Sunday, May 16, 2010


[LAIST Tour Begins, Fazenda Tozan, Churrascaria – Nova Pampa, Port of Santos, Deloitte, Embraer, Natura, Gol de Letra, Bom Bril, Agencia Click, Nextel Institute, May 6, Rio, Rio Weekend, Petrobras, PREVI]

Previ is Latin America’s largest pension fund (34th in the world) and manages funds for Banco de Brasil employees. They have R$142 AuM where the 10 largest pension funds (including themselves) have less than R$300B and the entire industry is estimated at less than R$500B. They have the following allocations:

Fixed Income: 31% (max 100%)
Equities: 63% (max 70%)
Real Estate: 3% (max 8%)
Structured Investments: .54% (max 20%)
Investments Abroad: 0% (max 10%)
Loans to participants: 3% (max 15%)

The interesting story here is that they currently have zero exposure abroad (or 100% domestic exposure). They only recently made a change such that they could invest a maximum of 10% of their assets in foreign countries and will probably be looking in the future to find good investment opportunities abroad.

They currently benchmark against the IPSA (indexed to inflation) and look for a +5.5% spread (usually ending up at a hurdle rate of 12.6%). They currently earn through the common 2/20 model, with a 2% management fee and a 20% performance fee for every dollar earned above the benchmark.

Being a pension fund, they prefer low leverage as there is plenty of volatility in the Brazilian markets. Their high (63%) exposure in equities is a result of their heavy investments in certain Brazilian companies and their lack of asset reallocation (doesn’t make sense at the moment for them to divest from large or controlling positions).

However, their corporate governance focuses on how they manage investment decisions to focus on dividends as a cash flow, investment rates of return and the liquidity of their positions. They also try to make investments in sectors which are a priority for developing Brazil’s industries in general including Structured Investments in Private Equity and Venture Capital as well as infrastructure such as the metro, roads, rail, sea ports and airports.

They even presented a case study on Vale. In 2001 Vale was in rough shape. The company needed a corporate reorganization as the financial performance was weak and less than expectations, they lacked strategic direction and transparency. In a move of shareholder activism Previ (similar to what OTPP did with Petro-Can last summer) shook up the corporate structure and took at 14.4% stake in the company.

Previ focused the restructuring of Vale on different strategic horizons. Horizon 1: lead in iron ore and expand capacity in pellets. Horizon 2: Global prominence in bauxite and alumina, growth though exploration, acquisition and joint venture and develop logistics networks. Horizon 3: Acquire non-ferrous businesses. Since these changes, Vale has traded at a spread over the IBovespa index, earning a return from 2001 of 412.02% beating the index’s performance of 54.91%.

This also brings me to the original point of my interest in the study tour. In the current economic market place, it becomes increasingly difficult to be insulated from the world economy and to be truly domestic. In the Vale example, while Previ doesn’t officially have investments in foreign companies, Vale does, having recently acquired Inco from Canada. Their commoditized products, namely iron ore and nickel, also trade on the international market. So while Previ doesn’t officially have foreign investments, they are not insensitive to the global macroeconomic conditions.

The example I’m always given is a company like IBM, where although they may be a US company, they have clients around the globe so they actually have exposure to international markets.

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