Pedro Bastos joined HSBC Global Asset Management in Brazil in 2006 as CEO in which time he has helped the company build assets to $40b and the firm has launched a wide range of funds, from fully fledged hedge fund equity arbitrage strategies through to credit portfolios. Pedro is on the board of the National Association of Financial Market Institutions (ANBIMA) and the Association of Capital Markets Investors (AMEC).
For major investments, we produce our own cash flow models, projecting forward five to 10 years. All our assumptions are then double checked in the market place where we talk extensively to suppliers, clients, competitors and regulators to deepen our understanding. That forms part of our exhaustive research on current and planned company investments, which in turn provides a much wider frame of reference than just company reports and statements and sell-side research.
The relatively limited number of companies is a key difference between Latin and developed markets and it is this that allows such in-depth analysis. The investable group of companies that we can look at totals 150 out of the 500-odd companies listed in Brazil. That’s compact compared to other regions. We also have 10 analysts, a large number to cover the 40 stocks in our Brazil fund.
As long-term investors, we look particularly at the generation of free cash flow returns and valuation. Company financials are scrutinized and reviewed as well. The companies’ own projections are important as the research team needs to engage with management to understand performance as well as how and why corporate financial dynamics are changing. There’s always something that can be gained from company data: we can check our own premises and it gives us a basis to confront the company if results are not in line.
However, we are wary of relying exclusively on such corporate information, given the in-house expertise and sell-side forecasts. Our team looks at common multiples, such as price-to-earnings, but as a bottom up, stock selection firm, we avoid labels such as growth- or value-orientation.
Increasingly, the investment selection process is incorporating non-traditional evaluations such as social responsibility and governance, integrating and blending these criteria into more formal and traditional financial and analytical modeling.
An extension of this more organic approach to measuring corporate performance is the thorny issue of executive remuneration. HSBC in Brazil has been voting in favour of companies that continuously improve corporate governance with the alignment of remuneration with long-term interests.
A number of peculiarities help explain why Brazilian funds have been less activist than those in developed countries. Until recently, shareholders or their proxies had to be physically present at meetings to vote and that’s a costly proposition in a country with the continental size of Brazil.
That rule has been dropped and there are even moves to make voting mandatory. I think asset managers will participate more and more in exercising voting rights, especially with the arrival of specialized shareholder consultants who advise on voting. We are just in the first phase.
Indeed, the Brazilian market is rapidly modernizing all around. The gap between Brazil and other jurisdictions in the developed world is shrinking and I dare to say that on average standards are better than in most emerging markets. This has been a healthy evolution, which has taken place over 15 years. The creation of the New Market, a segment which only companies with high standards of corporate governance can join, represented a major step forward.
What is left to be done? At a recent key investor seminar, 150 Brazilian investors were asked which reform would most improve governance in Brazil. The answer was a drive to continue to enforce and enhance these New Market rules and the greater use of independent board directors, who should fill at least one third of board positions.
Overall, that dovetails with the idea that ever more disclosure is required. We’ll see the trend for family-owned companies becoming corporates continue in Brazil and that will bring in still more transparency.