Brazil Smallcaps to Overtake Vale, Petrobras, Aberdeen Asserts

Fund managers at Aberdeen Asset Management and Bassini & Co. have missed much of this year's rally in Brazilian stocks because they sold shares of the largest companies and bought those 10 percent or less the size.

The Bovespa Index has surged 41 percent this year, led by Cia. Vale do Rio Doce and Petroleo Brasileiro SA, the two biggest by market value. They are worth more than $160 billion each, which would put them among the 12 largest members of the U.S. Standard & Poor's 500 Index. A Brazilian measure that excludes the 10 largest Bovespa members rose less than half as much.

The gap widened in the past three months as investors bought the best known companies to get back into emerging markets after global equities fell in August. Smaller businesses are now becoming bargains. The average price of the country's Second Tier Index compared with earnings has fallen 27 percent this year.

``After a while the money will start chasing the stocks that have underperformed,'' said Gustavo Pozzi, who helps manage $200 million at New York-based Bassini & Co., a hedge fund that sold its Vale holdings last month. ``Global investors have just been focusing on the most liquid stocks.''

Pozzi's purchases -- Fertilizantes Heringer SA, a fertilizer maker in Viana, and Sao Paulo-based real estate developer Sao Carlos Empreendimentos e Participacoes SA -- have underperformed the Bovespa since he bought them in early October. Vale, the world's biggest iron-ore producer, has 138 times the market value of those two companies combined.

Underperformer

The largest company in the Second Tier Index, Rio de Janeiro-based Centrais Eletricas Brasileiras SA, Brazil's state- controlled utility company, has a market value of $17.2 billion. It lagged behind the benchmark this year, rising 7.1 percent.

Fiona Morrison at Aberdeen, U.K.-based Aberdeen Asset Management, Christopher Palmer at Gartmore Investment Management and Urban Larson at F&C Investments in London, who together help manage $14 billion in emerging market equities, favor smaller companies. They can grow faster and benefit more from Brazil's record low interest rates, rising incomes, credit expansion and infrastructure spending, Palmer said by telephone from Gartmore's offices in London.

``Large stocks tend to run up on global thematic interest,'' said Palmer, who helps manage $3.5 billion. ``There's no real reason why they should outperform.''
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