Three consensuses among the international managers I visited this week – 03/14/2024 – From Grão to Grão

As I mentioned yesterday, this week I’m in New York at an event called Wall Street Immersion organized by Samuel Ponsoni from Outliers Advisors. We’re visiting a range of managers to learn about their strategies, get their views and understand how they are investing around the world. These managers we visited are responsible for managing a sum similar to the Brazilian GDP. Understanding what they are doing is essential to anticipate where this mountain of money is migrating to and where it is leaving.

One point made me very happy, because the greatest consensus I observed among stock managers was anticipated by me here in this column in 2020, that is, four years ago. See what I wrote that year.

The biggest consensus among the managers we visited is that the focus should be on quality companies.

Of course, what defines quality changes for each manager, but some criteria are common: high return on capital, low debt, stability of results, low need for investment in capital, investment in research and development (innovation), product with a competitive barrier , business culture, among others.

Obviously, the price you pay for a share also matters. However, before wasting time calculating whether a company is cheap, they first filter only those companies that qualify as quality. And this criterion has generated good results.

The table below shows the performance of several stock indices segmented by factors, such as: dividend, value, growth, quality and others.

These stock indices are calculated and assembled by MSCI, which is one of the most renowned companies in the world in creating indices. The table shows the indicator with the most positive performance in green and the worst in red.

Notice how the quality factor is the most positive in almost all observation windows, especially in longer terms.

Another consensus among the managers we visited is the fact that no one talks about a company paying dividends, or justifying investment because of dividends. Unlike this, it is common among Brazilians to focus on dividends. I will explain below why, perhaps, this is a focus of many Brazilian investors.

First, I will explain why the mountain of money is not interested in dividends. It’s not by chance. Dividend-paying companies are usually mature companies, which have low returns and do not have innovative products. It doesn’t seem like the type of company that attracts the desire to be a partner in the long term.

The value factor was commented on, but it is far from a focus. This is another thing that we Brazilians are behind on. Many Brazilian investors focused on value still justify it by citing Warren Buffett from the last century. As some managers here commented, even Warren Buffett already changed his focus from value to quality some time ago.

The third consensus is that investing in shares in Brazil is definitely not the hot ticket for foreigners. And it’s not because of politics. As one of the managers explained: “the mandate of politicians is temporary, a quality company lasts much longer”.

I’ve heard many Brazilian managers talking recently on podcasts that Brazil would be desired by foreign investors because many emerging countries were in a worse situation like Russia. I don’t think we can count on the mountain of international money anytime soon.

It is no surprise that the flow of foreign investors is so negative this year. According to data from B3, the volume of foreigners leaving our Stock Exchange reached R$22.3 billion this year until March 11th.

One of the reasons is simple. We don’t have quality companies. Our companies do not meet the tough criteria of the managers we visit.

It is no coincidence that many Brazilians are satisfied with companies that pay dividends. In the absence of truly quality companies, it is better to keep something more certain, which is the dividend money in hand.

For foreigners, I think we are in the category of value trap (value trap in English). In other words, our stock market may even be cheap, but they don’t see this situation changing anytime soon and the companies don’t have enough quality to sustain the wait.

Without a doubt, the trip was very rich in learning and changing perceptions. But, I will leave it to comment on changes in perception in future articles.

Michael Viriato is an investment advisor and founding partner of Investor’s House.

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