In 2006, in the midst of a global bull market, the last thing Fernanda de Lima wanted was to go back to Wall Street. After earning degrees in math and economics from University of São Paulo and an MBA from New York University, and logging long hours for a decade at Merrill Lynch and JPMorgan, Lima had had enough. She washed her hands of finance and, with her husband as CEO, was building a news site called InfoMoney. The pair was raising three young children at home.
But in August of that year her father, Paulo Cesar de Lima, founder of São Paulo brokerage firm Gradual Investments, had a massive heart attack and suddenly the 38-year-old Lima was called into the family business. “It was a crazy time. I was thrown onto the trading floor at Bovespa. It was just me and my father’s business partner Agostinho [Renoldi] running things,” she says of the São Paulo-based stock exchange, now known as the BM&F Bovespa. “I remember that I doubled the population of women on the trading floor when I jumped in… because it was just me and the cleaning lady.”
That was nearly 10 years ago. She pauses to collect herself and smiles. “My father never wanted me to work at Gradual. But when he died, everyone was just shocked. He started the firm in 1991, and people at Gradual were lost without him. I felt like I had to do something,” says Lima, 47.
Back in 2006 Brazil’s commodity-heavy economy was living its gold rush. Business was booming, but Lima’s two brothers wanted no part of the stressful family operation.
Lima didn’t need their help. Over the last decade she has built Gradual into the preeminent nonbank wealth manager and boutique brokerage firm in Brazil, with $2.2 billion in client assets, compared with $100 million when she took over in September 2006. Its head count has grown fivefold to 350, and its offices have grown to 20, including branches in Brazil’s Rio de Janeiro and Belo Horizonte.
While the basic blocking and tackling of wealth management and brokerage is core to Gradual’s operation, market-driven product innovation is what sets it apart from the large banks it competes with. Its biggest recent innovation is a stock index called the Indice Gradual Brasil, or IGB30, which consists of 30 Brazilian-traded equities largely immune to the economies of big foreign trading partners like China and the US. In other words, the IGB30 presents a way for investors to play the emergence of Brazil’s local economy rather than simply make a bet on natural resources like oil and iron ore.
“I got tired hearing about the Bovespa index falling every night on the evening news,” she says, noting the hard times Brazil has felt since the commodity supercycle ended in 2009. “We don’t have all these different indices in Brazil that capture the movements in the economy like you have in the US. So we decided to create one with seven-year backtracking,” she says.
From the beginning of 2008 through June 25, 2015, an investment in Gradual’s IGB30 would have risen by 101 percent versus a 16 percent decline for Brazil’s popular Bovespa index. During the financial crisis of 2008 the index would have fallen 29 percent, compared with a drop of 41 percent for Bovespa. The only time the index would not have outperformed the Bovespa was in 2009, when it climbed 61 percent compared to a 83 percent rise for the major index. Gradual’s IGB30 doesn’t own Petrobras or Vale, Brazil’s giant export-driven commodity firms.
Of course, Gradual has been quick to monetise its innovations. The IGB30 went live on Bloomberg last year, and investors pay Gradual a 2 percent fee to buy into the basket of 30 stocks, including companies like beverage giant AmBev, airplane maker Embraer, cosmetics company Natura and Lojas Americanas, a low-cost Brazilian retailer similar to Kmart.
For US investors the options for buying Brazilian stocks and bonds directly have always been limited. Brazil’s biggest companies have American Depositary Receipts (ADRs) trading here, and dollar-denominated, commodity-heavy exchange-traded funds like iShares MSCI Brazil ETF (EWZ) are popular. However, Lima felt Americans and other foreigners were missing out on some of Brazil’s best opportunities, so she formed a partnership with Cynthia DiBartolo of Tigress Financial Partners in New York to offer US-based investors who open an account at Tigress ($250,000 minimum) the chance to invest directly in Brazilian stocks, bonds and funds in Brazilian reals.
Today, for example, local-currency corporate bonds offer yields in excess of 10 percent. Or if you prefer to invest directly in equities, consider Brazil-based footwear giant Grendene. In tropical Brazil, stylish sandals are a staple. One of the biggest brands in Brazil is Ipanema from Grendene.
“It is diversifying. Its cost of production isn’t that expensive. And it has a great brand [priced at $10 a pair] modeled by Gisele Bündchen,” Lima says. Grendene’s stock is up 23 percent in the last 12 months and has a dividend yield of 5 percent.
While many US investors are reluctant to consider Brazil, which has been plagued by political scandal, corporate corruption and rampant inflation, a few private equity funds and money managers have begun to make select investments. “If you wanted to make a contrarian call today, then I think Brazil is ripe for it,” says Krishna Memani, chief investment officer of Oppenheimer Funds.
“This is a good entry point,” adds Lima, who admits that her opinion has changed 180 degrees in the last few months. In March there were concerns that Brazilian President Dilma Rousseff would oust her new, well-regarded finance minister, Joaquim Levy.
She hasn’t. Levy is putting Brazil’s inflation-prone financial house in order. The Central Bank, for example, has been tightening, raising interest rates to reduce the nation’s current 8.5 percent inflation rate to 4.5 percent.
Lima’s chief economist, Andre Perfeito, thinks Brazil’s benchmark interest rates will rise to 14.5 percent from 13.75 percent today. Lima compares Brazil’s current situation with the environment at the turn of the millennium. In 1999, during an economic crisis, Brazilian interest rates shot up to 45 percent as investors dumped Latin American risk.
“But then when rates began declining in 2000, the economy went like this,” Lima says, demonstrating an ascension with her left hand. “That’s what we think will happen again this time. Interest rates will go to 14.5 percent and then drop to around 10 percent in 2016.”
Falling interest rates and a stronger Brazilian real—a currency Gradual thinks has more upside than downside—are of particular interest to bondholders. Anyone holding a bond yielding 14 percent is going to be paid handsomely for it when rates drop by 30 percent.
Besides offering direct access to Brazilian sovereign bonds through Gradual’s Tigress link, Lima’s firm recently created a secondary market for midcap corporate bonds using its relationships with 250 Brazilian brokers and money managers to create liquidity. “If you’re buying something today and looking to sell it tomorrow, I can find someone to buy it,” she attests. More high-yield bond offerings are on the way, including tax-exempt infrastructure bonds.
To this end Gradual is working with the Brazilian congress, a legal team and regulators to create agricultural infrastructure bonds. “Maybe an ethanol-pipeline project,” says Lima, noting that Brazil is the world’s leading sugarcane ethanol producer. Another fund being created by Gradual is backed by retail receivables. It will likely have a three- to five-year maturity and is expected to yield inflation plus 16 percent to 18 percent.
Despite Lima’s success in building up her family’s Gradual Investments, she says she has little interest in going global or expanding into investment banking à la Goldman Sachs or JPMorgan.
Lima is content being a trusted middlewoman to Brazil’s mass aﬄuent and small institutions. “I don’t know everything, but I want to bring my clients the best of what I do know,” she says. “We don’t have bankers trying to find business. Business is coming to us.”
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(This story appears in the 21 August, 2015 issue of Forbes India. To visit our Archives, click here.)