Postcard From Brazil

City Different Investments is known for finding compelling opportunities that may lie off the beaten path of Wall Street. Last week we caught up with our intrepid portfolio manager Vin Walden, on the ground in Brazil, to discuss an idiosyncratic investment idea he sees there. 

Interview conducted 8/9/24

Hi Vin! What brought you to Brazil this time? 

Brazil is a fantastic country to visit—the natural beauty here is just amazing, including of course the jungles, the beaches, and many terrific city parks. In terms of the economy, it is big and diversified; there are over 200 million Brazilians, and the population skews younger than in wealthy countries. There are pockets of very interesting growth in the economy, with relatively low adoption so far of services—say, financial services or travel services—as well as technology. So that’s what piques our interest from an investment standpoint. 

And of course, this week is the Paris Summer Olympics, and Brazilians take their sports VERY seriously! It’s been a blast to watch the events on huge TVs alongside passionate Brazilian sports fans. 

Ok, but how does this relate to City Different global equity strategies? We don’t even invest much in emerging markets.  

You’re right, our exposure to emerging markets will always be limited. However, right now we think we can take advantage of an idiosyncratic, high-quality growth opportunity here. The company is Mercado Libre, known by its ticker symbol in New York, “MELI.”  The hypothesis is: MELI is an attractive investment, and very different from anything else in our portfolio. 

Tell us a little about Mercado Libre and what impact they have on the economy. 

Mercado Libre started 25 years ago as an online marketplace—think of eBay (which was actually a big early investor in the company). Today, MELI is the leading e-commerce and fintech company across Latin America, with their largest markets being Brazil and Mexico. We can think of MELI as sort of Latin America’s Amazon.com—over the years they have added many interwoven services to the e-commerce platform, in areas including payments, credit, advertising, and a very impressive logistics and delivery capability.   

We believe MELI’s services are very compelling—MELI allows millions of Latin Americans to shop for tens of millions of items at their fingertips 24/7 and receive their goods within days. Remember that many Latin American countries never had a sophisticated brick & mortar retail shopping infrastructure.  Suffice it to say, MELI’s huge selection, convenience, and low prices all resonate with consumers.

Note that while Amazon itself is an important competitor to Mercado Libre, MELI had a big headstart and has consistently gained market share over time in Latam. We expect these companies to continue competing vigorously.

How did you come across Mercado Libre, and what drew you to it?  

The bad news is...  I’ve watched MELI grow for about 15 years, but I didn’t invest early enough! [laughs] The good news is, I finally acknowledged my error, and—better late than never—we bought MELI in our City Different portfolios in 2022.    

MELI shares were under pressure in 2022 due to the post-pandemic hangover that e-commerce companies were suffering. But, we believe Mercado Libre is the kind of business that gets stronger over time. Every year, they have a broader product selection, a bit more scale, they can lower prices, and they get better at logistics. So the business really has legs. 

What stage of the business life cycle are they in? 

So when Mercado Libre came public in 2007, we started watching... and what we observed was, MELI was able to gain market share while riding the tailwind of a fast-growing industry. Even today, the e-commerce penetration in Latam is less than 15% and we expect the market to grow at least 10% a year for many more years. If you layer on the reality that MELI is a consistent share gainer and increasing its presence in new categories, including fintech and advertising...  well, it all looks promising to me. 

So what kind of research are you doing down there?  

For an investment like this, it's helpful to have an on-the-ground appreciation for the competitive landscape, the challenges, opportunities, etc. And of course, we want to know how MELI is executing and what customers have to say. At this point, I have talked to dozens of Brazilian consumers about their experience with Mercado Libre. 

Oh interesting—and what do consumers have to say about  Mercado Libre? 

They love it! Or I should say, the actual customers seem very satisfied with the service. One busy mom told me “I could not live without Mercado Libre!” MELI’s low prices are often cited as a selling point, but that’s just one point of many I think. However, I did meet many people who only use it infrequently, or not at all. So far, those consumers prefer to spend more time and more money shopping through other channels. 

I should add that I am also a customer myself. I recently bought three items—a backpack, headphones, and a pair of shoes—on MELI. All three items were delivered seamlessly to my door in—get this—less than 24 hours. That kind of logistics capability in the congested cities of Latin America is something special, in my view. 

Yes that does sound impressive.  Changing the subject a bit: What is one must-see attraction you recommend to someone visiting Brazil? 

It’s hard to pick just one...  but I’ll go with Iguazu Falls, on the Argentine border.  If you like natural wonders, the Iguazu waterfalls and the surrounding parks are just breathtaking. 

And what’s your favorite thing to eat there? 

Let’s keep it simple: raw coconut.  It’s cheap, it’s found everywhere, and it’s delicious. But seriously—we need to do a separate interview about the amazing Brazilian food!    

Last question: what’s next for your trip? 

The next thing I’m focused on is tomorrow’s women’s soccer match, for the Olympic gold medal, featuring... wait for it...  Brazil versus the United States! It’s gonna be great. 

IMPORTANT DISCLOSURES

This post is for informational purposes only and should not be viewed as a recommendation to buy or sell any security or personalized investment advice. Do not assume any securities identified were or will be profitable. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities and should not be relied on as financial advice. The information and statistics contained herein have been obtained from sources we believe to be reliable but cannot be guaranteed.  Any projections, market outlooks, or estimates are forward-looking statements and are based upon certain assumptions. Other events that were not taken into account may occur and may significantly affect the returns or performance of these investments.  Any projections, outlooks, or assumptions are subject to change without notice, and should not be construed to be indicative of the actual events which will occur. Past performance is not indicative of future results. There can be no guarantee that any strategy will be successful. All investing involves risk, including the potential loss of principal. To the extent that a reader has any questions regarding the applicability above to his/her individual situation or any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing.

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