Chile's regulator has made it easier for the country to invest its US$114bn in pension assets outside its home country. Rodrigo Amaral reports
Chilean pension schemes have been increasing their investments in other countries as they try to maximise returns and diversify their portfolio to spread the risks. Changes implemented gradually since 2007 have raised the maximum level of investments Chilean pension funds can have outside the country.
The limit was raised to 60% of total assets in mid-2009, from 30% in 2007. The new rules have created a real opportunity that pension funds have been only too happy to exploit. By the end of 2009, they had 43.7% of their assets invested outside Chile, compared to 24.1% in February of the same year. And there is scope to keep sending more money abroad, as investments remain well below the legal limit. Meanwhile, the national pension supervisor, Superintendencia de Pensiones, has moved to make hedging currency exposure easier than it had been.
Chile has one of the most advanced private pension systems in the world and scheme managers are actively looking for ways to make their assets work harder. With 97% of the country’s employees making contributions, and a good chunk of self-employed professionals too, pension funds have plenty of money invest.
Chilean schemes are not allowed to invest directly in hedge funds and other alternative assets
Pension funds represent a very important part of the Chilean economy, managing assets of US$114bn by the end of February. That’s equivalent to about 70% of the country’s GDP. The sheer volume of their assets means that pension funds account for a large part of Chile’s investment needs.
Opportunity for gains
“Financial vehicles negotiated outside our country offer not only opportunities to make gains, but they also have an important effect on diversification,” said Eduardo Steffens Vidal, the chief investment officer of AFP Cuprum, one of Chile’s major pension schemes.
By sending more money than ever abroad, Chilean pension funds have already invested $51.8bn in financial products provided by international groups, according to Superintendencia de Pensiones. This eagerness to embrace global markets is especially strong when it comes to investing in the so-called “Fondos A”, the riskier of the five kinds of funds pension funds can invest in, which are subject to less stringent investment restrictions. They can have up to 80% of their assets invested in equities, and 70% of all the money invested in Fondos A has already gone abroad.
This trend has fuelled the interest of asset managers from around the world who have been focusing their attention on this South American country as they look to expand their footprints. While large amounts of money are currently being invested overseas, there is still some way to go before Chilean pension funds reach the legal limits. There was a further $19.15bn that could have been invested in international vehicles last December, according to Superitentencia de Pensiones’ data.
Volumes have been picking up quickly. Amid the gloom of 2008, only $2.5bn was transferred abroad for investment purposes; the amount reached $15.2bn last year, strong evidence of the increasing appetite of managers to try their luck in new pastures.
“There are many groups already providing a wide range of products to Chilean funds, as they have considerable amounts of money to invest,” said Rodrigo Acuña, a partner at Primamerica, a Santiago-based consultancy.
The largest beneficiary so far has been BlackRock, which accounted for 11.33% of the assets Chilean pension funds invested overseas by the end of 2009. Other winners included Fidelity (8.81%), Schroders (7.3%), Vanguard (6.57%) and JP Morgan Chase (6.02%). Superintendencia de Pensiones estimated that about 50 companies currently provide international investment services for Chilean pension funds, but only eight of them account for more than half the market.
The data compiled by the supervisor disclosed that schemes are mostly attracted by equity funds, with 59.5% of all the assets invested abroad pouring into these investments. Fixed income funds, mainly exposed to corporate high yield bonds and emerging market sovereigns, come next with about 24%. ETFs come third with 12.3%.
In terms of geographical distribution, Chilean funds have displayed an increasing appetite for emerging markets vehicles. The United States remains the most popular destination of investments with 23.2% of the total, but its share has been gradually shrinking, while those of Brazil (14.6%) and China (7.8%) are on the rise. Investment has been spread around too, as pensions funds have investments in more than 60 different countries.
The asset classes that are still missing are alternative investments like hedge funds and private equity. “Chilean schemes are not allowed to invest directly in hedge funds and other alternative assets,” said Acuña.
Only instruments specifically mentioned in the Chilean law or approved by the Central Bank and the industry supervisor can be picked up by pension funds. Even if alternative investments were an option, however, Steffens said pension funds would not be particularly drawn to such products. “We believe pension funds already are widely diversified portfolios, and that the marginal gain delivered by those instruments is low, whilst to have access to them implies a very high cost,” he said.
Funds managed by the Administradoras de Fondos de Pensiones (or AFP, as Chile’s pension fund managers are known) suffered heavy losses in 2008, following the trend observed in other parts of the world. But Steffens noted that investments policies drafted before the crisis hit had a long term horizon and their basic principles had remained intact.
But the CIO of AFP Cuprum acknowledges that some important lessons have been learned.
“It showed how important it is to have more liquidity available in portfolios during times of high volatility,” Steffens pointed out. “The crisis not only generated large flows of money in and out of the funds, but also big price changes that made it necessary to perform transactions with the goal of keeping the performance of the funds within the range established by our investment policy.”
Steffens said that for all the turmoil that has taken place since 2007, Chilean pension funds have already recovered to the levels they had before the financial crisis. Last year’s rally was a major factor to offset the losses of 2008. Superintendencia de Pensiones estimated that the riskier funds that AFPs can manage, Fondos A gained 65% on average last year in dollar terms. The strong performance followed a 51.8% drop in 2008 and a 28.7% growth the year before.
The least risky funds, Fondos E, which focus on fixed income and have a mere 3.6% of their assets invested out of Chile, gained only 9.8% last year in dollar terms, and actually lost 9% of their value in pesos. Fondos E have been, however, the best performers in the past three years, with returns of 27.77%, against 5.09%% of their riskier peers.
AFP Cuprum’s five funds posted returns of up to 45.59%, in the local currency, the peso, in the past five years. The worst performing fund, which cannot bet in equities, saw assets increase by 5.52% in the period.
As managers of huge amounts of money in a market where the financial system has a limited scope, AFPs are set to carry on looking outside Chile to meet their actuarial targets; not least because the supervisor has taken further measures to make it easier and less risky to invest abroad.
In January, Superintendencia de Pensiones changed the law to allow pension funds to have more capabilities to hedge currency risk. The measure was seen as a necessity especially considering AFP’s growing interest in emerging markets vehicles, in whose currencies about 22% of their assets are denominated, said the supervisor.
Superintendencia gave pension funds more flexibility to hedge their risks by authorising them to use a wider range of currencies to do it. For example, before the change, if investors had assets in the Brazilian real, they could only have derivative contracts in real to hedge currency risk. Now they can use other currencies too, which is expected to expand their options to sign currency hedging contracts. The new resolution also expanded the deadline to settle deficits in derivative contracts, from five or 10 days (depending on the type of contract) to 90 days.
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