankers believe these will at first be conservative, such as investing in the S&P 500, before they begin to pursue more aggressive strategies. Cassio Calil, president of JPMorgan Asset Management in Brazil, says pension fund managers in the country will need to analyse an array of considerations, from currency risk to the fact that investing in multinationals in developed countries would see some of their money returning to Brazil through these companies.

Then there is the fact that, though Brazilian benchmark interest rates have fallen, many pension funds are still making good returns at home. The concern is whether these will be sustainable in the future as Brazilian interest rates continue to move lower.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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