A flagging outlook for hard commodity prices and rising state intervention are forcing Brazilian investors to step up the search for financial assets overseas, weighing on the nation's equity market, executives at Itaú Asset Management said in an interview.

A decline in interest rates to record lows is forcing funds to build a more diverse base of financial instruments to help lure new clients, Paulo Corchaki, who as chief investment officer oversees 307 billion reais ($152 billion) in assets for São Paulo-based Itaú Asset, told Reuters.

Money managers at Brazil's No. 1 private-sector fund are looking elsewhere in Latin America and the United States for such instruments due to a dearth of assets in the local market. The launch of more sophisticated products and smarter stock-picking strategies will eventually stave off competition, he added.

"We are moving toward a framework in which our exposure to overseas assets will be greater by the day," Corchaki said. Clients "want more liquidity, nothing too exotic, and international assets offer them some of that."

Corchaki's remarks highlight the importance of broadening the supply of financial products in Brazil, which has for years suffered from a severe lack of options to help finance investment or provide investors with alternatives for savings.

At the same time, his comments reflect concerns that the country, which over the past decade lured hundreds of billions of dollars from investors as growth gained traction, is now losing luster because of its huge dependence on commodities and growing state meddling in the economy.

"From the standpoint of a money manager, we are experiencing a dearth of assets in Brazil," Corchaki said.

Mixed signals about the extent of the global economic recovery and the debt crisis in Europe may keep weighing on risk-taking, Corchaki and Gilberto Nagai, Itaú Asset's head of Brazil equity investments said. Brazilian investors tend to look to data and market performance in the United States and other key financial hubs as a gauge for global market sentiment.

INTERVENTION, CHINA

The benchmark Bovespa stock index .BVSP is up 4.3 percent this year, the third-best performing index in Latin America, after sinking 18 percent last year. Initial public offerings are stalled in Brazil as rising risk aversion and concerns that local assets are too expensive keep potential buyers at bay.

At some point, pension funds and other specialized investors will have to boost purchases of corporate debt, exchange-traded funds and shares in funds made up of asset-backed securities to beat the returns offered by the most traditional asset classes, Corchaki said.

Investors are demanding funds with little or no exposure to hard commodities - which make up the bulk of Brazil's flagship exports, said Nagai.

"Part of that is the view that China is morphing into a services-fueled economy, which in theory would lead to a marginal decline in their purchases of basic materials," Nagai noted. China is the biggest buyer of Brazilian iron ore and also a major client for the South American nation's beef, soybean and other agricultural commodities.

Governmental intervention is seen as increasing with the recent implementation of tax and credit relief that favored some sectors at the expense of others, Nagai added.

Another asset class in which Corchaki expects robust demand is ETFs, which represent less than 1 percent of average daily trading volume on the Sao Paulo Stock Exchange.

ETFs are typically structured to track stock indexes and groups of related stocks. The securities are listed on an exchange and traded like a stock.