The past 12 months have been a trial by fire for independent asset managers. By trying to offer more sophisticated products and higher returns than those of major retail banks, these companies saw their investment fund equity shrink last year with the falling Bovespa index and a mass flight of investors, frightened off by the global financial crisis. But, now that the storm has passed, many are showing signs of recovery in their profitability and the volume of new deposits.

Such is the case of Mauá Investimentos, a ‘boutique’ asset manager with the former Brazilian Central Bank director Luiz Fernando Figueiredo as one of its partners. The crisis had hit the manager even before the collapse of Lehman Brothers. “We expected a scenario worse than what came to pass, and invested too soon in interest rates”, Figueiredo admits. The second mistake was a concentrated investment in Cesp shares, also based on a hypothesis that never came to pass: the company’s privatization. The result of these miscalculations was that Mauá’s equity, by March 2008, had sunk to near R$ 400 million, a brutal loss compared to its R$ 2.5 billion in March 2007.

Mauá had to react. “We made a major adjustment in our investment policy and risk management, and cut costs”, says Figueiredo. “This without imagining that a major crisis would hit in the second half of the year.” For example, changes included abandoning the model that allowed concentration on the shares of a single company, such as Cesp, which accounted for 10% of the manager’s main fund at one point. In the current policy, no company can comprise more than 1.6% of the portfolio. “We tightened the parameters”, he says. The staff was trimmed from 56 to 25 people and concentrated on risk and research.

To avoid the concentration of investments on a single company, Mauá fixed a 1.6% limit for each company in its portfolio

At Geração Futuro, its customer relations policy helped avoid mass flight

So far, it seems that the strategy is working. According to data from the National Association of Investment Banks (Anbid), the manager was back up to R$ 501.8 million in equity by August 2008, a number that increased to R$ 538.9 million by August of this year. “In September, our assets were already up to R$ 700 million”, Figueiredo says. He reports that clients who had withdrawn their investments from the manager have come back, and new investments have come in to two funds created last year – Mauá Fix, a moderate hedge fund with one third the risk of the house’s main fund, and which invests in exchange rates, interest rates, foreign debt and arbitrage; and Mauá Empresas, a long-term equity fund.

At Geração Futuro, net equity is also up after 12 months. The asset manager went from R$ 3.08 billion in August 2008 to R$ 3.33 billion in the same month this year. From September 15 to the end of February, before the Bovespa began to pick up again, R$ 42 million was raised and R$ 80 million redeemed. “The net loss is less than 8% of the NE”, says Wagner Salaverry, a manager at Geração Futuro. The Ibovespa’s bullish behavior since March has increased the price of securities and brought back balance to the ratio of deposits to withdrawals.

The Programado FIA equity fund is responsible for 39.5 thousand of Geração’s 70 thousand shareholders, and its returns fell 52% in 2008. But in 2009, the fund was up 69% by August. Salaverry reveals that the manager did not consider any radical portfolio changes at any point in the crisis. Geração’s portfolio is comprised mainly of blue chips such as Vale, Usiminas, Gerdau, Votorantim Celulose e Papel (VCP), and Petrobras. An important measure was to invest in Banco do Brasil’s shares, which were previously not in the portfolio, but are now the fund’s main component. The idea was to benefit from the fall in BB’s share price in 2008. The fund’s customer relations policy was also crucial to avoid mass investor flight. At the manager’s three offices (in São Paulo, Rio de Janeiro and Porto Alegre), the once quarterly customer meetings are now held twice a month. “Many investors became our customers because of this practice”, Salaverry says.

HEDGE FUNDS TO THE RESCUE – It wasn’t just the Ibovespa’s recovery that saved asset managers. The agility in portfolio rearrangement provided by hedge funds helped some managers recover. In June last year, the analysts at Fator Asset Management realized that China would also be affected by the global economic downturn and redid their forecasts. “We went short on stocks and long in dollars”, says manager Roseli Machado. This helped to compensate for the asset manager’s losses in net equity, which dropped to R$ 3.06 billion in August 2008 after peaking at R$ 5.3 billion three months earlier. This year, its assets under management are back on the rise, having reached R$ 3.66 billion by August.

Retail banks showed the greatest advance in total managed assets, helped by the sector’s consolidation

Fueled by the inflow of investments into hedge funds and the performance of stocks, the Brazilian fund industry’s net equity grew about 10% in one year – from R$ 1.18 trillion in August 2008 to R$ 1.31 trillion in August 2009. At the head of the Anbid’s ranking are retail banks, which showed the greatest advance in asset value – “especially due to the sector’s consolidation”, says the coordinator of the Anbid’s database subcommission, Luciane Ribeiro, spotlighting the acquisition of Votorantim and Nossa Caixa by Banco do Brasil, and Itaú’s merger with Unibanco. In Ribeiro’s view, the quick recovery of funds, which can be seen through asset managers’ rising net equity and greater investor appetite, is also due to the transparency of the operations and to the Brazilian market’s regulations.

But the wounds of a yet unfinished war are still not healed. Rogério Betti, a partner at the investment advisory firm Beta Advisors, notes the variations recorded by Quest Investimentos. The asset manager’s profitability was positive and above the market average – the result of good management. But it was unable to evade negative cash flow. Headed by a former Minister of Communications, Luiz Carlos Mendonça de Barros, the asset manager’s net equity was around R$ 3 billion in 2007, but dropped to R$ 1.07 billion by August last year. By August 2009, that number was down to R$ 926 million.

According to Betti, those losses are also enhanced by the operations of major banks, which account for the largest allocation of funds into independent asset managers. In the midst of the crisis, they took back their funds in order to avoid further risk. “Also, as bank deposit certificates (CDBs) were paying high returns, Brazilian banks became a safe haven and attracted investors”, Betti adds. “It was unfair competition for hedge funds.”

GAP Asset Management would fully agree. In the 12 months ended in August 2009, its net equity plummeted from R$ 3.79 billion to R$ 1.92 billion. “There was a deeper impact on net equity than on profitability”, stresses Emanuel Pereira da Silva, the asset manager’s executive director. An example of this is the GAP Absoluto hedge fund, which had a net equity of R$ 1.04 billion in August 2008 and a return of 3.9% per year. By the same month in 2009, its net equity had shrunk by 61.8%, to R$ 397.4 million, while the accumulated return was 16.14%.

Not even GAP’s responses were able to stem the outpour. In some hedge funds, such as GAP Absoluto, the manager reduced the lock-up period (the period of time between a redemption request and the effective redemption) from 60 to 30 days, aiming to make shareholders more comfortable with their investment. It also began to acquire securities with shorter maturity periods. “Investors were redeeming funds and postponing new investments out of fear”, Silva says.

UP FROM THE ASHES – A peculiar case was that of GWI, run by the Korean Mu Hak You. Known for its aggressive investment policy – “long positions only”, according to a former employee –, GWI kept itself highly leveraged by investing in the futures market, in a way that seemed to underestimate the destructive power of the financial tsunami looming beyond the horizon. The manager was forced to freeze all redemptions from two of its funds at the end of last year, to save them from utter ruin. The GWI FIA fund had once managed R$ 400 million, in June 2008, but it fell to R$ 10 million in December according to Anbid data. But with the market’s comeback, it had climbed back up to R$ 120 million by August this year, and its returns since January have been a whopping 165.24%. The asset manager’s directors did not grant CAPITAL ABERTO an interview. After all the twists and turns, those managers who were able to keep at least their reputation intact may now breathe easier.