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Matching liabilities is not enough - institutional investors in Latin America will need to increase the percentage of their riskier investment strategies to realize the returns they have come to expect, says Marcelo Pimentel Mello, Vice President – Investments at Sul America in Brazil. A speaker at the marcus evans Latin American Investments Summit 2010 taking place in Las Vegas, Nevada, December 1-3, Pimentel Mello discusses his outlook for the coming few years and how institutional investors can prepare portfolios for the future by adopting riskier strategies now.
What is your outlook for the coming few years?
Marcelo Pimentel Mello: If you look at how Brazilians invest their money, almost 100 per cent of their assets are invested in local strategies. In the past, investors were not allowed to have offshore investments, mainly because the government was afraid of a depreciation of the local currency. Given the current macroeconomic situation, that is no longer a problem, so the regulation is changing. We will see investors moving assets to other countries to diversify their portfolios.
There are very high standards in Brazil for return on interest rates, and due to rates being low right now, investors are trying to leverage their investments by moving assets from more conservative to riskier strategies. The trend in the next few years will be to increase the percentage invested in risky strategies, such as private equity, real estate and hedge funds.
What is the best way of entering international markets?
Marcelo Pimentel Mello: Brazilian investors will need to start investing in exchange traded funds (ETFs) which are easier to understand. If they want to buy into the US or European markets, they will have to have ETFs as international allocation is new to them.
What long-term strategies would you recommend?
Marcelo Pimentel Mello: Long-term investments should be linked to investors’ liabilities; investors need to understand them and then look into the market to find assets which match them.
Private equity, the real estate market and hedge funds can be good long-term investments if liabilities are not taken into consideration, but they do not reap short-term results. Institutional investors should decide which asset classes to invest in, and the liabilities and risks involved.
Do you have a final message to institutional investors in Latin America?
Marcelo Pimentel Mello: Investors in Latin America have many opportunities, but nothing comes easily. The majority of pension funds in Brazil are defined benefit plans - their liability being inflation plus six. In the past, Brazilian institutional investors would buy government bonds paying inflation plus seven, eight or nine per cent. These bonds used to pay around 15 per cent, but now they are only paying 11 per cent.
For most investors, this seems to be a relatively high rate of return, but it is low for Brazilians. This is why matching liabilities is not enough; investors need to take more risks, which can be challenging. Preparing portfolios for future generations will be difficult.
marcus evans, Summits Division
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About the Latin American Investments Summit 2010
This unique forum will take place at the Red Rock Casino Resort & Spa, Las Vegas, Nevada, December 1-3, 2010. Offering much more than any conference, exhibition or trade show, this exclusive meeting will bring together esteemed industry thought leaders and solution providers to a highly focused and interactive networking event. The summit includes presentations on risk management, short term capital influx, creating a state-of-the-art portfolio and life cycle investment strategies.
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