Spurred on by strong economic growth between 2004 and 2011, wealthy Brazilian investors had little reason to invest outside Brazil for a number of years. In recent times, however, economic and political uncertainty, coupled with historically low interest rates and inflation have meant that traditional fixed-income investments are no longer viable. The recent decision by the Central Bank of Brazil to trim its key Selic rate (Brazil’s basic interest tax defined by the government) by 50bps to 5.50%has only exacerbated the situation, forcing investors to consider other options
In the quest for high returns, many have turned to the stock market, with a record 1.4-million people now investing on the BOVESPA. While the exchange has provided solid returns over the past few years, it’s vital that investors maintain a diverse portfolio. It’s also worth bearing in mind that, globally, investors are moving away from equities, a scenario that’s likely to be repeated in Brazil. With that in mind, a growing number of wealthy Brazilians are increasing their offshore exposure. Once they realise the advantages offshore investing brings, it’s not unusual to see affluent investors aiming to hold 20 to 30% of their assets overseas, roughly double the percentage of five to ten years ago. Here’s why more investors should follow in their footsteps.
1. Investing offshore is getting easier for Brazilians
In fact, it’s getting easier for Brazilan investors looking to take a portion of their wealth abroad. The Comissão de Valores Mobiliários, the country’s equivalent of the Securities and Exchange Commission, has successfully adopted new rules, enabling high net-worth investors to put greater sums overseas. One of the smartest ways to do this is to invest through PIC structures (Professional Investment Company), a mechanism which allows investors to defer taxes.
2. Overseas investment protects against currency devaluation and inflation
With the Real showing incredible volatility, investors tied up in investments linked to the local currency are exposing themselves to more risk than they might want to. Investing in hard currencies, such as the US dollar, serves as a hedge and thus protects investors from the impact of local inflation and exchange rate fluctuations.
3. Diversification limits the country risk for wealthy Brazilians
The benefits of diversifying an investment portfolio across different geographic regions have been internationally recognised for decades. It’s inevitable, however, that money will flow to areas of high returns, as it did in Brazil throughout the mid-2000s and early 2010s. The recent state of affairs is a powerful reminder to Brazilian investors on the dangers of concentrating investments in a single location or entity. Having a diversified portfolio when it comes to asset classes allows for reduced total risk without sacrificing long-term returns. The same is true when it comes to geographies. The emergence of tech-enabled alternative asset classes, such as cryptocurrencies is also helping limit this risk and is something that all investors should look at.
4. Brazilians can sustain wealth for future generations
The desire to maintain and grow family wealth over generations is entirely understandable. Doing so requires the same, if not higher, levels of common sense and savvy as investing for oneself. Diversified portfolios with exposure to more developed markets and hard currencies can help affluent families sustain their wealth for future generations. One of the best vehicles to ensure that diversified portfolios are being put towards inter-generational growth is the family office. It’s particularly important in Brazil, which has a large number of high net-worth families.
It’s important to note that the family office has also evolved beyond a single point of contact dedicated to ensuring that wealthy families’ needs for financial solutions including structuring and preserving their wealth are served. Today’s family offices typically provide broader services such as dedicated wealth planning, financial expertise in asset management and importantly, tax and legal guidance through an ever-more complex compliance landscape.
Moving beyond 2019, family offices will continue to expand their focus to include much more than conventional services such as legal and traditional wealth management. Other areas that will see a lot of attention include alternative investment strategies, participation in fintech opportunities, digital transformation of families’ related businesses, real-time consolidated reporting and soft factors such as philanthropy and governance.
5. Globalisation presents new realities
While high net-worth individuals have always spent a lot of time abroad, investing overseas can make the process much simpler. Legally having bank accounts overseas can simplify and reduce costs with international travel (exchange rates, taxes etc). It can also support investment in overseas real-estate assets due to easier and cheaper access to mortgages and other debt instruments. And in a world where members of a family can easily find themselves living, studying, and working on several different continents, this kind of global diversity is more important than ever.
There are also an increasing number of financial vehicles aimed at catering to these needs. A good example of one such product is Private Placement Life Insurance.
Effectively an investment wrapped inside an insurance policy, a PPLI policy’s cash value depends on the performance of the investments within it. These investments can include hedge funds, mutual funds, and other potentially lucrative assets. Ultimately, it’s down to the policyholder to choose what kinds of investment they’d most like to have, meaning that they have a lot more freedom than they would with an ordinary life insurance policy.
A PPLI policy is generally by nature a globally focused vehicle. So, for instance, approved banking partners and advisors in Switzerland can work with Brazilian citizens, to provide an investment vehicle that has a global focus. The policy would purchase global funds and will be managed by a global advisor who is outside the US but understands the US market. This makes it perfect for anyone who wants to diversify from traditional Brazilian Real denominated investments but wants to maintain tax compliance and work with international advisors.
Investing offshore a sign of economic maturity
In a global environment faced with very low interest rates, Brazil should celebrate its new reality as a sign of an economy achieving economic maturity.
It’s far from alone in the challenges it faces and is better off embracing the opportunities presented by its new reality than simply trying to turn back the clock. Additionally, it should understand that it has a clear foundation to enable sustained economic growth that differs from the turbulence experienced over the past few years. As for investors, only time will tell how quickly they adjust to this new reality. But the sooner they realise that investing overseas is a legal, proven and necessary strategy, the better they will be in the long run.