Top Hedge Fund Sees Bargains in Brazil Retail, Health Stocks

(Bloomberg) -- At the height of Brazil’s recession, Pedro Sales was uncomfortably sitting on a pile of cash at the nation’s biggest independent fund manager.

“We had a high degree of certainty Brazil was going bust so I kept 50% cash in our equity funds, a total outlier,” said Sales, a Verde Asset Management SA partner, who manages local equity investments.

The strategy helped Verde protect returns during the crisis. But now that Brazil has stepped away from disaster and stocks have bounced back nearly 190% from a decade low in 2016, Sales is all-in on the stock market -- his only regret is not doing it sooner.

“Even after all the recent appreciation in Brazil’s stock market, we still find many names at very interesting prices,” said Sales, 42, in an interview at Bloomberg’s Sao Paulo office.

Sales, who oversees about 6.5 billion reais, has targeted firms in health-care and consumer sectors as his main wagers. His favorite names include Hapvida Participacoes e Investimentos SA and Notre Dame Intermedica Participacoes SA, two health-care providers that not only sell insurance but own hospital networks as well. According to him, these companies “will be the major consolidators of the sector, absorbing a vast growth” as their ability to manage costs means they can offer lower prices for health-care plans in a country where roughly 25% of the population has access to private plans.

As for local consumer companies, Verde has a stake in clothing retailer Cia. Hering, a bet that was increased this year after the firm restructured its senior management to include Thiago Hering, the son of the firm’s chief executive officer. Sales also bought shares of C&A Modas Ltda. in the company’s initial public offering earlier this year -- an IPO that priced at the bottom of its range and has since fallen 6.5%.

“C&A isn’t an obvious case,” said Sales. But he decided to stick with the company after seeing signs the retailer is giving more independence to its board of directors. It has also been curbing costs by reducing imports for its clothing production at a similar rate to its peers as Brazil’s currency weakens.

Verde Asset Management isn’t a stranger to making big money on contrarian bets. The firm’s founding partner, Luis Stuhlberger, became one of the most revered hedge fund managers in Brazil. His firm’s flagship fund has been posting around 25% annualized gains after fees since its inception nearly two decades ago. CSHG Verde Am Unique Long Bias FIC FIA, a fund managed by Sales, has had a 13.7% annualized return after fees since it was created in 2012. That compares to an average return of 8.7% on Brazil’s benchmark Ibovespa index over the same period.

Other bets include utilities, shopping mall companies and Petrobras Distribuidora SA, Brazil’s largest fuel distributor, which was privatized in July and has since appointed an “exceptional” board of directors, Sales said.

The asset manager is more optimistic than most investors on Brazil’s growth prospects and sees low rates for longer in Latin America’s biggest economy -- a game changer for the nation’s stock markets, Sales said. He also aims to increase the size of assets under management in his equity strategies by as much 2 billion reais in the coming years.

There’s one sector that helped carry the fund through its rougher times that has been gradually losing importance in Sales portfolio: Brazilian banks. “Five years ago, we considered this an exceptional sector in the longer term because competitive barriers were very high,” he said. “But the risk today for banks is much higher, as technology allowed competitors to thrive,” adding traditional firms will have to cut costs if they want to survive.

To contact the reporters on this story: Vinícius Andrade in São Paulo at vandrade3@bloomberg.net;Felipe Marques in Sao Paulo at fmarques10@bloomberg.net;Julia Leite in Sao Paulo at jleite3@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Jennifer Bissell-Linsk, Brendan Walsh

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