Brazil’s fund industry surviving the Covid-19 crisis

. Mar 30, 2020
stock market Brazil’s fund industry surviving the Covid-19 crisis

Despite the steep volatility that wiped away the equivalent of two years of gains for the São Paulo stock market and led the Brazilian Real to plummet, Brazilian investment funds managed to raise BRL 11.8 billion in the first twenty days of March, according to data provided by the National Association of Financial and Capital Market Entities (Anbima).  

Surprisingly, variable income-focused products registered a positive influx of money, with stocks funds raising BRL 5.8 billion, more than enough to compensate for the BRL 5.3 billion loss in fixed-income products. Exchange-traded funds (ETFs) — stock indexes traded as stocks — were another highlight, with a positive balance of BRL 6.49 billion.


data becomes even more surprising when analyzing some of Brazil’s most famous funds. Stocks funds Alaska Black FIC FIA &#8211; BDR Nível I — famous for its volatility as well as the double-digit gains — has seen its share price drop by almost 60 percent in the month as of March 26. The funds’ net worth melted from BRL 3.168 billion to BRL 1.317 billion in the same period. In spite of that, the fund has attracted 15 new investors in the same period.</p> <p>Moreover, major funds, that have been closed for fundraising for years, decided to reopen, <a href="">gathering more resources</a> to enjoy the 40 percent plunge suffered by São Paulo&#8217;s benchmark stock index Ibovespa.</p> <p>One of them was Dynamo Cougar, one of the oldest and most profitable stock funds in Brazil which was closed for new investors since 2011 and reopened on March 12. While the asset management firm prepared 2 rounds of fundraising, of BRL 300 million each, the demand was so overwhelming that it fulfilled the backlog in less than 24 hours. Dynamo decided to move on<a href=""> with a third round</a> of BRL 400 million to accommodate all the requests.</p> <p>It is important to remember that Cougar’s minimum investment is BRL 300,000 and only &#8220;qualified investors&#8221; are allowed, i.e., professional investors or those with a net worth north of BRL 1 million.</p> <h2>Unprecedented crisis</h2> <p>For Patrick O’Grady, CEO of Vitreo Asset Management, there’s no single factor that explains the phenomenon, but rather a group of reasons, beginning with the unusual circumstances of the crisis.</p> <p>Ibovespa triggered <a href="">six circuit breakers</a> — when trading is interrupted due to reaching the limit of losses — in the space of ten days. In an interview with <strong>The Brazilian Report, </strong>he explained that the fact that Brazil has passed from a 4-year bull market to a 40 percent plunge in less than a month gave little time for portfolio rotation.</p> <figure class="wp-block-image"><img loading="lazy" width="1024" height="683" src="" alt="crisis ahead" class="wp-image-34415" srcset=" 1024w, 300w, 768w, 610w, 2048w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Crisis ahead: volatility that wiped away the equivalent of two years of gains for the São Paulo stock market.</figcaption></figure> <p>“We’ve left a bull market to a bear in no time, I’ve never seen this before. It’s not like a scenario that had been deteriorating and then people adjusted their portfolios in time,” he said.</p> <p>In conjunction, there was the Central Bank&#8217;s decision to slash interest rates instead of raising them, amid a crisis that puts the Brazilian Real among the worst-performing currencies in the world. By doing so, the monetary authority turned fixed income into less attractive assets, which may explain why funds focused on these products are suffering. “You can not escape to a less risky alternative that is paying so little,” he explained.</p> <p>It is true, however, that there is a higher level of maturity amid Brazilian retail investors — in spite of the fact that many are actually experiencing their first market crash — which may explain their higher resilience, he said.</p> <h2>Digging deep into the data</h2> <p>According to Mr. O’Grady, while Brazil was enjoying a lengthy bull market, stocks and multimarket funds were able to extend their deadline for withdrawals. Of course, that varies according to each funds’ rules, but many now have a settlement period of 30 or even 60 days to return the money to an investor after a request. In fixed-income products, on the other hand, this deadline may be of one or three days, making them more susceptible to withdrawals.</p> <p>“If I make a withdrawal request and will only know how much I’m supposed to get in 30 days, in a very volatile market, perhaps the cause of volatility will be solved by the time I get the money and it will be the time to purchase again. So those who have the option to withdraw the money are in doubt,” he said.</p> <p>This delay also causes a lag in data provided to Anbima. Considering that the first plunge seen on Ibovespa was on February 26, when Brazilian markets reopened after Carnival, withdrawals requested from this day on will be only recorded now. “There is a disconnection in data. I believe withdrawals have already been requested, but they will only be reported from now on,” said Mr. O’Grady.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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