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Interview with Florian Bartunek and Eduardo Munemori of Constellation Asset Management

Constellation Asset Management manages the Constellation Fund, an equity long/short fund that invests primarily in Latin America. The fund trades the following strategies: relative value, pair trading, merger arbitrage, capital structure arbitrage and convertible bond arbitrage. The fund does not invest heavily in the fixed income markets.

The founding partners and co-portfolio managers, Florian Bartunek and Eduardo Munemori, are based in Sao Paulo, Brazil.

Prior to the founding of Constellation in 2002, Florian was partner and managing director of Banco Pactual where he was in charge of all equity portfolios and funds. He was the manager of the Andromeda Fund, the Infinity Fund and an exclusive portfolio for the Soros Fund. He was also the founding partner of Utor and a director of Anbid.

Eduardo was previously the head of telecommunications research at Banco Pactual and head of Latin America telecommunications research at Banco Santander and a portfolio manager at Utor.

The Constellation Fund was launched in December 2002 and has generated 43.4% since inception and an annualised return of 20.9%. The company currently manages US$63 million in assets, of which US$45 million is in the Constellation Fund.

  1. Which of the five strategies does the fund focus on and where are most of the returns made?

    Eduardo: Constellation is a multi-strategy fund. However the bulk of its returns come from relative value type of arbitrages, where longs and shorts do not necessarily belong to the same sectors. On a portfolio level, we reduce the volatility derived from this strategy by combining low correlated trades. In Brazil, it is more difficult to generate alpha on pair trades, due to the combination of: (1) the high correlation among stocks within the same sector and; (2) the high carry cost of the local positions, mainly due to the cost of FX hedge. We place risk arb trades only when we know the top management/controller of the target/acquirer, which yields some kind of advantage.

  2. What are the keys to your investment approach in these strategies?

    Eduardo: Our investment decision is mainly bottom up, based on our in-depth fundamental research and industry sector knowledge. We also focus on events ranging from spin-offs, mergers, etc, to softer catalysts like earnings surprise. We believe our competitive advantage also come from our extensive network in the universe of Brazilian and Latin American companies, which eases our task of assessing the quality of the business and the management's ability to create shareholders' value.

  3. How much directional exposure does the fund have?

    Eduardo: Directional exposure is not a significant contributor to our performance, being normally around 15% net long/short. The cross border risk of the fund is also minimised by the use of local financing, with our offshore money market investments used as collateral. The fund is also fully hedged against FX fluctuations most of the time.

  4. How effectively can you short borrow in Latin America; and do you borrow locally or do you need to use depository receipts?

    Eduardo: Nowadays it is easy to sell short in both local and ADRs markets. Lately, with the decrease in local interest rates, pension funds have been shifting their allocations more towards stocks. Since their actuarial rate is around local inflation of 6% yearly, lending stocks at 5%+ is not a bad thing and becomes almost mandatory.  

  5. How much of the fund is outside of Brazil and how successful have you been in making money outside Brazil since the fund's inception?

    Eduardo: The fund is an offshore fund and is US dollar denominated. Having come from the sell side covering Latin America, our analysts have an extensive knowledge not only on Brazil but also on Mexico and Argentina. Since the fund's inception, approximately 15% of our performance came from outside Brazil.

  6. How did you make your returns in August and September when the fund was up over 7% for those months?

    Eduardo: On the long side, the top alpha contributors were consumer, petrochemical and oil companies. On the short side, the main contributors were companies related to telecommunications service (wireline and wireless) and electric utility sectors. The fund remained on average 7% net long (adjusted by the beta).

  7. What are your views on the economic situation in Brazil, and what does this mean for the equity markets?

    Florian: We see a very positive economic backdrop for the Brazilian economy in 2005. The main positives are the resumption of growth and the lower debt to GDP ratios. It is also important to note that Brazil enjoys a stable political system, a sound fiscal policy and the currency floats freely. In a growth scenario, companies, and therefore equities should benefit the most.

  8. Most investors currently have Latin American exposure through the fixed income markets, why should they allocate to the region's equity markets?

    Florian: After years of sluggish growth, most Latin American economies are starting to grow again, positively impacting companies' profitability next year. Therefore equities should benefit strongly from it. It is also important to note that companies are becoming much more efficient and shareholder oriented, and valuations are still very attractive. On the other hand, fixed income assets still offer attractive yields, but at current price levels, provide little upside. We consider them a carry trade.

  9. What are your views on the IPO market and M&A activity in Brazil for 2005?

    Eduardo: The IPO market may continue very strongly. Almost all the companies which became public adhered to the new standards of corporate governance and had a successful debut on the stock market. This attracted foreign and long-term investors, yielding a lower correlation between the local market and these stocks, which also trade at a richer valuation when compared to their local peers/local average. The M&A activity may pick up, boosted by the increase in exposure of international companies to Brazil and also by the creation of some world-class companies (through the merger of local companies).

  10. Where are the macroeconomic risks in Latin America for 2005?

    Florian: We believe that, in 2005, the main risk for Latin American markets is an increase in global risk aversion that could negatively influence flows to the region. Latin American economies are still dependent on international flows which, so far, have been very positive. Domestically we don't see major risks in the short run. Economic policies have been sound and most countries are enjoying political stability. Brazil should stand out as the economy with the highest growth rate and cheapest valuations.

  11. Can you generally explain what your current investment base looks like?

    Eduardo: Our current investor base is well distributed among private banks, high net worth investors and institutional investors/fund of hedge funds (some based in US). Our team has also invested a significant part of their wealth in the fund.

  12. What are your marketing trip plans for the near future?

    Eduardo: We are preparing for a road show in Europe/US in the first quarter of 2005.

Contact Details
Florian Bartunek, Eduardo Munemori
Constellation Asset Management
+55 11 3049 8059, +55 11 3049 8060,