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SÃO PAULO – Due to the lower volume of small capitalizations compared to blue chips From the Stock Exchange, large management companies such as Bradesco Asset Management (Bram) and BNP Paribas Asset Management increased the liquidity of the portfolios to overcome the crisis in the best possible way.
Small caps are the least capitalized stocks on the stock exchange. The SMLL sector index gathers the 79 most liquid papers in the category, with Eneva, Qualicorp, Fleury and Bradespar representing the group with the highest representation.
As a general rule, these are companies with the most focused activity on local dynamics. According to the regulation of the Brazilian Association of Entities in the Financial and Capital Markets (Anbima), to compose a portfolio of small capitalizations, the manager cannot include in the portfolio a share that occupies the first to the tenth position in weight in the Ibovespa.
In addition, the stocks that hold the largest 11-25 contribution group in the main stock index cannot collectively represent more than 15% of a small cap fund.
According to the Bram superintendent, Marcelo Nantes, who adopts the Anbima criteria, the house’s strategy has been to prioritize the most liquid actions, given the expectation that the magnitude of the fall in the markets could generate a wave of withdrawals, which It ended up not confirmed in the manager or in the industry. “The investor was more mature than we had imagined.”
In fact, Anbima’s figures demonstrate the clear predilection of local agents for capital funds in recent months. Although in April, until the 28th, the class accumulated a net redemption of R $ 139 million, the amount is almost insignificant compared to the exit of R $ 63 billion when the other categories of funds are included in the account.
In the year, the increase in equity strategies reaches R $ 45.1 billion, while the industry as a whole has redemptions of R $ 44.5 billion.
In the case of small-cap strategies, the behavior is repeated: repayments totaled R $ 89.7 million in April, up to 28, but, in the year, the financing is R $ 2.7 billion.
Sectors and returns
The Bram superintendent prefers not to open specific portfolio positions, limiting himself to saying that the most representative sectors are electricity, food and e-commerce. “We were already in those sectors and we increased the size of the positions.” On the other hand, retail has lost space in Bram’s portfolio.
The strategy proved correct: in April, the fund’s small capitalization rose 18.04%, while the sector’s stock index advanced 10.19%, an appreciation very close to that of the Ibovespa, 10.25 %, according to Economatica data. However, since the beginning of the crisis (on February 21), the portfolio has accumulated a loss of 27%.
“Small capitalizations generally fall more than the market, but commodity exporters suffered greatly from the oil crisis,” says Nantes, referring to Ibovespa’s performance. In his assessment, small caps are expected to lead the recovery of the stock market in the coming months. “With the return of economic activity, these are roles that tend to perform better than average.”
Although the performance of the benchmarks was close in April, over slightly longer periods, the thesis that small capitalizations fall more in the fall and increase more at the maximum is confirmed.
Since the beginning of the crisis, on February 21, while the Ibovespa fell 29.2%, the small-cap index decreased 35.3%. And in the first four-month period, the Ibovespa lost 30.4%, compared to a 34.1% drop in the benchmark sector index.
Going back a little further in time, in the last major market crisis in 2008, while the Ibovespa fell 41.2%, the small-cap index lost 53.1%. On the other hand, last year, when the Stock Market advanced 31.5%, the small capitalization index appreciated 58.2%.
Resumed ahead
At Trígono Capital, Werner Roger, the manager’s CIO, also argues that small caps tend to recover first from the crisis. And it uses historical analysis to back up your expectations. “In the subprime mortgage crisis, it took Ibovespa 614 sessions (almost three years) to recover, while the small-cap index took 381 sessions.”
In 2010, in the PIGS crisis (Portugal, Ireland, Greece and Spain), the phenomenon was repeated, with the sector benchmark returning to the pre-crisis level in 49 trading sessions, against 122 in the Ibovespa. More recently, after “Joesley Day” (in May 2017), while the small cap index rebounded in 43 trading sessions, Ibovespa took 58 sessions, says the expert.
“The small cap index is much more diversified than the Ibovespa, which is highly concentrated in banks and commodities,” says Roger. “Due to the construction of the index, I think that in the next twelve months, its performance will exceed that of Ibovespa.”
Few and good
To protect himself from the coronavirus and take advantage of the resumption of small limits against others, Trígono adopted a strategy to increase the concentration of the portfolio. The main portfolio positions, which before Carnival corresponded to around 60% of the total, began to represent approximately 80% in April.
The logistics company JSL, the São Martinho sugar cane mill and Cia Ferro Ligas da Bahia – Ferbasa make up the majority of the manager’s portfolio. Also in the portfolio are the shares of the air compressor manufacturer Schulz, the Tupy foundry and the silo storage company Kepler Weber. “We have prioritized the shares of companies with dollarized earnings but with liabilities in reais,” says the CIO.
To increase concentration in some shares, Trígono sold others, such as Porto Belo and Celesc.
“Porto Belo makes porcelain tiles and is highly dependent on the performance of the real estate market, which may suffer more from the crisis.” In the case of Celesc, the energy distributor should be negatively affected by the reduction in consumption in the industrial and service sectors, predicts the manager.
Among the shares that are part of SMLL, only that of SLC Agricola, with an increase of 3.9%, managed to close in the positive field, considering the period from the beginning of the crisis, on February 21, until the end of April. The second best performance came from exploration and refining company Dommo, with a 2.6% decrease in the period.
At the other extreme, the Azul and Gol airlines accumulate the highest losses, 68.7% and 63.3%, respectively.
As a result of the decisions made in April, the Trígono fund rose 16.71%, outperforming the small market capitalization index and the Ibovespa. Roger points to the high degree of correlation between the portfolio and the sector benchmark by justifying the difference in results. “Only about 3% of our portfolio meets the small market capitalization index.”
Due to non-index name positions, the manager’s fund completed two years in April with a cumulative increase of 50.87%, well above the 5.90% earnings of the benchmark index.
“Rushed eats raw”
During the most volatile days, while in Bram the main defensive strategy was to look for more liquid shares, in Trígono, the way to avoid redemptions was to increase cash from almost zero to approximately 5%, a decision also adopted at BNP Paribas Activo .
Realizing that the crisis was approaching, manager Marcos Kawakami decided to increase the cash allocation from 2% in the pre-carnival to 8% in early March.
However, after taking a more conservative stance at first, the house manager acknowledges that he ended up underestimating the impact of the coronavirus.
“We think there was some hype at the falls when the first‘circuit breakers“March, and we’ve positioned ourselves a little more aggressively.”
At that time, the manager used some of the cash made a few days earlier to buy shares in airlines, consumer discretionary and construction companies. Due to internal policies, the asset does not open the fund positions.
The problem is that, a few days after the decision, the markets would fall even more. “We made a mistake in allocating resources,” says Kawakami.
When he saw that the size of the problem was worse than expected, the manager reduced his bolder position and turned to defensive names in electricity, telecommunications, and exporters. As a result, in April the housing fund rose 17.22%, although it still loses around 35% since the beginning of the crisis.
“The more defensive stance is not because we are pessimistic about current prices, but because we are still unclear when the resumption will take place and at what rate.”
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