UPDATE 2-Brazil funds need to adapt to low rates, Mendes says

Tue May 14, 2013 3:10pm EDT

* Funds face low rates, declining government debt

* Mendes affirms macroeconomic policy framework

* Declines to comment on monetary policy trends

SAO PAULO, May 14 (Reuters) - Brazilian asset managers must adapt to low interest rates and a declining government debt burden, central bank director Aldo Mendes said on Tuesday in the latest call for financial markets to increase funding for fresh investment.

The country's fund managers, who for years made hefty profits mostly by refinancing government debt, need to embrace "a cultural change" that breaks with investing practices inherited from a time when the country struggled with high inflation rates, Mendes said at an industry event in São Paulo.

Mendes affirmed that "this new moment" was taking place under a macroeconomic policy framework supported by a floating exchange rate, a mandate to keep inflation under control and responsible government spending practices. For the past two years, some investors have said President Dilma Rousseff's administration has sought to abandon that model to pursue faster economic growth.

The use of benchmark indicators that better reflect the present moment of the economy and the future are needed, as well as implementing risk and return measures in Brazil that are more comparable to those globally, Mendes, the central bank's head of monetary policy, said.

"The biggest challenge for the industry going forward is embracing a cultural change," Mendes said. "It is necessary to move toward new structural patterns and try to break from practices that date back to the inflationary periods of the past."

Brazil's asset management sector is the world's sixth-largest, with more than $1.2 trillion in assets under management. A decline in domestic borrowing costs to a record low last year as a result of slower inflation is forcing money managers to build a more diverse base of financial instruments to help lure new clients and propel returns.

"In the current moment, money managers are faced with the challenge presented by the combination of return, financial risk and liquidity that represents the newfound structural conditions" of the country, Mendes said.

Mendes declined to comment on monetary policy trends when sought on the sidelines of the event sponsored by Anbima, the group representing investment banks and asset management firms in Brazil.