By Paula Arend Laier
SAO PAULO (Reuters) - Equity funds in Brazil are expected to post returns below the benchmark Bovespa stock index's performance in coming months, partly as their preference for maintaining high cash holdings and heightened market volatility made them miss a recent rally.
According to money managers consulted by Reuters, their funds are keeping 20 percent to 30 percent of assets under management in cash, near a regulatory threshold. The nation's harshest recession in over a century, declining profits, and violent swings in asset prices are keeping investors wary of ramping up exposure to equities, they said.
Uncertainty over President Dilma Rousseff's impeachment proceedings, which began this month, has made cherry-picking more difficult, said Eduardo Roche, who oversees 200 million reais ($55 million) in assets for Rio de Janeiro-based Canepa Asset Management.
As a result, indexed funds and active funds returned 15.5 percent and 11.5 percent in March, respectively, below the Bovespa's 17 percent gain, data by industry group Anbima showed. Funds with more than 500 million reais in assets under management could have between 16.3 billion reais and 24.5 billion reais parked in cash, hurting returns, according to Thomson Reuters calculations.
The political turmoil "has the power to take the index up or down sharply, there is no middle ground," Roche said.
The rally came in the face of increased likelihood that Rousseff, a left-leaning politician that allowed fiscal spending and inflation to skyrocket, could be ousted 16 months into her second, four-year term in office.
Among funds whose performance is not pegged to the Bovespa, so-called small-cap portfolios returned 5.4 percent last month, and those with free allocation rose 7.3 percent. The worst-performing ones were funds investing in global markets, with returns of 1.5 percent in March.
Some investors said returns decoupled from company fundamentals, which remain weak, in March as euphoria over a potential Rousseff ouster caught traders' minds.
Shares in state-controlled Petróleo Brasileiro SA, which under Rousseff become the world's most indebted oil producer, and debt-laden steelmaker Usinas Siderúrgicas de Minas Gerais SA, both soared during the month even as analysts worried about their outlook.
Some of the best performers during the March rally were shares in "highly leveraged companies," said Marcello Paixão, who oversees 160 million reais in assets at Constância NP.
Likewise, the rally also triggered gains in the value of companies with better metrics, or with a "buy" recommendations, inhibiting additional purchases or stimulating profit-taking.
"Some of these companies rose 30 percent to 40 percent, and turned too expensive. Buying has become too risky", a partner at a Rio de Janeiro-based fund said in the condition of anonymity. "In that sense, you have to cash high and shun risk, for good or bad."
That said, while keeping cash at high levels can hamper returns, that also helps money managers avoid losses. In January, when the Bovespa lost 6.8 percent, funds outperformed.
The index rose 15.5 percent in the first quarter.
($1 = 3.6117 Brazilian reais)