In Brazil, `Wait, See and Pray' Is Mantra for Top Pension Fund

  • Funcesp expects to miss return targets this year and next
  • Selloff hasn't created much in the way of buying opportunities

Brazil’s largest private pension fund is running out of investment options.

Battered by a tumble in local bonds, anemic stock performance and few prospects for a recovery anytime soon, the $6 billion Fundacao Cesp will miss its return target for the third consecutive year in 2015. Prospects for 2016 aren’t much better, according to fund President Martin Glogowsky, as the country endures its longest recession since the Great Depression, the fastest inflation in 12 years and the highest interest rates since 2006.

Funcesp doesn’t see many attractive assets available for long-term investors even with the Ibovespa’s book value at about half the average for global stocks and after a selloff in government bonds this year. Bank stocks are near the cheapest in more than a decade, but Funcesp Chief Investment Officer Jorge Simino thinks prices could fall further. Foreign equities that would shield the fund from Brazil’s turmoil are too expensive after the real tumbled to a record this year. The fund already has 20 percent of its assets in the safest short-term investments and is considering raising that percentage.

“Volatility is huge, absolutely huge,” Glogowsky said in an interview last week at Bloomberg’s offices in Sao Paulo. “You can do well one month and next month you just go down.”

All the pessimism has shaped Simino’s attitude toward putting money to work in Brazil these days. 

It’s “wait, see and pray,” he says. “A new approach to investment.”

The fund, which manages retirement accounts for workers at 10 Brazilian power utilities, expects to post a total return of about 10 percent this year, short of its 15.5 percent target. While slowing inflation next year should reduce its target to about 11 percent, that’s still probably too lofty a goal given the country’s outlook, Simino said.

Amid forecasts for the biggest budget gap since 2002 and a political crisis that’s paralyzed the government, investors are pessimistic about Brazil’s chances to quickly restore growth. The 32 percent plunge in the real this year helped make the Ibovespa the world’s worst performing major stock gauge. Brazil was cut to junk by Standard & Poor’s last month, while the two other major ratings companies have the country on the cusp of losing its investment grade. The currency rose 0.4 percent Tuesday to 3.8909 per dollar as of 11:11 a.m. in New York.

The Sao Paulo-based fund had 23.2 billion reais in assets as of August, making it the country’s biggest pension fund that isn’t sponsored by a state-run company, and manages money for about 15,000 current workers and 31,000 retirees. Fixed-income represents about 80 percent of its portfolio of investments and stocks account for 12 percent, with the remainder split among real estate and loans to its members.

Funcesp isn’t the only Brazilian pension fund with returns that lag behind targets. On average, the country’s funds missed their targets in 2013, in 2014 and in the first six months of this year, according to the pension fund association.

In the 10 years through 2014, Funcesp has posted a return of 305 percent, compared with a target of 198 percent, according to its website.

Brazil’s fractured Congress and efforts to impeach President Dilma Rousseff are delaying fiscal measures that would restore confidence and are the country’s worst problems from an investor perspective, according to the Funcesp managers. But Brazil has been through crises before and will recover from this one as well, Glogowsky and Simino said.

”We can say we have seen this film before, because we have been through worse situations,” Glogowsky said. “But today I think the political issue is taking over.”

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