Despite being one of the economies tipped to dominate in the next few years, Brazil has experienced a relatively difficult period in its equity markets. In recent years, the Brazilian economy has seen money pour in off the back of enthusiasm for the county’s growth prospects, partly fuelled by recent deep sea oil discoveries. However, earlier this year, Forbes reported that Brazilian equities had been the weakest performer of the world’s emerging economies.
Bucking the trend
Despite this weak performance, some firms are still finding value in Brazilian equities. One investment company launched by a group of long-time friends believes the connections it has represent the sort of opportunities that will help spur on the Brazilian economy.
Launched in Sao Paulo in 2007, Perfin Investimentos responded to investors’ requests to offer its expertise to the wider investment community after three years of operating as an investment club. The investment club had been so successful, accumulating R$25m of funds and 150 investors, that the founders realised that they had a prime business opportunity.
“Everyone here is a partner, and they invest in the same funds as the investors, paying the same fees as the investors and yielding the same returns on the funds”
Speaking to Partners Alexandre Sabanai and Hugh Anthony Harley, it is clear that there is great enthusiasm for the Brazilian equity market, and a belief that they have the expertise that is a match for any other investment house.
Perfin acts as an equity specialist asset manager, offering investors a number of fund options. Its three funds are the Perfin Long Only, Perfin Long and Short and the Perfin Long and Short Plus. They differ in terms of the level of their exposure, and are designed to have low levels of volatility (either in absolute terms – for the Perfin Long Short family of funds – or relative to the BOVESPA, in the case of the Perfin Long Only), and only the latter fund with low levels of leveraging. “Preservation of capital” is the core component of Perfin’s investment process. Harley says that the company takes a “bottom up approach”, conducting extensive research into companies before deciding to invest. He adds: “We reach out to private companies to get a better understanding of the different industries and to get a clearer picture of the market.”
The Long Only fund typically takes between 12 and 15 positions, and is a concentrated portfolio of companies which the firm has the highest convictions. Sabanai describes the performance of the Long Only as “very impressive” since its launch in May 2008, with risk volatility around 20 percent smaller than the Ibovespa and a yield over six times higher for the same period.
The Long and Short fund predominantly rebalances the IBOVESPA index of roughly 50 stocks by, as Harley says, “deconstructing the index” and allocating – both long and short directly or through the index) – on companies that offer them the greatest opportunities for their fund, given their convictions. Sabanai explains that the funds objective is to generate returns that surpass the Brazilian Overnight interest rate benchmark. On average, the fund has seen around 2.5 percent annualised volatility. The average gross exposure is between 40 and 60 percent, with a maximum exposure of 100 percent.
However, net exposure is limited to minus 10 percent and 20 percent. Since inception in October 2007, the fund has been 49 percent over the benchmark (equivalent to an annual alpha of over six percent).
In July 2011, Perfin decided that despite the success of the Long and Short fund, they wanted to offer the investors a riskier version. Launching the Long and Short Plus fund, Perfin doubled the rates at which they would invest in equities from the original fund.
Harley says: “It is basically an enhanced version of the Long and Short fund, with the double the exposures.” This fund has been 11 percent over the benchmark since launch (or double the benchmark´s yield on the same period). Much of this performance is a result of the effective stock picking that has taken place this year.
Although the global economic downturn affected Perfin, they emerged relatively unscathed.
Sabanai blames “irrationality and risk aversion” as being the main drivers in the market in recent years. But in 2012 calmer heads have led to a more stable performance.
Focused purely on Brazilian equities, Sabanai says that they are seeing a lot of opportunities in infrastructure businesses, as well as utilities firms and commodities. He adds: “There are companies in our portfolio that are benefiting from 20 percent top-line growth.”
In light of the successful relationships Perfin had developed, the company decided to open up a wealth management side to the business to help manage the financial affairs of it’s investors. Perfin Wealth Management was launched in 2008 after requests from investors for a more extensive financial service. The business currently manages over R$1bn in client funds and acts as a useful buffer for the rest of the business. It is operated by two partners, Daniel Augusto Chaves and Gaspar Gasparian Neto, who are independent of the asset management business.
Perfin believes that it has a unique offering to distinguish it from its competitors, and is eager to be open and transparent with its investors. It schedules regular meetings with investors, and is always on hand to discuss its investment decisions. Harley says: “What sets us apart from our competitors is our high level of transparency.
“We not only offer investors direct access to our managers, but we also allow them to discuss investment activity with them. If they do not understand or are unhappy with an investment position, the managers are free to explain to them why they have taken that decision.” The company also provides investors with detailed publications of all the analysis it has conducted into companies, which it calls its ‘investor bookcase’, although it is usually just used by particularly keen investors, as Harley says: “Not every investor wants to read a 95-page detailed investment analysis report! The analytical process is something that Perfin takes very seriously.
We are truly guided by research. We have our five analysts who specialise in different parts of the market, and who each have around 10 years of experience in investing in Brazilian companies. They truly know which companies are good. We build our investment process so that every analyst has to explain their views to investors and the portfolio managers. Once they have this point they reach out to the investment committee, both on a weekly meeting, and on the daily discussions with the Portfolio Manager.” Perfin has also partnered with the Brazilian risk management specialist system, called Lote 45, to offer independent and transparent market data on its funds.
A reliable network
Part of the reason that Perfin is in such a strong position is due to its network of contacts at some of the leading companies in Brazil. Harley says: “Brazil is relatively small in terms of who owns the companies. Many are still family owned, and we have good access to these families.” A useful link into these families is one of the company’s partners. “One of our founding partners family owns a whole range of companies from different industries. This means that we have access to the research and expertise of all of these companies, and therefore all of these industries.”
He adds: “We don’t invest outside of Brazil. We have the expertise of the Brazilian market, with a network here, and want to specialise in these types of equities.” The advisory board also consists of four notable Brazilian businessmen that have a wealth of experience in a number of markets both domestic and overseas.
Harley notes how everyone at Perfin takes their responsibilities very seriously, and that they are all committed to delivering the best possible returns for their investors. This is reflected in the fact that all staff are partners of Perfin and are required to invest their equity money in Perfin funds and at the same rates as investors. Harley says: “Everyone here is a partner, and they invest in the same funds as the investors, paying the same fees as the investors and yielding the same returns on the funds. Almost a third of our assets under management come from the partners and closest relatives, and so it is very much within our interests to perform well. Our interests are aligned with our investors.”
With some of the partners having known each other since they were 15, it is clear that Perfin consists of people all pulling in the same direction. The company plans to expand in the future, and has continued to see considerable interest from abroad. It recently initiated the process of opening up investment funds in the Cayman Islands, and hopes to attract foreign investors. It is also in advanced investment talks with a large international multi-family office and institutional investors. Harley says the reason the company has received so much interest from international investors, most notably in North America, is because it is not one of the old and established firms. “They’re attracted to us because we are new. Our track record speaks for itself, but investors are also excited by us because we offer a fresh perspective on the Brazilian equity market.”