As a wealth management group catering for wealthy Latin American families, it’s appropriate that Aqua Wealth Management has a distinctly family feel.
Founded by José Pedro Varela back in 2009 in Uruguay, the former senior UBS and Merrill Lynch advisor wanted to ensure he built a close-knit unit that could cater to the varying needs of his clients. ‘After working for 20 years in various banks and the last 10 in the US in the area of wealth management, I had the opportunity to interact with various family offices and see first hand the type of added value it can offer clients,’ says José Pedro Varela (pictured centre).
It truly became a family affair when his brother Juan Cruz (pictured right) joined him as a partner and head of commercial activities at the firm in 2012. Their personal touch goes beyond simply running their clients’ money.
‘Our clients clearly understand the difference between our service and that of a bank, which is very different but complementary,’ says José Pedro.
‘Over the years our way of operating has led us to develop a very close relationship with our clients, which in many cases already covers more than one generation,’ Juan Cruz adds.
Completing the Montevideo-based trio is Ismael Perez, one of José Pedro’s first hires when he set up the company. Perez is the group’s investment manager and, using an open-architecture approach, he is in charge of analyzing and selecting the group’s investments.
‘Our fees are linked to the performance of clients’ accounts, and we always look for the most efficient and least costly vehicles to obtain the highest possible returns for them,’ Perez says.
‘This is a key criteria for us and one of the reasons it is part of our overall fund analysis process.’
Today the group runs more than $1 billion for around 30 families, the majority of which are from Brazil with others in Argentina and Paraguay. Their headquarters are in Montevideo, Uruguay, where they have an eight-strong team, and they also have an office in Brazil which employs six people.
Always on the lookout for solid long-term investments, Pérez says illiquid alternative investments have become a prime focus for him and his analysis team over the past 18 months.
‘We believe traditional equity and bonds markets offer a less attractive risk/return than in the past and it is necessary to sacrifice the liquidity of one part of the portfolio to invest in assets with better expected returns,’ says Perez.
‘An important part of our high-net-worth clients’ portfolio is cross-generational, which allows them to invest in illiquid assets and capture the premium they offer.’
Private equity forms the bulk of these investments, alongside private debt, real estate and infrastructure, with most of them focusing on developed markets – 40% in the US, 40% in Europe and the remainder spread across the rest of the world.
The nature of these sophisticated products has required the trio and their team to make sure their clients have a good understanding of their risk/return profile. This educational responsibility has extended to them taking their clients on various occasions to meet private equity firms at their headquarters, most of which are in the US. ‘It gives them a more profound understanding of the strategy and the managers who will be running their capital for periods of up to a decade or longer.’
This educational responsibility doesn’t just stop with their current client, as the cross-generational aspect of their business also means they take it upon themselves to instruct their offspring on their investments.
‘We dedicate resources to providing educational courses to this next generation of clients,’ says José Pedro. ‘Often our clients’ children are not well versed in finance, so we offer them classes, which are very useful as it allows them to understand their family’s investment portfolio.’
Whether it’s for private equity, hedge funds or long-only mutual funds, meeting the fund managers in person and having regular conference are a core part of the team’s own learning process. Their due diligence process is based around five main criteria: investment philosophy and process, performance, management team, the fund group, and total costs.
This final factor is a crucial part of their analysis process, and explains why they will look to invest in institutional share classes and exclude mutual funds that don’t offer them.
‘It is also important the way in which the managers are paid. We want it to be aligned with the interest of our investors without generating any compromising incentives,’ says Perez, adding he wants managers who are rewarded for long-term performance and not just short-term, one-year return spurts.
There have been many surprises and upheavals across key markets recently, which led the team at Aqua to make some changes to their portfolios at the tail end of 2016.
In December, they swapped out of the US-dollar hedged versions of the European and Japanese equities funds they hold in favor of their non-hedged versions – including the WisdomTree European Equity ETF and WisdomTree Japan Equity ETF as well as the MFS European Research and the Eastspring Japan funds.
‘This currency hedge contributed a lot to our third-quarter performance, but we now think it’s time to move to neutral positions for these funds. Currently the euro/dollar exchange rate is strongly undervalued based on its parity relationship with the purchasing power parity (PPP).
‘At the same time there exists an inverse relationship between the US’ current account deficit and growth surplus in Europe, which should lead to an appreciation of the euro.’
In November they also increased their exposure to natural resources, mainly through the BlackRock Global Natural Resources fund. This was move was driven by their belief that company valuations in this sector are becoming more attractive. Combine this with plans from the US and China to increase infrastructure spending and the oil price’s relative instability and Perez and his team believe the outlook is positive for the sector.
For their fixed income allocation they have been using their local presence in Brazil and knowledge of this market, making Brazilian bonds a core part of their portfolio.
This exposure has reaped strong returns in the past six months and they have been increasing their allocation to Brazilian inflation-linked bonds and fixed-rate bonds in anticipation of the fall in interest rates.
‘We believe the easing cycle in Brazil will be much stronger than the market expects,’ Perez says.
Investment grade bonds also account for a solid portion of their fixed income allocation, with most of them being done through short-duration ETFs. The average duration in this part of his portfolio is of three years, says Perez, who has also found a trick to cut costs when investing in these products.
‘In ETFs listed in Dublin you don’t pay tax on the dividends [unlike ones listed elsewhere] for fixed income products. This is something not many people know about. We’ve been using them for more three years and they are very efficient – we use them for both investment grade and emerging market bonds.’
Mutual funds in portfolio
- Robeco Select US Opportunities
- Vontobel Emerging Market Equity
- MFS Emerging Market Debt
- Muzinich Emerging Market Short Duration
- Invesco US Senior Loans
- Babson European Loans
- Pimco Global Investment Grade Credit
- Old Mutual Global Equity Absolute Return (GEAR)
- Legg Mason Global Macro
- Franklin K2 Alternative Strategies
Since they were first founded in 2010 the firm has been growing steadily. They launched their Brazilian office in São Paulo in September 2012, but their most recent venture has taken them to one of the most competitive offshore markets on the continent: Miami.
Opened in December, their new office will be an opportunity to expand their client list and tap into the wealth of Latin American families based around the region, says José Pedro.
Another area they are paying close attention to is Argentina, as reforms from the country’s business-friendly President Mauricio Macri are creating new opportunities for wealth managers.
‘There is a draft of a law that would create the “investment manager” role for those who offer routine advisory and investment management services,’ says Juan Cruz.
‘In the next few months this project could go through the Congress and if this were to happen, we would evaluate the possibility of opening an office in Buenos Aires. We have already made contacts in this regard.’
Tax reforms in the country have also meant a major overhaul for the financial industry, and the government’s amnesty program has also led to money flowing back into the country. The team is keeping a close eye on all these themes, says Juan Cruz.
A budding wealth management industry is not the only reason Argentina has caught their attention; the trio also believe the country has great potential for growth in the coming years, with one particular type of investment stealing the limelight.
‘There is high expectation over Argentina’s investment potential over the next few years. This is seen in the current interest from international groups, like private equity funds,’ says Juan Cruz.
‘Some funds are preparing themselves to have the necessary funding to pursue opportunities in the country. We know that sale processes are under way, and some of our clients have even asked us to help initiate the sale process for their own businesses.
‘For all the above reasons we believe that liquidity events will begin to occur and that would generate demand for an exclusive and personalized service, such as we at Aqua can provide.’
Brazilian brain power
The past two years have been tough for Brazil, with the deepest recession on record, fiscal deterioration and a corruption scandal without parallel in history. But Aqua has been able to use its local knowledge to ride out this volatility.
The group’s Brazil office is run by Gustavo Jesus, a 20-year investment veteran who was previously with JP Morgan for 15 years before being appointed the CIO of the firm’s São Paulo-based office in 2014. He believes we can expect good things from this market going forward.
‘We are seeing a turning point in 2017,’ says Jesus, ’with positive growth – although small – but also with the progress of the reforms agenda: last year the spending cap was approved, this year we expect the approval of the pension reform, which will address, at least partially, the main fiscal challenge Brazil has currently.
‘The improvement in the macroeconomic conditions will bring back the M&A activity that has been depressed in the last years. Therefore, there should be a lot of cash-outs and an increase of the wealth management industry.’
The macroeconomic developments in Brazil are encouraging, says Jesus, and, despite the country’s fiscal imbalance and explosive debt trajectory, the market offers great prospects.
‘With that, we think there is a huge opportunity in the fixed income local markets, where we can still lock in very high yields for many years.’
The setting for our photo shoot with the Aqua trio was certainly not your typical office space. Located around an hour outside Uruguay’s capital, Montevideo, Chacras de Las Sierras is a retreat in the Sierra de Las Animas that offers guests an array of activities, from trekking to polo as well as its own vineyard.
The team at Aqua have close ties to this area, as not only do they conduct their annual company retreat here but they also own a portion of the vineyard, which produces their very own wine, bottles of which they often give as gifts to friends, family and clients.
An escape from the noise and market terminals of the office, the trio and their team make their strategic decisions for the coming year in this idyllic setting where they have time to think and set out their plans. When it’s all done, they might enjoy a game of polo or finish off their stay by enjoying a glass of their own locally produced wine.