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Brazil’s Polo Hedge Fund Boosts Bets on Homebuilders


Date: Wednesday, July 29, 2009
Author: Alexander Ragir, Bloomberg

Marcos Duarte, co-founder of the $1 billion hedge fund Polo Capital Gestao de Fundos Ltda., is buying more Brazilian homebuilder shares even after the stocks more than doubled this year.

Duarte said the Rio de Janeiro-based firm is buying real estate developers Klabin Segall SA and EZ Tec Empreendimentos e Participacoes SA, adding to bets on the industry that helped his 659 million-real ($348 million) Polo Norte Multimercado LP fund outperform 96 percent of its peers in 2009.

The 12-stock BM&FBovespa Real Estate Index has surged 135 percent this year, rebounding from a 69 percent plunge in 2008 that dwarfed the Bovespa index’s 41 percent decline. Homebuilder stocks will keep rising on speculation improving credit markets, record low interest rates and President Luiz Inacio Lula da Silva’s 34 billion-real plan to build a million homes for low- income workers will boost housing demand, Duarte said.

“You have nominal interest rates the lowest ever, more people with access to credit and a big government package,” Duarte said in a telephone interview. The stocks have “gone up a lot and just now are nearing book value. But I think the year of the homebuilder will be 2010.”

Polo Capital’s assets have almost doubled from $550 million at the beginning of the year because of its funds’ performance and investor inflows, Duarte said. The Polo Norte Multimercado fund gained 31 percent in 2009, extending its 11 percent advance last year. The 470 million-real Polo FIA fund has jumped 53 percent, beating 89 percent of its peers.

Abyara Rally

Claudio Andrade, who founded Polo with Duarte in 2002, said in an interview on March 13 that the firm was adding to holdings in homebuilders such as Abyara Planejamento Imobiliario SA, a Sao Paulo-based real estate developer. The stock rose 138 percent since then.

Sao Paulo-based EZ Tec has surged 153 percent this year, sending its price to 7.26 times reported earnings, according to Bloomberg data. Klabin Segall, also based in Sao Paulo, climbed 60 percent this year and fetches 8.32 times earnings.

The benchmark Bovespa index trades at 21 times the reported profit of its companies. The measure has gained 44 percent in 2009, led by homebuilders Rossi Residencial SA, Gafisa SA and Cyrela Brazil Realty SA Empreendimentos e Participacoes.

Valuations

Eric Conrads, a Mexico City-based hedge fund manager at ING Investment Management SA, which oversees $12 billion in emerging-market assets, said last week that he’s selling homebuilders after the rally made them expensive. BM&FBovespa’s real estate index trades at 26 times profit, the highest since its inception at the start of the year.

The best real estate investments are companies building low-income housing, said Herculano Alves, who helps oversee the equivalent of $84 billion as head of equity at Bradesco Asset Management in Sao Paulo. He recommends Belo Horizonte-based MRV Engenharia e Participacoes SA and PDG Realty SA Empreendimentos e Participacoes in Rio de Janeiro.

“Imagine if Brazil grows 4 or 5 percent in the next five years how well these companies will do and how great their results will be,” said Alves in an interview at his office in Sao Paulo last week.

Lula Plan

Lula unveiled a plan on March 24 in which families earning less than 1,395 reais a month will have to make only symbolic home payments of as little as 50 reais per month. Those making less than 2,790 reais are eligible for subsidies.

The program was part of an effort to spark growth after Brazil sank into its first recession since 2003. Policy makers have cut the benchmark interest rate five times this year to a record 8.75 percent to bolster Latin America’s biggest economy.

Homebuilders such as MRV, which raised 722.1 million reais in a stock offering last month, have proven that they have the ability to raise capital and the projects they spend this money on will take about two years to be sold in their entirety, said Duarte. This means most of the sales growth from money raised by homebuilders is yet to come, he said.

“The industry is emerging from distress and most of them have been capitalized,” said Duarte. “You’ll have a lot of projects maturing in the end of 2009 and the middle of 2010.”

To contact the reporter on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net