Dreyfus Brazil Mutual Fund Challenges Brazil ETFs - Manager

The two-month-old Dreyfus Brazil Equity Fund (DBZAX) hopes its active management approach can successfully challenge the leading Brazil-dedicated exchange traded funds and lure U.S. retail investors its way.

"The benchmark indexes that the ETFs track are heavily weighted toward either commodities or small caps. We are a mix of both and we can underweight or overweight a sector based on our analysis of the market at the time," said Rogerio Poppe, portfolio manager at BNY Mellon ARX, the fund's advisor in Rio de Janeiro.

Dreyfus has been managing money in Brazil since 1999, and currently handles over 10.1 billion reals ($5.67 billion) in equity, fixed-income and alternative investments. Now, it has taken its local know-how and opened one of the only Brazil-focused mutual funds in the U.S., holding 35 companies.

While it has few retail fund competitors, it does have to contend with the massive iShares MSCI Brazil ETF (EWZ), trading over 11 million shares daily, and the new Market Vectors Brazil Small Cap ETF (BRF).

"With us, you're paying for the active management that you're not going to get with the Brazil-focused ETFs," Phil Maisano, Dreyfus' chief investment officer, told Dow Jones Newswires in the same interview earlier this week.

Exchange traded funds are different from mutual funds in that they can be bought and sold at any time of day like stocks, but are based on an index and therefore not actively managed. Mutual funds can only be bought at the market's daily closing price. And while the Dreyfus Brazil Fund's benchmark is the MSCI Brazil index, the long-only equity fund can underweight major commodity names such as energy firm Petroleo Brasileiro (PBR, PETR4.BR), also known as Petrobras, or mining titan Vale (VALE, VALE5.BR) to favor companies that are more focused on Brazil's domestic economy, which is expected to grow at least 5% next year.

The initial investment in the class A share is $1,000, making it a relatively inexpensive way for retail investors to buy Brazilian stocks.

The company's top holdings include Petrobras, the Itausa Investimentos SA holding company (ITSA4.BR), plastics and petrochemical company Ultrapar Participacoes (UGPA4.BR) and electric power utility Copel (CPLE6.BR).

For much of the year, the spotlight has shined on Brazil as a relatively low-risk, high-return emerging market. Year-to-date, the Ibovespa stocks index has risen over 70% in local currency terms and 100% in dollar terms.

"The biggest risk for the fund in 2010 is going to come from outside forces, like rising interest rates in the U.S.," said Poppe. But he predicted the Ibovespa index will hit 80,000 points next year, with corporate earnings rising by 20% to 25% on average following a rough 2009. Ibovespa is currently trading at around 67,000 points.

The fully invested fund expects Brazil's domestic economy, and infrastructure investment, to be the growth story over the next two to three years.

"We like consumer discretionary and some sectors leveraged to the Brazilian investment cycle," said Alexandre Gorra, head of international trading at BNY Mellon ARX in Rio de Janeiro.

"When you consider the build-out needed for the 2014 World Cup and the 2016 Olympics, and you look at how investment per gross domestic product is at historic highs of over 20% when it is usually in the teens, you see that a new reality is shaping up in Brazil," Gorra said.

Brazil has been chosen to host the World Cup, while Rio de Janeiro will be the site of the Olympics.

"Brazil has always been behind emerging market favorites in Asia because it didn't invest, but now it is catching up. We are seeing investment inflows in Brazil moving away from pure play commodities and into Brazil-centric assets like infrastructure because of those changes," Gorra said.

-By Kenneth Rapoza, Dow Jones Newswires; 5511-2847-4541, [e-mail]