Deep due diligence key to PICTON’s success in Chile, Peru and Colombia
"We will never do an investment that we don’t have the time to do a deep due diligence on," says PICTON founding partner Jose Miguel Ureta
Latin America’s economic and financial landscape has evolved considerably over the past two decades, resulting in the region becoming an attractive destination for asset managers and investors. Jose Miguel Ureta, founding partner of investment advisory firm PICTON, discusses the competitiveness of the three Latin American countries, and the importance of a strong due diligence process.
World Finance: Latin America’s economic and financial landscape has evolved considerably over the past two decades, resulting in the region becoming an attractive destination for asset managers and investors. Here to discuss the opportunities is Jose Miguel Ureta, founder of PICTON: an independent investment advisory firm serving high net worth individuals and institutional investors throughout Chile, Peru and Colombia.
Jose, could you start by talking me through the different stages of development within the three South American countries?
Jose Miguel Ureta: All three countries have embraced a development model based on a market economy, where the private sector plays a key role in economic growth.
The three countries are a sizeable market of almost 100 million people and $840bn GDP.
Chile started more than 30 years ago, and is the most advanced of the countries. And the success of the Chilean model was key to give Peru and Colombia the political support to implement some unpopular reforms that the embracement of this model requires.
World Finance: And when it comes to investment in this region, what’s your philosophy?
Jose Miguel Ureta: We’re quality investors, and knowing who is who is key. Therefore we only invest in Chilean companies. We don’t have any competitive advantage in other countries. We get the exposure to other Latin American countries through those companies – the Chilean companies that we invest in – and through funds.
We recognise that the management of these companies – and local asset managers, in the case of funds – are better prepared to do deep due diligence and understand the industry.
In fixed income we invest in high quality Latin American names, and all other foreign investments we only invest in diversified funds with low correlation to the Chilean markets, which are mainly developed Europe, Asia, and the US.
World Finance: These are still developing markets; what challenges does this represent, and what should investors really be aware of?
Jose Miguel Ureta: That this is a cyclical region, with heavy dependence on commodities. Metals in Chile and Peru, and oil in Colombia. Investing in the Chilean stock market is pretty much the same as investing in copper.
A big part of the cyclicality is explained by currencies. Since December 2012, Brazil has devaluated the real 45 percent. The Colombian peso: 45 percent. Chile: 32 percent; and the Peruvian sol, 24 percent.
World Finance: How investor-friendly is this region?
Jose Miguel Ureta: It is a very investor-friendly region. If you see the June 2005 World Bank Doing Business rankings, Chile is ranked 48th among 189 countries. Within this ranking I’d like to highlight in the case of Chile, a very high minority shareholder protection, a sound tax scheme, and it’s ranked very well in construction permits.
Peru is ranked 50th. And I would like to highlight the ease of registering property in Peru, and getting credit.
Colombia is ranked 54th, and it’s ranked in the second place in access to credit among all the 189 countries, and in the 14th place in minority shareholder protection.
World Finance: OK, so talk me through your typical investment process.
Jose Miguel Ureta: We’re long-term investors. We focus on quality more than price. We prefer a good asset and an adequate price than a cheap, low quality asset. Bargains have proven to be very lousy investments.
We devote a lot of time to checking the character of the majority shareholder, and the quality and consistency of the management of the company, and the investment management team in the case of the fund. And this approach has allowed us to obtain 35 percent excess return, compared to the Chilean stock market in four years – just focusing on quality.
We have a senior investment team of eight people, and a disciplined investment process. We will never do an investment that we don’t have the time to do a deep due diligence on. And that’s key.
World Finance: What trends are you seeing in the wealth management market in the region?
Jose Miguel Ureta: We see additional liquidity events like the recent sale of Lindley in Peru, and the sale of CGE CFR and Cruz Verde in Chile. And that will create more family offices which are very sophisticated investment offices. And it’s an opportunity for independent investment managers like us.
The movement towards open architectures will continue, and the separation of the buy side from the sell side will continue. We think that it is very healthy for the industry to separate the sell side from the buy side.
World Finance: Finally, what have been the consequences of the business scandals in Chile and Brazil? I’m thinking of Petrobras for example, and the challenges that these scandals have put to your development model?
Jose Miguel Ureta: These cases are definitely ugly events that hurt the essence of capitalism. I hope that we’re mature enough to understand that the market economy model is not immune to events like collusion and corruption. In fact, it’s part of human nature.
However, with good regulation and enforcement, the benefits of the model are much higher than its costs. Corruption and collusion have always been there – it was not very visible, which is not good – but these high profile cases, with billionaires in jail, will probably cause lower corruption in the future, which is good.