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For one thing, its battered economy was in such poor shape that within a year it required an IMF rescue of more than $30bn, a record amount at the time, which followed a forced devaluation of its currency in 1999. The global commodity boom that would soon see multinational mining companies and oil industry giants stampeding over its borders had yet to begin.
If people who had never been there before thought about Brazil at all in 2001, it was probably as the jungle-covered, native Indian-inhabited home of the world’s second-longest river. Or, perhaps, where a girl from Ipanema went walking in the ’60s.
Brazilian growth
How times have changed. Brazil’s economy in the third quarter of 2011 may have contracted slightly as it reacted to the global economic turmoil, after posting growth of 7.5% the year before; but it nevertheless is now the world’s sixth-largest in GDP terms. Brazil’s market capitalisation more than doubled in 2009, and grew by 15.6% in 2010.
According to the 2011 edition of the Merrill Lynch/Capgemini World Wealth Report, Brazil ranks 11th in the world in terms of the number of high net worth individuals who live there.
Bill Pingleton, managing director of the Americas for Franklin Templeton, which has been distributing its funds in the region since the mid-’90s, says Brazil is now the world’s eighth-largest fund market, though only the 11th-largest “if you exclude money-market funds”, a regional favourite.
Plans to expand
It is not surprising, therefore, to find that a growing number of financial services companies are considering how best to tap into the market, while others, already there, are looking for how best to expand.
Among them is Geneva-based Vistra, the cross-border structuring specialist. Gerard van Spall, the Curaçao-based head of regional operations, says the company is “looking very seriously at enlarging our South American efforts”.
“As you may see if you look on our website, Vistra is just about everywhere in the world except for South America,” van Spall explains.
“We are not sure yet how we are going to do it [expand into South America], but we are studying it right now.”
Among the places van Spall says Vistra is considering is Montevideo, Uruguay – which puts him in good company. Sometimes referred to as the Switzerland of South America, this relatively small country is a well-established launchpad for European and US companies looking for a tax-efficient operational base (Panama and certain British islands in the Caribbean are also popular).
In addition to representative offices of major US and European banks, and such asset managers as Man Group, Uruguay is also headquarters to two of the largest distributors of investments and savings products operating in South America – Royal Skandia products distributor Aiva and FPI distributor SupraInvest.
Regulatory climate
What Uruguay is not, however, is a hotbed of expatriates in search of help with their investments, those familiar with the country say.
“It has a good regulatory environment,” explains Gustavo Otero, business development manager for Investors Trust Assurance, who is a Uruguayan native and previously worked in the insurance industry there. Founded in 2002, Investors Trust is registered in the Cayman Islands and was conceived to market investment products similar to those of the other major cross-border life companies, but tailored to the specialist needs – including languages – of emerging markets.
The lure of Rio
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Rather than Uruguay, financial advisers keen to sell to expatriate clients in South America have, at least over the past decade, tended to focus on the major Brazilian cities.
Rio, for example, is home to the headquarters of Global Index International, an expat-focused firm which also has offices in São Paulo, as well as Mexico, Colombia, Peru and Argentina. Other firms looking after expatriates in São Paulo include deVere and Globaleye.
Bucking this trend, with its South American base in Buenos Aires, is Swim WorldWide, which also has offices in Lugano and London.
Some financial services experts looking at South America, meanwhile, say they are intrigued most by Chile, which has the region’s second-highest GDP per capita.
That said, IFAs who come to South America expecting to just look after expatriate Brits, and perhaps a sprinkling of Commonwealth clients, may be in for a surprise, according to Globaleye Brazil vice-president Karl Westlund, who two years ago took over the running of Globaleye’s Brazilian operation.
Unbiased advice
At Globaleye, Brazilians account for 90% of the company’s South American client base and expatriates for only 10%, Westlund notes.
Adds Investors Trust’s Otero: “The biggest potential market in South America for any IFA, whether local or from abroad, is the emerging middle class. Countries like Brazil, Argentina, Chile and Peru are growing very fast, and a new middle class is being born.”
Like others, Otero points out that for historical reasons, many South Americans are instinctively wary about where they keep their money. This is one reason that certain South American nationalities are known to prefer offshore jurisdictions.
It is also why, Otero says, they “place a high value on unbiased advice, from people who are independent”.
“The family office concept is increasingly common, and they make use of private banks as platforms to access a range of different assets, but they also offer advice to the clients,” Otero notes.
Cultural diversity
The main reason more companies are not in South America yet is because it is a notoriously difficult market to get into and to remain in.
The first difficulty is that all of the countries are so different from one another. Many also are still afflicted with varying but significant levels of crime, drug trafficking, poverty, corruption, bureaucracy and lack of infrastructure that have historically made the continent a virtual no-go area for financial services companies. There are cultural and language complications too.
“Nearly everybody fails in this business [independent financial advising] in this part of the world,” says John W. Fleming, the founder and principal of Global Index International, whose company’s origins date back to 1996.
“It is just too complex, for so many different reasons. Anyone can come down here for two or three years, do things casually and get by under the radar, but no one lasts. We are an anomaly to still be here.”
Finally, for European IFAs and product providers, there is the fact that US companies are already operating in most parts of South America, and typically have established US ways of doing things as the region’s default. However, some say the US influence is beginning to weaken.
Tactical urgency
A recent Strategic Insight report suggests that now may well be the time for asset managers, at least, to consider making a move south of the border.
Daniel Enskat, the report’s author, notes that the Latin American asset management industry could as much as triple in size by 2020, as the investment habit spreads from its current base among Latin American HNWIs and institutions, such as pension funds, into the region’s growing middle class.
As he sees it, Latin America as a market for financial products is currently “under the radar”, but unlikely to stay there much longer.
“Tactically speaking, if you are not in Latin America today, you may be too late,” he says of fund managers in particular, citing examples of such companies as Fidelity and Franklin Templeton which are well-established there and finding the region profitable.
Cross-border market
What is more, he notes, South American investors actively seek out cross-border Ucits funds for the global exposure and diversification they don’t get from local domestic products.
Explains Enskat: “From an asset allocation perspective, many institutions have no choice but to go outside of their own markets.”
Note: this article was amended on 9 Jan, 2012, following the upgrading in December of Brazil to world’s sixth-largest economy.
