CASE STUDY: Seagul Latin America

Sorrel Moseley-Williams

The five main emerging markets – China, India, Indonesia, Brazil and Russia – have all in recent years made the transition from developing country to an emerging market.

The Seagul Latin America fund primarily invests in Brazil, as it is the strongest and most developed economy in the Latin American region, and the firm that manages it, Seagul Capital LLC, which launched in January 2008, has US$50m in assets. The fund also invests in Argentina and Mexico.

Run by managing directors Raul Guimaraes and Diego Orlanski, Guimaraes says he has been investing in Brazil since 1993, and in those 15 years it has changed so much it is now barely recognisable, for the good. This was a period when former finance minister, Fernando Cardoso, was elected president and sold off various government-owned monopolies in the telecoms, electrical power, port, mining, railway, and banking industries, taking significant economic decisions for the country.


Fifteen years ago, Brazil had a tiny equity market. “The private sector back in 1993 barely existed, but it is now strong in Brazil,” says Guimaraes.

Indeed, infrastructure developments at Bovespa, Brazil’s stock exchange which sees almost 70% of the region’s trade volume, mean it cannot be compared with how it was operating a mere three years ago. It is a lot more developed and very sophisticated in terms of the operations that can be made.

“Even in the past three years, Brazil is a new country. The capitalists have entered the market and it is a lot easier to conduct business now. It is a strong capital market and there has been a boom in private equity,” says Guimaraes.

“Banks are as good as any in the US if not better, technology-wise. We find Brazil to be a sophisticated market in which to conduct business, and it is certainly more developed than other regional emerging markets such as Argentina or Mexico.”


Less advanced levels of technology can be a challenge that fund managers need to overcome when working with local service providers. Paul Chain, president of AIS Fund Administration, a fund administrator to 70 funds including the Seagul Latin America fund, says a lack of Western standards of technology can prove detrimental to compiling daily reports and daily NAVs.

“At a local level, prime brokers, for example based in an emerging market country, may still have to compile information by hand, which can leave room for human error,” he says.

And in terms of moving money in and out of Brazil, technology has facilitated this. “Back in 1993, the challenges of ‘money in, money out’ were great,” says Guimaraes. “One needed to have several bank accounts available and it would take around two months to transfer money. A lot of red tape was involved back then.”

Chain adds: “The previous rules and regulations meant we could not take positions out of the country – it all had to be cleared locally, which was problematic.”


But in 2008, it is a different story. “Fortunately subsequent governments have removed the bureaucracy and it is now a lot freer to move money about,” says Guimaraes. “We don’t have to rely on the government’s decisions as much.”

Certainly in the Latin American region, countries such as Argentina, Brazil and Chile have suffered plenty of political turbulence over the past 25 years, thanks to the dramatic swings between dictatorships and democratically elected governments. Such instability meant governments had a strong hold over commodities and could interfere with the economy as they saw fit. Markets were often hard to enter, and then there is the poor infrastructure as a result of widespread corruption that appears to go hand-in-hand with developing countries.

Although Brazil is producing sustainable economic growth at the moment and is currently politically quite stable, Argentina is still suffering from political issues. Recent disturbances include the tax-on-farmers crisis, which led to real upheaval in president Cristina Fernández de Kirchner’s Peronist government, and she was unable to push her proposed tax on soy exports bill through Congress in July. While Brazil is experiencing plenty of growth and currently has a strong currency in the ‘real’, Argentina is a more challenging country for managers. It is going through less buoyant times and it is not a dominant market at the moment, according to Guimaraes.

“We don’t want to take too much risk in Argentina because it is not as capitalist a country as Brazil, and we remain cautious about its current political situation. That is why we have low exposure there,” he says.

The challenges managers need to assess when investing in an emerging market are its domestic political backgrounds, its recent regional economic success and its transitional status. Brazil has witnessed so much improvement technologically, politically and economically speaking in such a short period that it appears the only challenge left for Brazil-focused emerging market managers is the returns they make.