Fund Up 21% a Year Since 1997 Buys Brazil Stocks Before Vote

(Bloomberg) — A Brazilian fund with annualized returns of 21% since 1997 is piling into local stocks after they sank to the lowest in more than a decade, shrugging off concern over a divisive presidential election a month away.

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The Cougar fund managed by Rio de Janeiro-based Dynamo Administracao de Recursos Ltda has bought up shares in hospital operator Rede D’Or Sao Luiz SA, power company Eneva SA and fuel distributor Vibra Energia SA this year after they fell in price.

“Investors seem to be short-sighted over the political and electoral scenario,” Dynamo said in an emailed response to questions. “Our experience tells us that Brazil will remain pretty much the same following the vote: maybe a few steps behind, a few steps ahead, but without major ruptures.”

Like many stock markets around the world, Brazilian equities got crushed by surging global interest rates. But the nation’s particularly aggressive tightening, with an 11.75 percentage points surge since March 2021, triggered a massive shift to fixed income, meaning local equity and hedge funds struggled with redemptions and were forced to sell indiscriminately.

The presidential election has added to concerns, with some investors bracing for a spike in volatility as the dispute between incumbent Jair Bolsonaro and former President Luiz Inacio Lula da Silva gets tighter.

The price-to-forward-earnings ratio for the benchmark Ibovespa equity index plunged to the lowest level since 2008 in late June and trades well below historical averages even after a recent rebound.

Lackluster Performance

Dynamo’s strategy led to one of its worst second quarters on record, with a 25% drop on its flagship Cougar fund — launched in 1993, when Brazil faced bouts of hyperinflation. Still, the asset manager argues there’s an “interesting opportunity” to invest in Brazilian stocks, as many companies were able to endure the pandemic while keeping the lowest leverage levels in years. The fund is up 10% after fees so far in the third quarter.

The asset manager raised fresh money back in February to help finance its buying spree — the reopening lasted less than 50 seconds before reaching its target — bucking an industrywide trend of record outflows in equity funds.

Dynamo is even doubling down on Natura & Co., the cosmetics maker that owns brands like Body Shop and Aesop and which has fallen 76% since peaking in July last year. Dynamo said it bought more Natura shares after the company announced in June a management shake-up as part of a corporate reorganization to face disappointing results and soaring costs.

“If Brazil doesn’t make a big mistake on the external-policy front, it’s set to lure foreign capital and resume growth,” said Dynamo, which oversees about 16 billion reais ($3.1 billion).