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Standout Brazilian Equity Fund Embraces Some Controversial Bets

Standout Brazilian Equity Fund Embraces Some Controversial Bets

(Bloomberg) -- One of Brazil’s most popular and best-performing equity funds is scooping up stocks that were left behind in the country’s record-breaking rally.

Like most local investors, Moat Capital, which has about 5.3 billion reais ($1.3 billion) under management, is optimistic that economic growth will accelerate in 2020 as the government’s reform agenda advances. And it owns plenty of stocks that would benefit from the accelerating activity, including retailers and banks. But there are also some more controversial holdings, including payment processor Cielo SA and telecom firm Oi SA, which trade at a fraction of what they did a few years ago.

“We are bullish Brazil growth, but that doesn’t mean we’re buying only domestic retail stocks,” Moat Capital’s founding partner Luiz Aranha said in an interview at the firm’s office in Sao Paulo. “Our focus is to check if what a certain stock currently prices in is reasonable or not. That’s our DNA.”

That’s the rationale behind holding Cielo, which has slumped to around 7 reais -- less than a third of its value just two years ago -- as it sacrifices short-term profits in order to defend market share amid fierce price competition. Aranha says the stock is trading at a discount, and that earnings should stabilize going forward.

For Oi, which posted a 5.7 billion-real loss in third quarter and is still trying to recover from a $19 billion debt restructuring, he says the company is investing in fiber optics, which is likely help business recover.

“The firm has the capacity to generate solid cash ahead,” said Aranha. “But the market is focusing on the short term, which isn’t good.”

Standout Brazilian Equity Fund Embraces Some Controversial Bets

The firm’s Moat Capital FIA was one of the funds that attracted the most money last year, closing 2019 with a net inflow of 2.6 billion reais, according to data compiled by market regulator CVM. That accounts for more than 3% of the 86 billion-real inflow absorbed by Brazilian equity funds last year -- the most for any year since Brazil’s capital markets association began tracking the data in 2006.

The fund started in the second half of 2014, just as Brazil headed for a massive recession amid rising political turbulence that resulted in the ouster of the president. That year, domestic equity funds saw a net outflow of about 14 billion reais.

“Market timing was bad when we built the firm,” Aranha said. “But that was the necessary time for the fund to mature and accumulate track record -- so then we’d be ready to have the inflows we had in 2019,” he said. Cassio Bruno and Marcelo Romeiro joined in as partners later.

The fund’s performance after fees has topped 98% of its peers’ over the past five years, according to data compiled by Bloomberg.

Among retailers, the firm has a constructive view for B2W Companhia Digital and its controller Lojas Americanas SA, which lagged peers last year. Other top holdings include state-run Petroleo Brasileiro SA and Banco do Brasil SA, meatpacker JBS SA and steelmaker Gerdau SA.

After years away, the fund also resumed its bet in Itau Unibanco Holding SA, Latin America’s largest bank by market value. It’s a position that comes with its own share of controversy too: though large banks are some of the most widely held and traded stocks, an MSCI index of financial shares is down 5.6% this year, one of the worst performing sectors. It only lags the information technology index, whose sole member is Cielo.

“Banks aren’t sexy right now, but competition should hit more fee revenues rather than loans, which are poised to recover,” Aranha said.

--With assistance from Filipe Guerra.

To contact the reporter on this story: Vinícius Andrade in São Paulo at vandrade3@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Julia Leite, Richard Richtmyer

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