Brazil-Heavy Funds Crushed as Political Chaos Rocking Market

(Bloomberg) -- Turmoil in Brazil is slamming U.S. mutual funds.

Funds with large holdings of Brazilian assets tumbled yesterday as allegations against the country’s president sparked a selloff.

“I have never seen anything like this,” said William Pruett, manager of the $599 million Fidelity Latin America Fund, which slid 12 percent on May 18. "It’s incredible that such a large emerging market could move so much in one day.” More than 60 percent of his fund is comprised of Brazilian stocks.

Brazil’s Ibovespa had the biggest plunge since October 2008 on May 18 on news that President Michel Temer approved hush money payments to a lawmaker who orchestrated the impeachment of his predecessor. While that benchmark stock index rebounded 5 percent Friday, it’s still leading losses among the world’s biggest equity markets this week on concern the crisis could derail an agenda designed to pull Latin America’s largest economy out of its deepest recession on record.

The $1.3 billion Pimco RAE Fundamental Plus EMG Fund fell 4.3 percent Thursday, the biggest drop among U.S. emerging market stock funds, according to data compiled by Bloomberg. The fund had a 20 percent allocation to Brazil as of April 30, compared with 7.4 percent in the MSCI Emerging Market Index, according to Pimco’s website. The fund also invests in fixed income securities.

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The second-, third- and fourth worst-performing emerging-market funds lost 3 percent to 4 percent Thursday. They are the $35 million Ashmore Emerging Markets Small-Cap Equity Fund, the $3 billion Invesco Developing Markets Fund and the $1.5 billion Brandes Emerging Markets Value Fund. Their allocation to Brazilian stocks is 14 percent to 18 percent, according to data compiled by Bloomberg.

Agnes Crane, a spokeswoman from Pimco, and Invesco spokeswoman Raslyn Wooten declined to comment. Representatives of Ashmore and Brandes didn’t immediately return calls.

Pimco’s RAE Fundamental Plus EMG Fund gained 40 percent over the past year, better than 99 percent of rivals. In dollar terms, the Ibovespa Index gained 28 percent in the year through May 18, even with yesterday’s 16 percent decline. The fund is managed by Robert Arnott, co-founder of Research Affiliates, a California-based research firm, and Mohsen Fahmi and Sudi Mariappa of Pimco.

The $39.9 billion Templeton Global Bond Fund, which invests in Brazilian local notes, dropped yesterday the most since last June. It has 14 percent exposure to the country. Manager Michael Hasenstab said in an email that political support for entitlement reform in Brazil would allow the country to realize its full potential.

“We remain convinced this short-term volatility will pass as key policy makers move forward with important economic reforms,” he said.

Paul Christopher, global market strategist for Wells Fargo Investment Institute, said investors have been too bullish on Brazil and yesterday’s decline isn’t a buying opportunity.

“A rally not necessarily based on fundamentals, a corruption scandal. I’ve seen it all before, like a few years ago in India,” said Christopher, who helps oversee more than $1.6 trillion. “I wouldn’t recommend Brazil for a long-term investment because there are just too many risks.”

Fidelity’s Pruett remains optimistic about Brazilian stocks over the next several years. The economy is near a bottom, he said, and interest rates have more room to fall. Even if the country’s push to reform the pension system is slowed by the current political situation, the future looks better, he said.

“There are a lot of attractively-priced quality stocks among the banks, consumer discretionary companies and industrials,” he said. The largest holding as of March 31 was Sao Paulo-based Itau Unibanco Holding SA.

--With assistance from Rita Nazareth Brandon Kochkodin Elena Popina and Ben Bartenstein

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net.

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Alan Mirabella, Rita Nazareth