Guide to Institutional Wealth

Guide to
Institutional
Wealth
In partnership with:
Brazil
Funds are taking
on more foreign risk
GUIDE TO
INSTITUTIONAL
WEALTH
PAGE 3
Mexico
Funds mandate
external managers
PAGE 5
Chile
Potential threats to a
regional role model
PAGE 7
Peru
Increasing
allocations abroad
PAGE 9
Shifting gear
Colombia
Changing regulations
PAGE 10
As the global recovery takes hold, institutional investors in Latin America are looking at new
ways of diversifying their assets. By Katie Llanos-Small
Managing the long-term savings of
609 million people is a delicate task —
particularly so in a region where a rapidly
expanding middle class is saving everlarger pots of cash.
Little wonder, then, that in Latin
America, the topic of investing pension
funds assets is fraught with political
tension.
The debates vary. In Chile they are
perhaps most stark: the new government
is set to change the system. Its highestprofile initiative so far is its proposal for
a state-backed pension administrator to
compete with private ones — a radical
idea to some in the country, which led the
region in implementing a private pension
system.
In Mexico, too, tension is notable.
Pension funds must invest at least 80% of
their assets in the local market, creating
concentration concerns for the regulator.
Despite pressure from the industry to
allow more investment offshore, there
is little political will to see local savings
invested abroad.
“What we have is a fast-growing
pension system that doesn’t find
enough alternatives to invest within the
Mexican financial system and has a cap
of 20% abroad. It is a problem,” says
Carlos Ramírez, head of the country’s
pensions regulator, Consar. “The political
environment hasn’t been the best to
promote a change to the 20% limit. It has a
lot of political opposition.”
It is a familiar trade-off for other
countries, too. Governments across the
region are striving to attract investment
into infrastructure projects. Local
institutional investors often provide a key
pillar of support for multi-billion dollar
initiatives, but concerns are mounting
over the prospect of losing such backing to
overseas investments.
Brazil, with its critical infrastructure
needs, is a prime example of this
challenge. The country’s pension funds
are happy to invest at home — and with
domestic treasuries yielding 12%, their
case for doing so is strong; they are also
diversifying locally into growing numbers
of corporate bonds and structured
instruments, including infrastructure.
Yet the high returns at home in a variety
of securities have compounded regulatory
reticence to ease the way for international
diversification — something that has
only been allowed since 2009. Even
now, Brazilian pension funds must club
together with others in a vehicle, to spread
international investing risk.
“We have to invest in a local fund
of which we can have up to 25% of the
assets, and that fund can invest overseas,”
says Maurício Marcellini, investments
director at Funcef, which has 52 billion
reais ($24bn) of assets across its plans, and
which is studying its options to invest up to
May/June 2014 l atinfina nce.com 1
Tough crowd
Yet a rough period in markets is catalyzing
a change in strategies. Consar’s Ramírez
describes 2013 as a difficult year for returns
and growth in Mexico.
“The system had been growing at a
double digit rate for the past five years
and last year it only grew around 7%. The
number is not catastrophic — but it wasn’t
the normal year we’ve seen in the past.”
In a bid to open the way for smarter
international allocations in the name of
diversification, Mexican pension funds
are beginning to use fund managers to
invest some of their portfolios outside
North America. Global equities are the
mandate of choice so far, with the Afores
happy to select fixed income allocations by
themselves closer to home.
Several of the largest pension fund
administrators have made a start towards
mandating third-party asset managers. The
process has taken some time, though, as the
new regulations have been smoothed out.
“With any new regulation, there were
quite a few areas that they need to look at,”
says Armando Senra, head of Latin America
and Iberia at BlackRock, pointing to the
finer details of mandating asset managers.
“How do you work with an international
custodian? How do you track the assets?
Even just the small things: how do they send
out the RFP, what are the things they need
to be asking for?”
Brazilians, meanwhile, are looking at
ways to replicate international risks closer
to home. Western Asset, for example, is
working on a fund that will use a derivative
contract to replicate the movements in
the S&P500. In tandem with Clearbridge,
another Legg Mason Group affiliate, the
firm is also launching a fund to invest in
Brazilian Depositary Receipts of US-listed
companies — which the regulator considers
international investments.
BlackRock launched a global equity
fund in Brazil last year, precisely to capture
interest from pension funds looking
to invest in a diversified international
portfolio.
“Although [local investors] still see the
long term opportunity in Brazil, I think that
they recognize that they need to diversify
their portfolio — because of size of their
portfolios and because of what is happening
in the global economy,” says Senra. “We
are at a point where Brazil is not doing
so well and you have developed markets
recovering. And for the first time — at least
from what I sense — there is real interest in
investing abroad.”
International allocations are particularly
important for Chilean and Peruvian funds.
In March this year, Chilean pension fund
managers had 41.3% of their assets invested
offshore, with just 30% of that in fixed
development is holding things up.
“Last year in November, in one of the
most important annual conferences in
Peru of private sector entrepreneurs, we
announced a challenge to the government,”
Valdivieso says. “We told them we’re going
to set up a $1 billion infrastructure trust
fund, in which we have the resources: now
we need the projects. That trust fund is a
very flexible vehicle. We can increase it in
size as required. But we need the projects –
and that’s what we’re waiting for.”
Steady hand
As Latin America’s
pension funds allocate
increasingly large shares of
their portfolios away from
plain vanilla, fixed-income
instruments, into private
equity, infrastructure,
equities, and international
assets, so too must their
management experience
increase.
It’s an issue that’s being
addressed across the
region. Peru’s regulator
is working on measures
to improve corporate
governance. In Brazil,
Funcef, one of the
country’s largest pension
managers, last year moved
a chunk of its assets to a
new vehicle with stricter
oversight and stronger
corporate governance.
And a bill working its
way through Mexico’s parliament is also
targeting investment oversight.
“This is a system in which we have
a very heterogeneous situation — from
one Afore to another you can find a very
different world,” says Consar’s Ramírez.
“Some have been moving fast, improving
their corporate governance, strengthening
their investment and risk committees,
strengthening the role of independent
counsellors, strengthening the role of the
auditors, so they’ve been moving in the
right direction. Other Afores have been
moving more slowly.
“The bill strengthens both the
investment and the risk committee, the
role of independent council and auditors,
and it brings two new committees — the
ethics and the compensation committee —
which is basically best practice in terms of
corporate governance.” LF
©istockphoto
0.5% of that internationally. “So that makes
it more complicated — but it’s prudent from
the point of view that Brazilian funds need
to be able to invest internationally, and
securely. It is a gradual process.”
WORKING CITY: Lima’s central Jirón de la
Unión street shows the growing wealth of
local populations in Latin America
income. And in Peru, some 37.4% of the
country’s 104 billion soles ($37 billion)
pension savings are invested offshore.
Increasingly, Peru’s pension
administrators are being given more
freedom to manage their own investments
— for example, scrapping a requirement
that they have each instrument signed off
by regulators.
Despite high allocations to international
investments, Peru’s funds are also keen to
invest more in local infrastructure, Luis
Valdivieso, chairman of Peru’s pension
fund association, tells LatinFinance. For
them, the slow progress of infrastructure
2 l atinfina nce.com - May/June 2014
InstitutionalWealthIntro.indd 2
5/6/14 6:18 PM
INSTITUTIONAL
WEALTH
BRAZIL
Brazilian investors are taking a more cautious approach to risk after
sharp swings in the Selic last year. But diversification is still slow to take hold.
By Katie Llanos-Small
Easy does it
TRICKY SITUATION: Brazil’s central bank
governor Alexandre Tombini has had to
stage an abrupt shift in policy rates
JEAN-PIERRE GIL
WESTERN ASSET
“CREDIT HAS REALLY
BEEN GROWING IN
THE PORTFOLIOS,
IN GENERAL, BOTH
INSTITUTIONAL AND
RETAIL, IN THE PAST
10 YEARS OR SO,
MARKEDLY IN THE
PAST FIVE YEARS”
pressing priority. Statistics from pension
fund association Abrapp show that 61% of
the system’s assets were in fixed income
instruments at the end of September — a
level at which it has hovered for several
years.
But funds are nevertheless diversifying
their investments — albeit gradually.
Funcef, for example, has kept its fixed
income allocation broadly stable, but is
looking at ways to spread risk in the rest
of its allocations. It has 12% of its portfolio
in structured instruments, including
infrastructure investments — a level that it
could rise to 15% in the coming years.
“We have indexed and non-indexed
equity strategies, and a strategy for
structured assets, whether they be
traditional instruments or infrastructure
investments,” Maurício Marcellini, Funcef’s
investment director, tells LatinFinance.
“What we’ve been doing last year and this
Source: AP
quick glance at the
upward shift in Brazilian interest rates last
year is enough to realize it was a painful
year for the country’s investors. After
hovering at 7.25% for five months, the Selic
rate began to climb steadily in April 2013.
Since then, it has risen 375 basis points —
and some analysts reckon it could go even
further, to hit 11.25% this year.
At the same time, the main stock
exchange index, the iBovespa, fell 15.5%
over the course of 2013. The two factors
conspired to hit fund returns sharply.
Brazil’s largest pension fund, Plano 1,
managed by Previ, returned 6.52% last
year — down from 12.62% the previous
year. Funcef, another of the country’s
largest pension managers, returned 6.98%,
well below its actuarial target of 5.5% over
inflation.
“Not only did volatility go up a lot,
especially after the start of the taper talk
by the Fed in May to June,” says Nicolas
Saad, portfolio manager at Western Asset
Management in São Paulo. “Also, the
performance of [Brazil’s fixed-income]
indices was very poor due to the overall
increase in interest rates: not only in the US
— but also the consequence of this for Brazil
was a very strong, very sharp increase in
interest rates.”
The result has been that pension
funds and insurance companies are
more carefully scrutinizing risks in their
portfolios. But with Brazil’s sovereign
January 2016 instrument paying 12%,
shifting to other investments is hardly a
©REUTERS
A
May/June 2014 - l atinfina nce.com 3
year is to improve diversification — moving
out of indexed equities, and increasing nonindexed and structured instruments.”
Further, Funcef’s board signed-off on its
first international allocation in 2013: up to
0.5% of the total portfolio can go overseas
over the next five years. Regulations forced
Brazil’s pension funds to invest locally until
2009.
Since then, they have been allowed
to allocate up to 10% of their portfolio
internationally, although they must do so
through a special purpose fund in which
they cannot own more than a quarter of the
assets.
Take-up has been slow, given the
regulatory requirements and the yields
available on shore. But asset managers are
already offering vehicles for international
investments.
Funcef has been examining the technical
aspects of the opportunities, and is set
to present an allocation proposal to the
executive committee, says Marcellini. The
allocation, likely to be to a global equity
fund, is expected to take place in the second
half of 2014, or early 2015, he says.
Meanwhile, pension managers are
also re-evaluating their strategies in fixed
income. Funcef has moved towards
inflation-linked government instruments
and away from paper tracking short-dated
rates.
At Western Asset, in contrast, Saad, who
looks after sovereign portfolios, has turned
to shorter-dated paper and instruments
Top ten
Brazil’s biggest pension funds
Fund
Manager
Fund size ($bn)
1
Plano 1
Previ
73.74
2
Sistema Petrobras
Petros
23.23
20.51
3
Reg/Replan
Funcef
4
PBS-A
Sistel
5.07
5
DB Plan
Valia
4.86
6
DB Plan
Real Grandeza
4.76
7
PBB
Fapes
3.67
8
PBB
Centrus
3.43
9
PSAP/Electropaulo
Funcesp
3.28
10
DC Plan
Itau
3.2
Source: Abrapp; fund sizes to end-Sep 2013
linked to the Selic rate, in light of the
uncertainties ahead.
Institutional accounts are also
diversifying into moderate and low-risk
corporate bonds in a bid to add alpha —
even if treasuries cover their inflation-plus
actuarial targets.
“Credit has really been growing in the
portfolios, in general, both institutional
and retail, in the past 10 years or so,
markedly in the past five years,” says
Jean-Pierre Gil, who looks after credit
investment portfolios at Western Asset.
“We have an increasing number of
issuers, even some frequent issuers,
something we didn’t have in the past —
names that come to market every year.” LF
MAURICIO MARCELLINI
FUNCEF
“LAST YEAR AND THIS
YEAR we’ve been
MOVING OUT OF
INDEXED EQUITIES,
AND INCREASING
NON-INDEXED
AND STRUCTURED
INSTRUMENTS”
Bonds have it
Brazilian pension funds’ investment allocations
64.8%
60.9%
59.8%
36.7%
33.3%
32.8%
30.7%
32.5%
30.1%
28%
4%
3.3%
2.5%
2.8%
Dec-2005
Dec-2006
2.6%
2.2%
Dec-2007
Source: Abrapp. Data to end-2013
4 l atinfina nce.com - May/June 2014
3.1%
2.6%
Dec-2008
3%
2.4%
Dec-2009
61.7%
61%
59.8%
59.3%
57%
2%
0.1%
3%
2.5%
Dec-2010
61%
28.6%
2.6%
Dec-2011
4.3%
4%
3.6%
2.3%
0.1%
29%
2.7%
0.1%
2.7%
2.5%
Dec-2012
2.7%
0.1%
Sep-2013
Fixed income
Structured instruments
Real estate
Equity
International investments
Loans policy holders
INSTITUTIONAL
WEALTH
MEXICO
Mexican pension funds have begun to hire third-party fund managers,
but politics is proving a barrier to further increasing their freedom to invest
abroad. By Katie Llanos-Small
Mandate for change
exican pension funds have had a tough year.
A year ago, Mexico’s pension funds were sitting on annual returns of between 5.32% and
15%. But by the end of March, the best performer had gained just 5.5% year-on-year. The
worst lost 4.54% over the same period.
The slump in returns is, in part, a consequence of a sharp shift in US Treasury rates, which
has rattled the performance of fixed income globally. It also reflects a bias towards bonds
in the Mexican pension system, albeit a tendency that is weakening. Mexico’s Afores had
51.6% of their investments in local government bonds at the end of March, and nearly 20% in
corporate debt.
The panorama is changing, slowly. Allocations to government bonds have fallen two
points over the past year. More dramatically, after a change in regulation in 2011, the Afores
are now beginning to make use of a new investment tool: third party mandates.
Banamex was the first out of the gate. Last August, it awarded a $400 million mandate
to Schroders to invest in global equities. This year, it announced a second mandate for the
same firm, to invest in European equities. Two other firms — JPMorgan Asset Management
and BlackRock — are also set to get allocations for the global equities mandate, while
Pioneer, Franklin Templeton, BlackRock and BNP Paribas will get further allocations for the
European mandate.
The asset managers bring expertise in foreign markets
and the possibility of benchmark-beating returns that the
Afores would struggle to capture themselves. “The idea of
the mandates is to diversify and gain access to markets and
investment strategies that in general we don’t use in Mexico,”
Rodrigo Blancas, head of mandates at Afore Banamex, tells
LatinFinance.
Mexican regulations changed to allow the Afores to use
external asset managers, though only for international
investments, in 2011. Banamex, for example, manages its
own holdings of US Treasuries.
While the regulator, Consar, is still defining the regulations
for third party bond mandates, Banamex is looking at
its options for a new mandate, potentially in currencies,
commodities or an alternative asset class. “We’re looking at
all the asset classes to see which would make most sense for
us to establish investment parameters,” said Blancas.
Already, they are finding the process is becoming more
streamlined.
UNDER DEBATE: Mexico’s legislators
are resisting higher limits to offshore
allocations in a new pensions law
Source: Cámara de Diputados
M
“The first mandate for Schroders took
a year and a half to implement,” Blancas
explains. “It was the first in Mexican
history. It was very complicated, especially
in the operational and legal parts. But the
second mandate was much faster — around
half a year. We’re gradually reducing the
time it takes.”
Other Mexican pension firms, including
Afore XXI Banorte and GNP Profuturo, are
also working on investment mandates,
LatinFinance understands.
Mexico’s largest pension manager, Afore
XXI Banorte, found strong interest to help
manage its assets internationally. Thirteen
asset managers pitched for its European
equities mandate, of which it has selected
BlackRock and Schroders to manage the
$900 million worth of investments. While
the mandate has been agreed, it is yet to be
funded.
“There is a lot of interest on the part of
the fund managers,” says Ignacio Saldaña,
May/June 2014 - l atinfina nce.com 5
chief investment officer at XXI-Banorte.
“They have been flexible, and they have
adapted as needed.”
XXI-Banorte uses its investment
diversification options as much as it can,
particularly as bond prices fall in response
to rising US Treasury yields, Saldaña says.
The fund takes a close interest in Mexico’s
infrastructure projects, for example. “The
worries about the fixed income market have
drawn us to participate more aggressively in
other asset classes,” he says.
In search of returns
A point of contention is the pension funds’
20% limit for offshore investments. Saldaña
says he’d like that cap raised to as much as
40%. It’s a concern that the regulator also
feels.
“We have a fast-growing pension system
that doesn’t find enough alternatives to
invest within the Mexican financial system
and has a cap of 20% abroad,” says Carlos
Ramírez, head of the pensions regulator,
Consar. While his organization — and the
pension funds themselves — would like a
higher cap on international investments,
there is political push-back.
“A lot of legislators believe that investing
the money of the Mexican workers abroad
is not a good idea,” Ramírez explains. “Here
at Consar we’re absolutely convinced that
we have to change that limit. Hopefully we’ll
be able to take a shot at that limit probably
by the end of next year — but it’s not going to
be in the short term.”
Mexico’s congress is debating a social
security bill that is set to overhaul more
than 50 aspects of the pensions law,
including corporate governance and
Branching out
Investment mandates agreed by Afores
Manager
Mandate type
International manager
Banamex
Global equities
Schroders ($400m), JPMorgan, BlackRock
( to be funded)
European equities
Schroders ($470m), Pioneer (close to being
funded), FranklinTempleton, BlackRock, BNP
Paribas (to be funded)
Profuturo
Approval for third-party mandates
XXI Banorte
European equities
BlackRock, Schroders ($900m)
Source: Consar, LatinFinance
fees. Ramírez says the legislation is
comprehensive, with the exception of
two major elements: increasing offshore
allocations and the amount that Mexican
workers must contribute.
“Regardless of the other 54 articles,
which are very important, if we don’t
increase the mandatory contribution
and we don’t change the 20% limit, we’re
basically condemning Mexican savers to
low pensions.
“Our job is to look after the MXN2 billion
that is the property of 50 million Mexicans.
At the end of the day, our main goal is to
increase their pensions. If we don’t touch
those two issues, we won’t be able to do
that.”
Still, the Afores have plenty of room to
allocate mandates, he says. In aggregate,
the pension funds are approaching the 20%
offshore limit, with 16.2% in international
stocks and 1.5% of their portfolios in bonds
outside Mexico. But much of that is selfinvested, meaning they could switch some
holdings for third party mandates.
“Mandates are very interesting vehicles
for the Afores to use on a much more
regular, deeper way in the years ahead,”
he says. “It has the advantage of providing
the Mexican workers, the savers, with the
possibility of having exposure to a broad
diversity of companies. At the end of the
day, what we’re looking for in the Mexican
pension system is broader diversification
and higher returns.” LF
CARLOS RAMIREZ
CONSAR
“WE HAVE A
FAST-GROWING
PENSION SYSTEM
THAT DOESN’T
FIND ENOUGH
ALTERNATIVES TO
INVEST IN MEXICO
AND A CAP OF 20%
ABROAD”
Global view
Allocations and returns of Mexico's largest pension funds
Investment allocations (%)
Manager
Fund
XXI Banorte
Basic 2
Returns (%)
Assets
($ bn)
Treasury
bills
Corporate
debt (local)
Equity
(local)
Equity
(int'l)
International
debt
1 year
5 yrs
(cumulative)
14.44
55.2
18.4
7.6
14.9
1.7
-0.76
8.55
XXI Banorte
Basic 3
12.69
51.5
17.8
9.1
17.2
1.8
-1.23
9.25
XXI Banorte
Basic 4
10.68
45.9
15.9
11.4
23.1
1.6
-1.52
10.06
11.41
Banamex
Basic 4
9.35
45.3
12.9
8.5
25.7
0.6
1.34
Banamex
Basic 3
8.78
47.7
16.3
7.3
19.8
0.9
0.95
9.85
SURA
Basic 3
8.53
47.3
19.9
6.9
16.7
1.9
2.18
10.88
Banamex
Basic 2
7.82
49.5
20.4
5.7
17
1
0.99
8.89
SURA
Basic 2
7.29
51.1
21
5.6
14.5
2.1
2.37
9.67
Profuturo GNP
Basic 3
6.84
41.9
24.9
6.1
19.6
2.9
0.5
9.59
Profuturo GNP
Basic 2
6.69
45
27.4
5.1
17
2.6
0.7
9
Source: Consar, data to March 2014
6 l atinfina nce.com - May/June 2014
INSTITUTIONAL
WEALTH
CHILE
Chilean pensions are a large and growing market for international
fund managers. But an industry that has served as a model for the rest of the
region is facing new risks. By Jason Mitchell
Changing the game
I
to allocate even more of their funds abroad.
Chile’s six private pension providers —
Modelo, Capital, Cuprum, Habitat, Planvital
and Provida — have a total of $158 billion
under
management, while Chile’s mutual funds
industry amounts to an additional $40
billion, though only $2 billion of this is
invested overseas, according to Investec.
Chilean managers are keen investors
in emerging markets. Around 52% of
their international equity investments are
allocated to emerging markets — mostly
Asia — according to Investec. Around 56%
of their international fixed income assets
are destined to high yield bonds and 33% to
emerging market bonds.
Active international fund managers such
as Investec like the Chilean market because
Source: Ministerio del Trabajo
nternational asset managers already see Chile as one of the
most important markets in Latin America for distribution of their
funds. Many firms — including Fidelity, Franklin Templeton, State
Street, Blackrock, Investec and Aberdeen — distribute their products
here, usually through a local partner.
The Chilean regulator allows private pension providers, known as
the AFPs, to invest up to 80% of their funds overseas. Today, 36% or
$55 billion is invested internationally, according to Investec. Increased
local stock market volatility over the past year, and the general illiquidity of Chile’s capital markets are among the factors pushing managers
STATE COMPETITOR: Chile’s new labor
minister Javiera Blanco has been mandated
to set up a government pensions provider
local managers are prepared to take more
risk than their counterparts in Peru or
Colombia.
Chilean funds are more ready to partner
up with discretionary managers and add
alpha in return for higher management
fees, while in Peru and Colombia, managers
tend to stick to less expensive, passive
international managers that try to mimic
a benchmark. However, there is debate in
Chile about the pros and cons of investing
in active funds.
“It’s worth paying the higher fees to
an active manager if they can prove their
ability to deliver alpha,” says Alejandro
Echegorri, chief financial officer for Latin
America at Principal Financial Group, the
Iowa-headquartered asset manager which
owns the Chilean AFP Cuprum. “That’s the
trade-off.”
Arturo Cifuentes, academic director
at the University of Chile’s Center of
Regulation and Macrofinance Stability
and president of the financial advisory
committee of Chile’s sovereign wealth
fund (with a total of $22.19 billion under
management) disagrees. “As someone
who has managed a hedge fund in the past,
there are certain situations in which active
management works,” he says.
“Yet, all the empirical evidence shows
that generally passive investments win
over time. I have been trying to press this
point with the new government in Chile,
but there is no national debate about this
subject yet.”
Most Chilean managers do not mandate
an international manager directly but tend
to invest through a pooled fund, which
works out cheaper for the local manager.
Asset managers — such as Investec,
Pimco, UBS, Vanguard, Aberdeen, and
Fidelity — use local fund management firms
to distribute their funds to the AFPs. The
pension providers invest in the funds and
the international asset managers pay the
local distributor a fee, usually based on
May/June 2014 - l atinfina nce.com 7
revenues, for the money that they raise
from the AFPs. Investec, for example,
uses Compass Group, a specialist Latin
American fund manager, to distribute its
funds in Chile on a non-exclusive basis.
“AFPs prefer to work with one local firm
only,” says Richard Garland, managing
director, Americas and Japan client group
at Investec. “That firm is able to filter out
the best funds. Otherwise, local asset
managers would get contacted by hundreds
of international firms every day soliciting
work.”
However, while Chile’s pensions industry
has served as a model for reform-minded
countries elsewhere in Latin America,
and while it has taken a lead in terms of
managing international asset managers,
some see new government policy risks
facing the industry.
Chile’s new moderately socialist
government is looking to raise taxes by
around 3% of GDP to finance education
and other social projects. According to
Habitat, the tax changes will lead to its
pension clients receiving $107 million a year
in diminished returns, while the pension
system as a whole will lose around $428
million.
“For those joining the system today, the
reforms will reduce their final pensions by
around 6%,” Cristian Rodríguez, the AFP’s
chief executive officer, said in April. “It’s
important that our members know what is
at stake if the reforms in their current form
are approved.”
Meanwhile, the Chilean government also
plans to introduce a state-backed pension
provider to compete with private pension
CRISTIAN RODRIGUEZ
HABITAT
“FOR THOSE JOINING
THE SYSTEM TODAY,
THE REFORMS WILL
REDUCE THEIR FINAL
PENSIONS BY AROUND
6%. IT’S IMPORTANT
THAT OUR MEMBERS
KNOW WHAT IS
AT STAKE IF THE
REFORMS IN THEIR
CURRENT FORM ARE
APPROVED”
administrators, in what could be the
biggest shake-up of the country’s pension
system for more than a decade.
Michelle Bachelet — who assumed office
as president on 11 March — has mandated
Javiera Blanco, the new labor minister,
to introduce legislation within the first
one hundred days of her administration
to set up the new provider, to compete
directly with the AFPs. During this period
a committee of national and international
advisers will advise on other changes to the
pension system.
The number of AFPs has more than
halved since the 1980s. Blanco has argued
the new provider should help to reduce the
commissions that private providers receive
through increased competition while
extending the system’s coverage to include
all Chileans.
She says the Chilean pension system,
when it was established in the 1980s,
initially set a target for the percentage of a
worker’s pre-retirement income that is paid
out by a pension program upon retirement,
at 70%. But in reality, the ratio is lower than
40% for men and lower still for women, she
adds.
“The state-backed AFP is planned to
improve the role of the state in pension
provision,” Blanco said recently. “The
main role of the state is to ensure that
there is pension coverage for the whole
population.”
The minister pointed to research
showing the system is efficient in terms of
the profitability of the AFPs but wanting in
terms of the performance of the pension
funds. However, economists have criticized
the move and say they cannot see how
a state-backed provider will improve
performance.
“I think a state-backed provider is a very
bad idea,” says Cifuentes at the University
of Chile.
“Management fees are already fairly low,
so I cannot see how competition from the
state provider can reduce them even more.
Pension funds returns have very little to
do with the funds’ management and much
more to do with the amount that someone
contributes while they are working. In fact,
returns have been pretty decent.” LF
Setting the pace
Chile’s biggest pension funds
Investment allocations (%)
Manager
Fund
Provida
C
Habitat
Capital
Annual returns (%)
Assets ($bn)
Treasury
bills (local)
Corporate
debt (local)
Bank debt
(local)
Equity
(local)
Equity (int'l)
Debt (int'l)
2013
10-year
average
19.5
12.63
8.55
8.07
14.22
25.09
15.66
4.37
8.35
C
15.8
15.27
11.11
13.51
13.26
25.28
12.86
4.84
8.69
C
12.8
11.68
9.66
11.87
13.8
25.95
15.83
4.32
8.36
Cuprum
C
10.9
13.39
8.31
13.31
13.08
25.24
14.32
5.41
8.80
Provida
D
8.3
20.31
9.74
11.46
6.11
13.5
13.78
5.26
4.40
Habitat
B
7.9
9.48
5.34
7.79
16.34
42.22
11.05
4.59
5.71
Cuprum
A
7.6
2.37
1.33
3.09
13.95
63.83
9.57
7.13
6.72
Habitat
A
7.6
1.83
2.3
3.51
14.04
63.95
8.19
7.02
6.82
Provida
B
7.3
7.29
4.27
3.88
16.98
42.04
15.11
3.87
5.33
Capital
A
6.5
2.32
1.37
2.26
14.32
64.92
11.93
6.51
6.73
Source: Superintendencia de Pensiones, allocations to end 2013
8 l atinfina nce.com - May/June 2014
INSTITUTIONAL
WEALTH
PERU
With a rapidly growing pension pool — and a laggard stock market —
Peru has started to grant funds more freedom over where and how they invest.
By Jason Mitchell
Outward bound
© iStockphoto
P
eru’s pension fund industry is
growing rapidly — so rapidly, in fact, that
the local capital markets are finding it hard
to keep up. Allowing the funds to increase
their allocations to different asset classes
and new geographies beyond Peru is a
natural response and in Peru, the regulators
have not been opposed to making those
changes.
Two years ago, AFPs were only allowed
to invest up to 20% of their allocation
overseas. But by July this year the limit will
stand at 40%. The limit can be raised to 50%
without appealing to Congress for a change
in the law.
The backdrop to this is a stock market
that dropped by 30% last year, making it
one of the worst performers in the world.
As a result — while Peruvians are saving
more for their retirement — some funds
have begun to show negative returns
(returns have been flat during the past five
years).
In an attempt to reverse that trend,
regulators are giving local asset managers
SPREADING THEIR WINGS: Peru’s
pensions funds are being given new
freedoms over where they invest
much more freedom over their asset
allocations, including increasing limits
on foreign investment. “The increase
in the limits is incredibly important for
the Peruvian pension system,” says José
More abroad
Top ten pension funds in Peru
Investment allocations (%)
Annual returns (%)
Assets
($m)
Treasury
bills
Bank
deposits
Bank debt
(local)
Corporate
debt
(local)
Equity (local)
Int'l investments
(mutual funds)
2013
7-year
average
10.6
13.7
13.6
2.9
3.1
28.7
30.4
-1.70
3.56
Type 2
7.8
15.3
9.4
1.8
6.1
19.1
24.3
-5.14
3.71
Type 2
7.0
13.1
19.3
2.3
4.5
23.9
25.9
-1.94
3.92
Integra
Type 3
2.8
4.3
6.7
0.4
0.9
42.7
44.0
-1.29
4.13
Prima
Type 3
2.7
4.4
3.7
0.6
2.5
33.9
39.3
-5.48
3.53
Integra
Type 1
1.9
15.0
25.6
7.6
8.2
9.2
12.0
-2.78
2.41
Profuturo
Type 3
1.7
3.3
10.9
1.2
1.0
41.6
41.4
0.24
4.34
Prima
Type 1
1.4
14.7
21.4
8.6
18.5
4.5
7.2
-2.67
2.93
Profuturo
Type 1
1.2
11.0
30.4
6.7
9.8
6.7
9.2
-2.55
2.24
Habitat
Type 2
0.05
14.3
17.1
10.5
6.7
34.3
34.3
-
-
Manager
Fund
Integra
Type 2
Prima
Profuturo
Source: Superintendencia de Banca, Seguros y AFP, allocations to April 2014
May/June 2014 - l atinfina nce.com 9
Antonio Roca, chief investment officer at
AFP Prima.
“AFPs have been investing overseas
really up to the limits, so I think we will
continue to see more and more Peruvian
money invested abroad. Organically, the
industry’s assets under management are
growing by around 9% a year but the local
capital markets are just too small for that
money to be deployed domestically. We
must look overseas.”
Roca says that initially the authorities
were reluctant to allow an increase in
international allocations because they
wanted the pension funds to invest in
domestic stock listings of new companies or
to buy bonds issued locally. However, there
have been relatively few IPOs and not many
opportunities to invest in local debt; even
the sovereign has not had to issue new debt
over the past year (the government fiscal
surplus stood at 0.7% of GDP last year).
But the authorities are giving the funds
other new freedoms, too. Today, the
mandatory pension system allows people
to invest in three types of fund: Fund 1,
conservative; Fund 2, moderate; and Fund
3, aggressive. The limits for each fund type
are set for equities: up to 10%, 45% and
80%, for funds 1, 2 and 3, respectively.
But under new rules passed in 2012,
a fourth fund type — Zero Fund — will be
created in a similar fashion to Fund 1 but
with no equities. Affiliates will be forced
into this fund when they turn 65. This fund
will coexist with the other three.
At the same time, under new rules — due
to be finalized this year — the alternatives
limit in Fund 3 will be raised to 20%. The
asset class will also constitute a separate
bucket from equities and will not form
part of the equities limit (today, under
Fund 3 rules, managers can invest up to
80% in equities and alternatives). In this
way, under the new rules, managers will
be able to invest up to 100% in equities and
alternatives.
The alternatives limit for Fund 2 will also
increase to 15%. The range of alternative
investments will be extended to real estate
and infrastructure funds, private equity,
and long- short hedge funds.
“Peru’s markets are just too illiquid,”
says Vicente Tuesta, chief investment
officer at the AFP Profuturo. “The limits for
international allocation really must move up
to Chilean levels eventually. Managers must
be allowed to be more flexible and access
Continued on page 47
10 l atinfina nce.com - May/June 2014
INSTITUTIONAL
WEALTH
COLOMBIA
Colombia’s pensions industry needs reform to
boost returns, and the government is keen to see change.
By Jason Mitchell
Pent-up reforms
A
ssets under management
in Colombia’s pension industry are
increasing at 12% annually — faster than in
Peru — yet returns have not kept up.
Last year, the most conservative funds
saw returns of 6.5%, while high-risk funds
showed a return of 5.18% and moderate-risk
funds gave back only 4.89%, according to
the regulator.
The government last year moved to
reform the system by publishing a new draft
pensions law — which would have increased
the target returns of private pension funds
and encouraged them to invest more
overseas — but the decree was delayed,
partly due to industry concerns amid an
emerging markets sell-off last May.
The government nevertheless remains
keen to reform the system. It established
a high level commission — which included
former Peruvian finance minister Luis
Carranza — to consider how to bolster the
reforms.
GERARDO HERNANDEZ
FINANCIAL SUPERINTENDENCY
“THE SYSTEM HAS
TO IMPROVE FUND
PERFORMANCE TO
ATTRACT MORE
AFFILIATES”
Colombia’s finance minister Mauricio
Cárdenas has said he is especially keen for
local AFPs to purchase more US dollars
to help ease upward pressure on the
Colombian peso. The regulator is also keen
to change the fund’s allocations and boost
their performance.
“If the pension funds undertake less
short-term trading and allocate more
assets to long-term investments that
would help to mitigate risk stemming
from financial markets volatility,” said
Gerardo Hernández, Colombia’s financial
superintendent. “The system has to
improve fund performance to attract more
affiliates.”
Today, Colombia has 18 million people
contributing to pension plans. This
includes six million to the public scheme
and 12 million to the private pension plans
(AFPs). A change in tax law in 2012 has
resulted in more Colombians moving to
the formal labor market. This, in turn, has
led to a dramatic increase in the number of
affiliates.
The AFP industry in Colombia is
becoming more concentrated following
the merger of Porvenir with the AFP BBVA
Horizonte in December (Grupo Aval, which
owns Porvenir, purchased Horizonte from
the Spanish bank BBVA in 2012). Porvenir
took on 3.5 million additional clients
and now has 52% of the private pensions
market. It says it is seeing an 18% annual rise
in the number of its affiliates.
Asset managers in Colombia have $96
billion under management, according to
Investec. Of this sum, $73 billion belongs
to AFPs. The private pensions are able to
invest between 40% and 70% overseas
depending on the fund. Today, they invest
$11 billion abroad ($7 billion of which is
invested through mutual funds) but that
is expected to rise by at least $1 billion this
year.
Peru
Continued from page 46
Source: Ministerio de Hacienda y Crédito Público
The private pensions are split into three
fund types: conservative, moderate and
high risk. Some 95% of affiliates contribute
to the moderate fund. The AFPs mostly
invest in local equities and domestic
government bonds, which were badly
battered during the emerging markets selloff last year.
As things stand, the rules do not allow
Colombian pension funds to invest in any
fixed income securities below investment
grade. However, emerging market highyield bonds are among the most profitable
and AFPs are pushing the government to
make the rules more flexible.
“Overseas investments are managed
through both passive and active investment
strategies,” says Miguel Largacha Martínez,
president of AFP Porvenir. “The main
foreign asset class is international equities,
not only in developed markets but also
in emerging markets. We invest through
exchange traded funds and also use active
managers who seek alpha generation
through a bottom-up investment process.”
Felipe Peláez, co-head of asset
management at BTG Pactual’s Colombia
unit, agrees that the main driver of
greater allocation abroad will be new
regulation. “There will definitely be greater
opportunities for international fund
managers,” he says. “Institutional investors
execute most of the investment strategies
overseas through funds. Security selection
does not play a role for investment overseas;
they want to select good investment
managers for this type of investment.”
Meanwhile, AFPs are also expected to
become one of the biggest investors in
ADVOCATING CHANGE: Colombian
finance minister Mauricio Cárdenas
wants funds to invest more abroad
infrastructure projects in Colombia. The
finance ministry introduced a new type
of infrastructure bond last year. And,
although last year AFPs only invested 0.6%
of their assets directly in infrastructure
projects, the government expects that AFPs
will be the largest investors in the roughly
$30 billion of infrastructure bonds it hopes
to issue over the next six years. LF
liquidity in every form. If that happens,
pension returns should start to go up.
Peruvian AFPs have total assets
under management of around $38
billion, according to Apoyo & Asociados
Internacionales, a Lima-based credit ratings
agency. Mutual funds amount to around $6
billion and insurance companies have $9
billion under management.
One further growth in the private
pension provision in Peru has been via the
arrival of a new AFP, Habitat, which is part
of the Chilean group by the same name.
Habitat, the second biggest in Chile, won a
bidding process to set up a new AFP in Peru
in December 2012.
As the industry sees new entrants and
the funds enjoy more inflows, Peru’s
pension regulator also approved measures
to remove the obligation that it must
approve any investment in bonds, shares,
some structured products and short-dated
currency forwards.
“It passes on responsibility to the fund
managers to declare the eligibility of
the instruments they are going to use in
managing their portfolio — all the plain
vanilla instruments are going to be the
direct responsibility of the managers,” Luis
Valdivieso, chairman of Peru’s pension fund
association, told LatinFinance at the time of
the change.
“That provides more flexibility; it allows
a more speedy response to changes in
market conditions.” LF
Diversifying assets
Colombian pension fund allocations
Investment allocations (%)
Manager
Fund
Assets
($bn)
Treasury
bills
Bank debt
(local)
Bank
deposits
Corporate
debt (local)
Equity
(local)
Bank debt
(int'l)
Corporate
debt (int'l)
Equity
(int'l)
Porvenir
Moderate
26.30
34.7%
2.1%
4.0%
1.9%
28.4%
0.0%
0.0%
14.5%
Protección
Moderate
21.07
35.2%
2.3%
3.3%
2.8%
30.3%
1.3%
0.1%
14.7%
Colfondos
Moderate
7.96
33.6%
2.2%
3.4%
1.0%
31.3%
0.9%
0.5%
17.2%
Skandia
Moderate
(pensionar)
2.84
33.1%
2.0%
0.9%
2.3%
31.0%
0.0%
1.0%
17.6%
Porvenir
Conservative
2.20
48.1%
5.5%
17.0%
3.6%
7.3%
0.0%
0.1%
10.2%
Protección
Conservative
1.52
47.6%
4.3%
18.6%
3.5%
10.4%
0.1%
0.2%
8.7%
Colfondos
Conservative
0.78
48.7%
7.9%
12.4%
1.8%
9.3%
1.5%
0.7%
9.75%
Protección
High risk
0.59
24.08%
0.59%
2.56%
0.20%
33.40%
0.11%
0.36%
31.7%
Skandia
Conservative
0.29
43.1%
12.9%
12.3%
2.9%
10.1%
1.1%
0.4%
8.7%
Skandia
High risk
0.10
25.8%
1.4%
0.7%
1.3%
34.3%
0.8%
2.3%
30.4%
Source: Superintendencia Financiera de Colombia; data to February 2014
May/June 2014 - l atinfina nce.com 11
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