September 28, 2022
This is the inaugural letter of our new Global Equities Fund. Since we are a brazilian firm and historically focused on local equities the new endeavor deserves a inaugural letter and some explanation, so here we are.
The title of the letter, although philosophical and slightly poetic, is very exact: we want to announce why we are creating this fund (and why now?), how we plan to execute it and what you should expect as result.
This is always a complex question because the answer focus differs depending on the stakeholder. To launch the fund we obviously believe in our capacity to offer a great service and deliver above average returns, so the real questions for potential clients are “why do you think you can compete?” or “why should I choose you and not another?”.
The same question when asked internally and debated with the partners entails other complexities like “Why start a new strategy?” or “Why Global Equities and not something else?” or “Who is gonna buy it?”.
And because we are going through a very strange moment with pandemics, wars, inflation and a lot of uncertainty it begs the additional question of “Why now?”. We want to address our reasons to exist from each of these points of view.
…people who think it can be easy [Investing] overlook substantial nuance and complexity. — Howard Marks, “It’s Not Easy” Memo (2015)
Fools ignore complexity. Pragmatists suffer it. Some can avoid it. Geniuses remove it. — Alan Perlis, first Turing Award recipient.
Let’s start with the easiest (quick wins!).
New investment strategies expand our addressable market, potentially diversify revenues and generally strengthens our business. If done wrong - or too much, or too fast - it can disperse attention and cause major trouble but since we currently are mono-product (Long-only Public Equities in Brazil) it is not a great risk.
This letter is addressed to potential clients, so you can justifiably ask yourself why talk about our internal reasons to start a new fund. The answer is that transparency is always a good policy, so we want you to know what we hope to gain before trying to sell you anything.
The question of “Why Global Equities?” remains and it is an important one given that are many other options. Firstly, long term equity investments always been the house specialty, with many years of accumulated experience between the partners. Although there currently are other more in favor strategies in the Brazilian market, specially due to the current scenario of inflation, high interest rates and uncertainty, we stick to our guns and do what we believe - long term equities, no leverage, no market timing, only expanding the universe of coverage.
And there is other great benefit that we are calling “knowledge synergies”. The idea is a simple one: economies are global and Brazil is not an island, so the knowledge acquired studying international companies can be put to use in the Brazilian funds. If you doubt if this is really productive just ask any retail analyst how much it spends looking at US and China companies to explain e-commerce in Latam, or how many times banks/financials analysts looked abroad to understand neo-banks.
Lastly, there is a commercial reason: brazilians, even the wealthy ones, are very home biased. So we are betting that this is going to gradually change with people becoming more financially sophisticated and realizing the risks of having all your assets in a weak currency within a globalized economy. We made some progress on the sophistication front - more people are investing outside banks and have more money in equity, indices and funds - and the currency problem is just plainly obvious (~60% devaluation in the last 10 years).
Can we deliver above average returns without taking irresponsible risks? That is the real question for our potential clients.