Trip report: Brazil

Recent history in Brazil has seen a push towards identifying and weeding out the linkages between corporate and political networks that have intertwined over decades to breed a culture of impunity.

The ongoing investigations under Operation Lava Jato continue to uncover steadily the scale of the kickbacks and fraudulent nature of numerous corporate contracts across sectors, with federal prosecutors seeking to recover approximately USD12 billion from those implicated. These attempts at justice and reform, however, are still very much in their infancy in the long road to truly addressing a political and corporate nexus where systemic corruption has become endemic. This was the backdrop to a trip to the country in August 2019, where meetings with management teams repeatedly reiterated the crucial nature of investing alongside stewards who demonstrate competence, integrity and humility. 

As a team, we constantly try to challenge our conceptions about franchises and their stewards and as such, we spent some time during this trip with a few companies that we have not met in some years, revisiting our views about them. 

"If there is a lack of machines,  you can buy them; if there is no money, you can borrow some;  but people you can neither buy nor borrow, and motivated  people are the basis of success."
Eggon João da Silva, co-founder of WEG

A couple of the companies we met looked quite attractive on paper, with little debt on the balance sheet, growing fast, and with decent profit margins. However, further research into the founders of these businesses revealed quite a different story. We came across a regulated business whose founding family also owned a media and publishing entity in the North East of Brazil, where the links between political influence and business can sometimes be even more explicit than the rest of the country. Another example we came across was a company with dominant market share in their sector that has been found to be channel stuffing1 twice in the past five years, and whose founder-Chairman and the former CEO have both recently resigned as part of an investigation into bribery charges. 

These instances highlight the simple but essential fact that every founding family is not made equal, and emphasize the need to continue to be extremely rigorous where we look to invest clients’ capital. We continue to believe that management teams and founders that build franchises through political connections, those that do not treat all stakeholders appropriately, or demonstrate large risk-taking appetites might, at some point, disadvantage minority shareholders as well. 

In today’s world of casino capitalism2, having a patient steward at the helm gives companies the tangible advantage of being able to withstand short-term pressure from aggressive competitors funded by deep pockets. 

We came across this in Brazil during our meeting with Raia Drogasil, the leading drugstore chain in the country. The company was formed through the merger of Droga Raia and Drogasil, two strong brands who have a century of history and experience behind them, with the founding families continuing to own close to 32% of the company.3

Over the years, management have proved themselves time and again to be able to execute just the right balance between growth, via new store openings, and consistent profitability. Attracted to a profitable, consolidating industry, recent years saw a number of risk-happy competitors entering the market and rapidly opening new stores. However, with neither the history nor the experience of what running drugstores entails, the most exuberant of these new entrants are now heavily debt-laden, loss-making, closing stores, and looking for opportunities to exit the business. 

During two years of aggressive competition, the stewards at Raia demonstrated the ability to unwaveringly stick to a strategy that has served them well for a century, taking slower short-term growth in their market share rather than sacrificing their solid balance sheet to match the risk appetites of their competitors. They are now picking up the fruits of this long termism, with a range of consolidation opportunities to choose from as competitors depart and market shares gradually shift their way.

Another example where the patience and long-term vision of the stewards has been essential to the business is WEG. Set up in the 1960s, WEG, named after the initials of the founders – Werner Voigt, Eggon da Silva and Geraldo Werninghaus – produces electric motors. They are one of the few globally competitive industrial companies to come out of Brazil, challenging the likes of ABB, Siemens and Emerson across the world. 

The vision of these stewards to take an evolutionary approach to building out the business internationally has seen the company go from a predominantly domestic business in the 1980s to 34% of products being exported in the 2000s to 30% of products now being produced and sold abroad, with another 30% being exported from Brazil. Slow but steady vertical integration is one of their main advantages, allowing them to maintain both flexibility and a competitive cost structure by setting up manufacturing much closer to customers. Above all else, they have shown a consistent adherence to their mission of continuous and sustainable growth while maintaining simplicity. This continues to be seen in their core focus on a business they have proved themselves in over the decades, a conservative balance sheet maintained to take advantage of opportunities when competitors suffer and disciplined capital allocation. 

Having a family behind a company is no automatic guarantee of returns, and trying to find and back true family stewards is a key part of our jobs as active investors. We believe that these stewards provide long-term competitive advantages in the form of the patience to build sound businesses over decades, the resilience to overcome short-term setbacks and the institutional memories not to get carried away, both in times of elation or gloom. In a world where corporate time horizons continue to shrink, we remain on the lookout for these stewards managing durable franchises with structural growth tailwinds.

Download a PDF of this article >

Important information

This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document.

This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information. We do not accept any liability for any loss arising whether directly or indirectly from any use of this document.

References to “we” or “us” are references to Stewart Investors. Stewart Investors is a trading name of First Sentier Investors (UK) Funds Limited, First Sentier Investors International IM Limited and First Sentier Investors (Ireland) Limited. First Sentier Investors entities referred to in this document are part of First Sentier Investors, a member of MUFG, a global financial group. First Sentier Investors includes a number of entities in different jurisdictions. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies.

Hong Kong and Singapore

In Hong Kong, this document is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this document is issued by First Sentier Investors (Singapore) whose company registration number is 196900420D. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. Stewart Investors is a business name of First Sentier Investors (Hong Kong) Limited. Stewart Investors (registration number 53310114W) is a business division of First Sentier Investors (Singapore).


In Australia, this document is issued by First Sentier Investors (Australia) IM Limited AFSL 289017 ABN 89 114 194 311 (FSI AIM). Stewart Investors is a trading name of FSI AIM.

United Kingdom

This document is not a financial promotion. In the United Kingdom, this document is issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 143359). Registered office: Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB, number 2294743.

European Economic Area (“EEA”)

In the EEA, this document is issued by First Sentier Investors (Ireland) Limited which is authorised and regulated in Ireland by the Central Bank of Ireland (registered number C182306) in connection with the activity of receiving and transmitting orders. Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland, number 629188.

Middle East

In certain jurisdictions the distribution of this material may be restricted. The recipient is required to inform themselves about any such restrictions and observe them. By having requested this document and by not deleting this email and attachment, you warrant and represent that you qualify under any applicable financial promotion rules that may be applicable to you to receive and consider this document, failing which you should return and delete this e-mail and all attachments pertaining thereto. In the Middle East, this material is communicated by First Sentier Investors (Singapore).


If in doubt, you are recommended to consult a party licensed by the Capital Markets Authority (“CMA”) pursuant to Law No. 7/2010 and the Executive Regulations to give you the appropriate advice. Neither this document nor any of the information contained herein is intended to and shall not lead to the conclusion of any contract whatsoever within Kuwait.

UAE - Dubai International Financial Centre (DIFC)

Within the DIFC this material is directed solely at Professional Clients as defined by the DFSA’s COB Rulebook.


By having requested this document and / or by not deleting this email and attachment, you warrant and represent that you qualify under the exemptions contained in Article 2 of the Emirates Securities and Commodities Authority Board Resolution No 37 of 2012, as amended by decision No 13 of 2012 (the “Mutual Fund Regulations”). By receiving this material you acknowledge and confirm that you fall within one or more of the exemptions contained in Article 2 of the Mutual Fund Regulations.

United States of America

In the United States, this document is issued by First Sentier Investors International IM Limited, as SEC registered investment adviser. Stewart Investors is the trading name of First Sentier Investors International IM Limited. This material is solely for the attention of institutional, professional, qualified or sophisticated investors and distributors who qualify as qualified purchasers under the Investment Company Act of 1940 (hereafter the “1940 Act”), as accredited investors under Rule 501 of SEC Regulation D under the US Securities Act of 1933 (“1933 Act), and as qualified eligible persons as defined under CFTC Regulation 4.7. It is not to be distributed to the general public, private customers or retail investors.

Other jurisdictions

In other jurisdictions where this document may lawfully be issued, this document is issued by First Sentier Investors International IM Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 122512). Registered office 23 St. Andrew Square, Edinburgh, EH2 1BB number SC079063.


  1. Channel stuffing is a deceptive business practice used by a company to inflate its sales and earnings figures by deliberately sending retailers along its distribution channel more products than they are able to sell to the public.(Source: Investopedia) 

  2. An economic system driven by speculation rather than long-term investment.

  3. For illustrative purposes only. Any fund or stock mentioned in this presentation does not constitute any offer or inducement to enter into any investment activity nor is it a recommendation to purchase or sell any security. Companies mentioned herein may or may not form part of the holdings of Stewart Investors.