Brazil has been consolidating its position in Latin America as the region's largest investment fund industry. With over 100 fund managers, and assets amounting to R$238 billion (US$132.4 billion), the industry has already recorded growth of R$25.6 billion or 12 percent this year alone, with nearly half of that total corresponding to the net inflow of investment for the period, according to data provided by the National Association of Investment Banks.

The sector gained strength over the past decade, following the reform that put an end to commodity funds which generated daily profitability and were merely seen as overnight funds, in which the investor's main goal was to protect himself from inflation rather than obtain a return.

Under the Real Plan, investment funds took on a new significance in the financial market. The fall in inflation led investors to seek new savings mechanisms just when the privatization process was strengthening the capital market. Equity funds became viable investment alternatives for the retail market, reaching a peak late in the first half of 1997, when equity fund assets accounted for 20 percent of the industry total. With the Asian and then the Russian and Brazilian crises, that percentage fell drastically and today equity funds account for just 7.6 percent of the market.

For historical reasons, the Brazilian investor has a low propensity to invest in equities. In the 1970s, a program to strengthen the capital market allowed individuals to invest part of their income tax liability in equity instruments, known as "157" funds. Scant supervision and the widespread changes that have taken place in the financial system over the last three decades have meant that the vast majority of investments in 157 funds turned to dust. Many fund managers made money charging extremely high management fees, but the result was a deeply entrenched risk-aversion in Brazilian culture.

"The strongest incentive for the investor to return more strongly to the equity market will be lower interest rates," claimed Heitor Hortncio, of Sntese Administraco de Recursos. One of the alternatives being put forward by fund managers, to clients who are afraid of taking on more risk, are multiportfolio funds, which invest part of their assets in fixed-income stocks and another part in equities. Investments in this type of product currently amount to R$1 billion (US$556 million).

Ever since the Asian crisis, fixed-income funds have comfortably maintained their preeminence in the industry. In recent years, high interest rates paid by the government on the securities they issue have guaranteed good returns with low risk, and this year has been no exception, given the volatility on external bourses and the repercussions of this in the Brazilian financial market.

Fixed-income funds have made cumulative gains of approximately 5.10 percent over the first four months of the year, compared to a negative return of 12.05 percent achieved by passive equity funds that keep pace with the So Paulo Stock Exchange Bovespa index.

For the next few years, apart from the challenge of creating points of attraction for the equity fund industry, fund managers will have to face the complex task of consolidating the sector.

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