Last updated: 12:27 / Thursday, 29 May 2014
Interview to Gonzalo Cuadrado

The Bottom-up Approach of the EDM Latin American Equity Fund Takes its Manager to... Brazil

The Bottom-up Approach of the EDM Latin American Equity Fund Takes its Manager to... Brazil

It was just a few months ago that EDM Gestión decided to expand the stock markets in which it invests to Latin America, and that the company registered a fund in Luxembourg focusing on shares of companies within the region, which is managed with the same philosophy that has brought them so much success in their Spanish and European equity funds.

Gonzalo Cuadrado Quiles, manager at EDM Gestión, has been in charge of the project since its inception and, in an interview with Funds Society, recognizes the attractiveness of this whole new world of opportunities. Especially after the emerging markets’ scene in recent months, which saw investors making massive withdrawals of capital which have caused declines in valuations in markets like Brazil. In these times of great inefficiencies, when many investors who replicate indexes are forced to exit, is when a company like EDM can offer value. “This is where a management company of modest size can take advantage of the inefficiencies, and, through active management, provide additional value by means of a good research,” he said. Sometimes, due to their large size, funds can not take advantage of opportunities in smaller companies and that is a limitation which EDM isn’t faced with.                                

And it’s in those great inefficiencies which are created by massive outflows or by the size of the companies, where the manager finds value to construct the fund’s portfolio, which he admits he is still in the process of building. Although the portfolio is not yet fully constructed, it already offers returns of around 5%.

Through a process identical to that of other EDM European or Spanish vehicles, which is based on the selection of companies according to their fundamentals (high-ROE, visibility on earnings growth, sustainable and stable cash flows, low debt, quality management teams with integrity, and reasonable valuations), and on a process of long-term investment, the manager is ready to invest in any country, any sector and in any size company, although his steps led him especially to Brazil (with a portfolio weight of 45%) and Mexico (26%), with the rest in companies from countries like Chile or Peru.

Opportunities in Brazil

Although he insists that this composition is purely a result of the selection of companies, it is also obvious that Brazil is a market which actually offers many opportunities. First, says Cuadrado, by developing its equity market, which has boosted the number of companies, and which in turn offers more opportunities, at least in numerical terms. Secondly, he recognizes that Brazil has been under the spotlight of international investors and has suffered more than other markets in the region, a de-rating which has left valuations at attractive levels, although he focuses primarily on the quality of the companies. And he also admits that a change in government could help in the future. Among his investments are Localiza, the car hire market leader; the aircraft manufacturer, Embraer, and Vale, the basic materials company.

Cuadrado is not in favor of comparing prices in Brazil and Mexico, since the composition of the two markets is different; he also has a great part of the fund's positions in the North American country, in companies like Gruma (world leader in packaged flour pancakes), a company with a lot of exposure to the U.S.

Cuadrado does not mind investing in European or American firms with exposure to Latin America (like the Spanish company Prosegur, with 85% of its EBITDA in Latam) or Latin American companies which have exposure to other parts of the world. In fact, he believes that the internationalization process to compete with European or U.S. firms is a value catalyst of the local companies which have done very well for decades. In fact, he reminds us that some sound and liquid companies are taking positions in Spanish firms. Other catalysts which will propel Latin American companies are the low private leverage (of households and businesses in the region), the need for development of tertiary services, which in many Latin countries are a far cry from those in Europe or USA, or the potential for consumer credit. Therefore, although his investment process focuses on companies, he admits that macroeconomics offer much potential to his fundamentals: policies to improve infrastructure in the region or the demographic factor (for example, a large percentage of the population under 25 years of age unlike the aging in Europe) provide the potential for the growth of many businesses in the region. “There is much talk about the poor state of Latin American economies, but it is not as alarming as it is usually portrayed: each country has an independent monetary authority, institutions which are increasingly sounder, less debt than many developed countries, smaller deficits, and with the exception of Brazil, controlled inflation,” explained the manager.

In addition, cash outflows in recent years in emerging economies and the concentration of flows in Europe or the U.S. make it increasingly more difficult to find opportunities in the developed world. “The times of cheap money in U.S. are over but that has already been gradually assimilated,” he says regarding the threat that tapering will pose for emerging economies. On the other hand, it seems logical that at some point the global flows will turn around to favor developing markets once again.

A Growing Appetite

Cuadrado explains that the fund, domiciled in Luxembourg, is attracting investors mainly from Spain and Europe, and already boasts 16.5 million Euros in volume. Their expectations are also for growth, both by the behavior of markets (“Latin America has a higher growth potential, although with other risks,” says the manager) and by flows. At EDM, they expect the demand to come not only from Europe, but also from Latin American clients, channeled through its sales organization in Mexico and due to the satisfaction with European or Spanish stock funds under the company’s management, and to the growth in active management.  “There are not many managers characterized by their selection of securities and exposure is more common through ETFs,” he says. That is why this fund may provide them value.

Cuadrado manages the fund from Barcelona, but has frequent meetings with companies, whether in Latin America or in London, where the roadshow campaigns are targeted, because knowing the companies is a basic premise to invest in them.