Brazil attracts more than US$5 billion from global investors, but local funds miss out on part of the "party".

The United States has acted as a magnet for global capital in recent years. But recently, this magnetism has been undergoing a rebalancing, with emerging markets attracting a portion of investors' portfolios .

In this context, Brazil has returned to the radar, and some managers are managing to capture this movement – even though the country is still viewed with caution due to the lack of strong fundamentals to justify good asset performance in the coming years.

To understand what this global investor is looking for, NeoFeed spoke with Third Party Distributions (TPDs), institutions that connect investors with investment managers, as well as asset management firms.

“We have observed a renewed interest from international investors in Brazil through listed vehicles, seeking liquidity, scale and efficient access to emerging markets,” says Axel Christensen, BlackRock 's chief strategist for Latin America.

"These flows, however, do not reflect a single directional bet, but rather diversified strategies with exposure to the Brazilian stock market within a global allocation," he adds.

The point is that there is no interest in over-allocating in Brazil, however the emerging markets asset class is heavily under-allocated, as is Latin America. And with the war in the Middle East and the volatility in developed countries, investors have awakened to the diversification of asset classes and regions as a hedge.

Inflows into emerging market funds hit record highs for several weeks since the start of the year. According to data from JP Morgan , emerging market equity funds accumulated more than $39 billion in inflows in January, which the bank described as one of the best starts to the year for the asset class in more than two decades.

According to data from LSEG Lipper, liquid emerging market funds accumulated a net inflow of approximately US$79 billion in equities and US$15 billion in fixed income this year up to April 22nd, totaling approximately US$94 billion for the year.

Since Brazil represents about 5% of the main stock index for emerging markets (MSCI Emerging Markets), also used as a benchmark by many actively managed funds, it is estimated that around US$4 billion in stocks have entered Brazil.

As for bonds, Brazil holds approximately 9% of the main index for allocation to emerging market government bonds (JPMorgan GBI-EM Global Diversified), with an estimated inflow of US$1.4 billion into this market this year.

According to market participants consulted by NeoFeed , the main observation is that the majority of this allocation comes from liquid and passive strategies.

Instead of selecting managers to generate alpha in the stock market or fixed income, most global investors are seeking beta for efficiency and practicality. Large ETF managers, such as BlackRock, have been capturing this trend.

But when you look at the portfolios of more sophisticated investors, they are seeking to invest in alternative investment theses that are uncorrelated with war-torn regions.

Some emerging markets that are performing well include infrastructure, mining (precious metals and rare earths), commodities, and real assets. In these areas, while Brazil is gaining ground, Russia and China continue to be considered "uninvestable" by many investors.

“Two years ago, if I spoke to 100 international investors, I would find one interested in Brazil. Nowadays, if I speak to 100, more than 10 are interested,” says Daniel Rummery, founder of Brunel Partners, a British agent placement firm operating in Latin America.

Over the past 12 months, the company has raised nearly R$3 billion for funds managed by Brazilian asset managers or through co-investments.

Examples include a $40 million investment from an American endowment in CapSigma; investments in Starboard Asset's Starboard Fund IV; a $15 million check from an American endowment for OneVC's OneVC Fund III; and also $15 million in a club deal with HIX Capital .

For the next three to four months, there is an additional pipeline of R$2 billion to R$3 billion in demand for infrastructure funds and club deals , as well as critical minerals, or credit strategies and special situations in Latin America.

“The investor profiles that are already doing things are family offices, endowments, and sovereign wealth funds. What hasn't appeared yet are international pension funds. They tend to be the last ones, the slowest ones. They won't be the ones investing at the very beginning of the entry point, but they will get there,” says Rummery.

Capital Strategies, a European third-party firm, states that foreign capital is currently seeking more specific alternatives, with less correlation to the United States and Europe, which ultimately opens up opportunities for Brazil in areas where the country has scale and significant assets. And discussions are ongoing.

“What I have been seeing is a demand for assets that are uncorrelated with the major markets, ranging from arbitrage funds and frontier markets to strategies linked to real assets,” says Leonardo Lombardi, business partner at Capital Strategies.

"Brazil presents opportunities in infrastructure, especially in energy, real assets, and special situations," he adds.

But those with longer-standing relationships with global investors have been able to capture what are called " plain vanilla" investments (an expression used to describe something simple and unsophisticated). Capital Strategies, for example, helped Bradesco Asset raise capital for a Brazilian UCITS active income fund in dollars.

"We have observed a significant increase in interest from foreign investors in Brazil, which for us has come from the demand for our Brazilian active fixed income strategies, structured in UCITS vehicles and with exposure to the real," says Ricardo Eleutério, director of Bradesco Asset .

"The interest is global, especially from institutional investors, such as pension funds and insurance companies," he adds.

Bradesco's asset management arm has had a UCITS platform in Luxembourg for almost two decades. In 2024, it reinforced this strategy, aligned with the bank's internationalization efforts.

Unprepared managers

Foreign investors seem to be less concerned about the outcome of this year's presidential elections than Brazilian investors. The reason given is that they don't see a strong possibility of things changing for the worse.

There is even a small expectation that a more austere government may emerge, which would help to increase asset values. Therefore, the investment strategy is to reallocate assets to a neutral and balanced portfolio in Brazil.

On the other hand, there is another positive global macroeconomic aspect: the trend of a weakening dollar and appreciation of other currencies for emerging markets. This provides further incentive to move emerging markets from underallocated to neutral.

The point is that even though the trend of choosing active fund managers is currently focused on sophisticated investors, the local industry could benefit more from this trend if it were better prepared for this type of investor.

"The truth is that global investors from the developed world find an industry in Brazil that is unprepared for what they need and very outdated," said Leonardo Camozzato, CEO of HMC Capital in Brazil.

The first reason is the mandate. Foreign investors tend to prefer Latin American investment theses, not a strictly Brazilian mandate – something that local managers insist on doing and selling to foreigners.

The second issue is the structure of the products: expensive administration fees, vehicles that are not very accessible to global investment except for UCITS, requiring too many adaptations from those who invest abroad.

And the third is governance itself, with materials, controls, monitoring, communication, and staff that don't always operate to the international standard that this investor expects to find.

According to Camozzato, this mismatch between what global investors are looking for and what much of the local industry offers helps explain why interest in Brazil has not yet translated into a broader wave of fundraising for local funds – even though discussions have resumed.

In this way, Brazil is gaining space in portfolios, but those who are benefiting the most are the large global asset managers with mandates in emerging markets and Latin America, in a format and cost that is attractive to these investors.

But these asset managers have been seeking out Brazilian managers to capture opportunities through co-investments, mainly with asset managers from large banks, who can create vehicles in Luxembourg and have the structure to meet international standards.

“If co-investment works and the foreign investor gets to know the manager better, the chance that they will invest in the fund in a few years is greater,” says Camozzato. “And if they start having this foreign investor, their service bar will naturally rise.”

Thus, local managers are beginning to have the chance to work as originators of large assets, which can be an important step towards the maturation of the local industry. Those who jump on this relocation bandwagon now and develop themselves with it will be ahead of the game when the demand is truly for investment in Brazil.