In Brazil, things can change in the blink of an eye.
For example, when I met BTG Pactual Wealth Management’s Enio Shinohara and Guilherme Salgueiro at their New York offices on May 17, none of us knew that a fresh political scandal was about to burst onto the scene back in their native country.
That evening, news broke that Brazilian president Michel Temer had been caught on tape allegedly approving bribes. The following day panic ensued across Latin America: the Brazilian real dropped almost 9% and its stock market plummeted more than 10% as investors began to absorb the full extent of the scandal.
Damage to the market was short-lived, the real and the country’s stock market have rebounded close to pre-scandal levels, but the news was a test for Shinohara’s and Salgueiro’s investment resolve. They reduced some of their clients’ portfolio risk but they remain confident on Brazil’s long-term prospects.
‘Like many others, we made some adjustments, but generally we stick to a long-term strategy and don’t succumb to market pressure following these sort of events,’ says Shinohara.
‘The key challenge for people like us, who potentially need to make investment decisions every day, is to stay focused on the bigger picture, which you’ll miss if you’re only looking at your screens and the short-term.’
Keeping the faith has paid off for Shinohara and Salgueiro. Meanwhile, the jury is still out on whether Brazil’s embattled president will survive this latest upset.
Educating the masses
New York-based Shinohara, 42, is no stranger to Brazil’s tense political and economic landscape, having started his investment career in the country 23 years ago. As the head of portfolio solutions at BTG Pactual Wealth Management, he now leads its investment research and fund selection team of 14 people spread across São Paulo, Miami and New York.
Each team member has a speciality. Salgueiro, 33, who started his investment career in 2001 is the one dedicated to offshore manager selection. The pair have been working together for nearly a decade, first at Brazilian firm Claritas Investments, before they both joined BTG Pactual in 2009.
BTG Pactual Wealth Management currently runs more than $26 billion in assets and over 15% of that money is invested offshore through mutual funds, hedge funds, alternative vehicles and direct global investments. The firm’s wealth arm signs partnerships with asset managers and currently has 15 mutual fund manager groups and about 20 alternative investment firms on its third party platform.
Shinohara and Salgueiro are familiar with the bumpy road to returns in Brazil and they are keenly aware of the need to limit their clients’ exposure to home-grown risks.
‘Our mandate is to perpetuate wealth over the long term,’ says Salgueiro, ‘and that involves a constant education in terms of showing the importance of adding new sources of alpha and returns outside the geography and credit risk they are exposed to locally.’
Embracing this approach means that you can’t succumb to the temptation to react to market movements or macro events, says Shinohara.
‘To do nothing is also an investment decision,’ says Shinohara. ‘Many people forget that, although this stance can make some private banking and Latin American clients feel uncomfortable.’
Most of their Brazilian clients, who make up the bulk of their books, have an ingrained home bias and fixed income accounts for a large portion of their investments.
‘We should not underestimate the distortion created by high interest rates in Brazil,’ says Shinohara. ‘The Sharpe Ratio of local government bonds was potentially the best you could find in the world over the last few years. So there was no incentive for Brazilian investors to diversify and that makes our job more challenging.’
However, that mentality is set to change as interest rates in Brazil have been coming down, and fast. From 14.25% in October last year, they have been cut to 10.25% at the time of writing and are expected to continue falling into single-digit territory. Shinohara and Salgueiro are hoping this will prompt Brazilian investors to diversify their assets and embrace riskier, more sophisticated long-term investments outside of Brazil.
‘We try to show our clients that successful long-term investors, especially in the States, are much more allocated toward equities and alternative investments in general,’ says Shinohara. ‘The role model, in our case, is the US endowment fund. They are big and have been extremely successful for many years, decades in some cases.’
More uncertainty, less volatility
The low levels of volatility in today’s market have been worrying Shinohara.
‘There’s a very important point of difference between uncertainty and volatility. Uncertainty is at very high levels due to numerous geopolitical factors that could unravel, but volatility is still very low.’
The huge amount of liquidity central banks across the world have injected into markets has been a major contributor to today’s low market volatility, says Shinohara, as a lot of that money was parked in passive vehicles and ETFs.
‘The net effect is that if you have large amounts of money going into the same assets, the correlation of those assets increases and the dispersion of the returns collapses, resulting in volatility falling. It’s a technical effect to some degree.’
Amazon, he points out, corresponded to about half of the appreciation of the S&P 500 in the last year to date.
‘The S&P 500 index no longer reflects the structure of the US economy and what is happening in the market. It’s a reflection of a few stocks that have been appreciating more.’
Salgueiro adds: ‘People have short memories. If you had shorted the market before Brexit you would have been on the wrong side of the trade, same before the Trump election, same for the sell-off last year when the Chinese yuan devalued. The bull market has been going long enough for the market to become complacent.’
The alternative call is one Shinohara and Salgueiro answered long ago and it’s a metric they use to differentiate themselves from their Brazilian rivals. Salgueiro leads their research into liquid alternatives and hedge funds, where they have been finding interesting opportunities.
‘We have a flexible mandate for more liquid strategies, like long/ short equities or those that are event-driven,’ says Salgueiro. ‘We’ve done lots of “day one” investments and we try to find talent early on in the cycle.’
Shinohara adds: ‘Whenever you invest early, the manager is hungrier and is starting from a smaller capital base, so it’s easier to make money to produce better returns. We are very careful about what we call “the investment manager cycle”.
‘You see that in all regions in the world – in Brazil, Asia and here in the States – whenever a manager gets too big, it’s a yellow or red flag. That’s when you need to start thinking about getting out.’
It is not a one-size-fits-all view though, as there are times in alternative investments when bigger is better, says Salgueiro.
‘For instance, when we look for distressed credit opportunities you need to invest in managers that are big enough to write the checks and have the legal and research capabilities, and infrastructure to move quickly.
The same applies to quantitative investment where computational power is key.’
The group currently has partnerships with New York hedge fund shops Soroban Capital Partners and Trian Partners, and London-based group AKO Capital. Within liquid alternatives Argentinian group Copernico Capital Partners is on their platform as well as Schroders through the Schroder GAIA Two Sigma Diversified fund.
However, fund managers be warned: if Shinohara welcomes you onto BTG Pactual’s third party platform, you’d better make sure you make time to speak to him and his team when they need you.
‘If we don’t have access to the key decision-maker we are out,’ says Shinohara. ‘Regardless of the size of the fund, be it a mutual fund or hedge fund, no dialogue with the main man is a deal breaker for us.
‘The past 20 years have taught us that direct access to the decision-maker makes a huge difference. You get to know the personality and behavior of each person.’
Although not prone to knee-jerk reactions, Shinohara says they have been making some changes to their asset allocation portfolios over the last few months as part of their long-term strategy.
‘In fixed income, we’ve tried to shorten the duration of our portfolios in developed markets to the maximum underweight possible, since we are very bearish about the impact of US interest rates on the market,’ says Shinohara.
Instead, they have allocated more toward securitized products, mostly MBS, which offer less duration risk than sovereign bonds. High yield has been an area up for the chop, adds Salgueiro.
‘We have significantly reduced our exposure toward high yield. Rather than spread risk, we are focusing on geography risk in emerging markets,’ he says. ‘In terms of credit risk, we have reduced a lot, both in the US and Europe.’
Within Europe, one of their preferred partners for high yield is Danish firm Capital Four.
In emerging markets they maintain a slight overweight, especially in Brazilian credit, both sovereign and investment grade, even though those credits rallied a lot in the first half of May.
When it comes to equities, they are currently neutral toward the US, having recently allocated money away from the States toward Europe, including the UK. Among the funds they use for this allocation is French group DNCA’s European Value fund as well strategies from UK group Schroders. For US equity growth they currently use a fund from AllianceBernstein.
The duo have also redeployed money into emerging market equities and cash.
‘Given our investor base is concentrated in Latin America, where clients are used to higher interest rates, there is often a desire to either trade or allocate cash,’ says Salgueiro. ‘We are very mindful of that, so we don’t shy away from raising cash levels when we think risks in the market are inappropriate.’
The Brazilian real’s volatile nature means this is not suitable for a long-term play and is one they must consider carefully, says Shinohara.
‘In Latin America, particularly in Brazil, if you keep your cash idle, the opportunity cost is huge. Whereas with a dollar investment the opportunity cost is usually less than 1% a year. So the fact we make it part of our clients’ portfolio from time to time is a very important active investment decision.’
1994 - 2000
Hedging-Griffo Asset Management - São Paulo
Portfolio manager, appointed head of asset allocation and fund of funds team
2000 - 2002
GP Investimentos - São Paulo
Team leader of fund of funds unit
2002 - 2004
MBA degree at INSEAD Institute (France and Singapore)
2004 - 2005
GFIA - Singapore
Principal partner for Asian hedge fund advisory firm
2005 - 2009
Claritas Investments - São Paulo
2009 - present
BTG Pactual Wealth Management, New York
Partner/head of portfolio solutions
2002 - 2003
Unibanco Asset Management - São Paulo
2003 - 2007
Quantix Investments - São Paulo
Risk analyst at Brazilian macro hedge fund
2007 - 2009
Claritas Investments - São Paulo
Fund of funds analyst in Shinohara’s team
2009 - present
BTG Pactual Wealth Management - New York
Executive director/offshore manager selector