1. Latin America Pension Funds & Their Investment Portfolios A Presentation to the Chartered Alternative Investment Analyst Canada Chapter
September 2013
Confidential – Not for release without prior written permission from the authors
Copyright all rights reserved to Campollo Consulting LLC & Wall’s Street Advisor Services LLC. Nothing in this presentation or the service it describes should be considered either legal or investment advice.
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2. Latin America Pension Funds & Their Investment Portfolios
Our Purpose today is to provide you with:
An overview of the funded pension systems of Latin America;
Features of their investment portfolios;
A look at what the near future may hold for these;
With a focus on the five ‘Major Markets’.
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3. 400+ pension funds’ investment portfolios
The presentation draws from our Guide to Latin America Pension Funds 2013TM service & related research
11 countries - all 10 with mandatory funded contribution plans + Brazil
400+ pension funds’ investment portfolios
$800+ bn. in assets (as of end-2012)
Country reports on investment portfolio regulations and industry developments
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4. LatAm Pension Funds’ Potential
Latin America is quickly becoming a “strategic marketplace for money management ” – State Street Bank (Nov. 2011) …. WHY?
Have scale - Pension Funds’ assets at end-2012 nearly $810 bn.
Steady high growth - demographics (generally young populations) & national policies (promoting retirement funding) underlay growth prospects – AuM to grow over the next 5 years at about 15% p.a.
Opportunities for new financial products and services - surging contributions’ growth, prudential need for asset diversification, and regulators’ recognition of the virtues of diversification, in both domestic & foreign assets, are opening opportunities.
Pension Funds need more investment ‘space’ - Pensions’ investments in local stocks are approaching their ‘single issuer exposure limits’ – they are out-growing their home markets.
Regulators set limits that can be made for each asset class for each pension type (conservative, balanced, growth) based on risk and liquidity factors. There are limits at the issuers level, instrument level or a maximum for all combined Pension Funds.
Opportunities for foreign managers:
-To find competitors and possible partners for product creation
-To quickly market their investment strategies and products within regulatory guidelines
Question for Peter:
Is the last part of the last bullet point true?
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5. Campollo Consulting WSAS
LatAm Pension Funds’ Growth Potential - Relatively low Assets-to-GDP levels suggest great potential to grow - Double-digit compound annual growth rates projected to continue
All markets in LAC except Chile have Pensions Assets/GDP ratios below OECD average of 33% which means that there is plenty of room to grow in their development. It seems that although they are small with they are growing faster than developed markets. Assets/GDP Chi 63%, Mex 12%, Col 21%, Peru 19%, Bra 15%
CAGR :
Col 19%; Mex 18%, Bra 10%, Peru 10%, Chile 8%.
While some developed markets pension funds had negative investment returns, the LAC markets posted positive performance.
Growth prospects are positive due to the mandatory nature of the private pension system.
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6. LatAm Pension Funds – Institutional Types
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7. Brazil’s Institutional System – The BIG Exception
First established in 1940s, Pension Plans are corporate, government, or multi-employer sponsored.
Defined Benefit Plans (‘Plano Beneficio Definido’)dominate in terms of assets and affiliates.
Variable Contribution (‘Plano Contribucao Variavel’) and Defined Contribution (‘Plano Contribucao Definida’) are fastest-growing types.
Plans, particularly among related sponsors, frequently join a “Pension Fund” (‘Fundo de Pensao’), which provides investment and administrative services.
Previ, the largest Brazilian Fundo de Pensao by total assets
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8. The Multifondos Systems - Country examples
Chile introduced mandatory individual capitalized account funds in 1981 – options for affiliates among managers, but not for risk/return preferences
A multifondos system gives pension affiliates an option among a series of risk-based funds offered by an investment manager (AFP)
Each AFP provides a series of risk-based funds managed within the same detailed sets of investment requirements/restrictions
Permitted maximum exposures to Equities & Foreign illustrate:
Regulators continue to increase permitted overseas investment limits, in an effort to increase diversification.
In the case of Peru- The Regulator increased the foreign investment limit that Pensions can hold, to 40%. The rationale is:
Peruvian Sol experienced a 10% depreciation from the beginning of this year through August (2013) against the US Dollar. In 2013 there were significant Capital Outflows from the vast majority of Latin America markets, not just Peru, as foreign investors dumped stocks due to weak performance of the stock markets, and due to the U.S. Federal Reserve winding down the QE3 stimulus and the possibility of increasing interest rates. Dividend yields were more promising in the U.S. and this prompted the outflows. The Peruvian Central Bank’s intervention in the market (to sell dollars) was an effort to defend the currency, as capital outflows diminished their reserves, so that the Sol did not weaken too much (which would run the risk of inflation). The increased limit to 40% of foreign assets permitted to Peruvian Pensions would meet two purposes: diversification and currency stabilization.
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9. Campollo Consulting WSAS
Pension Funds’ Assets by Country, Major and 6 Minor Markets
In 2012, the major markets, saw their currencies appreciating by Chile, 8%, Colombia 9%, Peru 3% and Mexico 7%. Therefore the growth of their pensions to end of Dec 2012 was much more in USD terms than in Local Currency term. Brazil was the only market whose currency depreciated by 10% in 2012, with All Pensions posting a 21% growth in local currency terms but a small growth in U.S. dollar terms of 0.3%. All other markets growth in 2012 in USD was above 20% in local currency and in U.S. dollars as the currencies for Chile, Colombia, Peru and Mexico appreciated vs the U.S. dollar.
CAGR lcl cy Stock Mkt % Change
Brazil 10% 9.6%
Chile 8% 6.9%
Mexico 18% 19.5%
Colombia 19% 18.7%
Peru 10% 18.6%
Pensions Growth US$ Stock Mkt % ChangeUS$
Brazil 20% -0.1%
Chile 20% 15.9%
Mexico 30% 28.5%
Colombia 32% 30.2%
Peru 23% 25.3%
Number of times that the stock market is larger than the size of Pensions:
Bra (3.7), Colombia (3.3), Peru (2.7), Mexico (3.6), Chile (1.9).
Average for the Region (3)
Cerulli Is this true for Colombia? Does this mean foreign mutual funds where pensions from Per and Col invested?
Peruvian and Colombian pension fund managers will turn to cross-border products in light of more moderate growth expectations for their respective domestic stock markets
Cerulli 2011 (in red not true)
-The major drivers of foreign allocations will continue to be the limited capacity of local capital markets to absorb new flows, pension funds being granted more and more capacity to invest in equities, growth of voluntary pension sytems, and the influx of global managers
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10. Country shares’ of LatAm Pension Funds’ Total Assets, end-2012
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11. Pension Funds – Number by Country, 2012
Again, it’s no surprise that Brazil has the largest number of Funds 330 which in turn can be broken down into DB, DC, VC
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12. Latin America Pension Funds Overview of Asset Allocations end-2012 (%)
Mexico has been the most conservative with the vast majority allocated to Fixed Income.
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13. Top 25 Pension Funds – Total Assets 2012 US$ millions
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14. Top 25 Pension Funds- Fixed Income 2012 US$ mn
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15. Top 25 Pension Funds – Total Equities 2012 US$ millions
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16. Campollo Consulting WSAS
Brazil – Asset Allocations by Plan Types (Local Currency bn, end-2012) Defined Benefits Plans have the lion’s share (source: Abrapp)
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17. Brazil – Returns by Plan Types 2010-2012
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18. Brazil –Consolidated Pension Portfolio Distribution US$ bn, end-2012
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19. Chile – Features of the Multifondos System Distribution of Assets by Fund Type, end-2012
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20. Chile – Features of the Multifondos System
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21. Campollo Consulting WSAS
Chile – Features of the Multifondos System Real Returns by Fund Type - Note inverse risk/return results for
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22. Colombia – Features of the Multifondos System Share of System Assets, end-2012
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23. Campollo Consulting WSAS
Colombia – Features of the Multifondos System Portfolio Distribution by Fund type, end-2012
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24. Colombia – Features of the Multifondos System Returns by Fund type, end-2012 System just 2 years’ old by August Regulator permits publication of only rolling 48-month returns
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25. Mexico – Features of the Multifondos System Share of System Assets and Returns, end-2012
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26. Campollo Consulting WSAS
Mexico – Features of the Multifondos System Portfolio Distribution by Fund type, end-2012
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27. Campollo Consulting WSAS
Peru – Features of the Multifondos System Share of System Assets and Nominal Returns end-2012
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28. Campollo Consulting WSAS
Peru – Features of the Multifondos System Portfolio Distribution by Asset & Fund type, end-2012
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29. LatAm Pension Funds & Alternative Assets – Permitted Exposures
Regulation on private equity investments is different from one country to the other.
-Mexican Pensions can only invest in domestic private equity and can't allocate capital to international private equity funds
-Brazil Pensions can allocate up to 20 per cent of their total assets to private equity funds previously approved by the National Monetary Council. But the cap is lowered to 10 per cent if they invest in international funds
-Chile Pensions can allocate up to 2.5% of total assets to private equity and can invest in both local and international private equity funds
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30. Typical Requirements for Qualifying Investments
Summary of Typical Requirements for Qualifying Investments, e.g.:
Credit Ratings -Investment Grade
Risk Ratings
Qualified Investment Management Companies (Managers’ experience, operating histories, AuM minimums, others)
Exposure Limits by asset classes, instruments, issuers, management companies, currencies,
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31. LatAm Pension Fund Investment - Private Equity
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32. Brazil Domestic Institutional Investors surpassed Foreign Investors Commitments in PE in 2012 (Source: abvcap and KPMG)
Total Investments
2011-R$11.8 bn
2012-R$14.9 bn
54%
46%
49%
51%
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33. Brazil – Private Equity Total Investments by Sector (%) (Source: abvcap and KPMG)
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34. Mexico - Evolution of the Investments in CKDs and FIBRAS
CKDs + FIBRAs
TOTAL US$6,829 mn
13,658
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000 -
10,141
4,977
4,342
2,683
2,726
2,450
2,369
2,045
1,218
1,350
585
537
477
479
3,841
3,292
2,949
2,826
2,481
2,402
2,312
1,325
1,130
1,514
1,663
1,588
1,305
772
495
461
2,549
Agropecuaria Santa Genoveva
Red de Carreteras de Occidente
MACQUARIE
WAMEX Capital
Atlas Discovery México
NAVIX
Nexxus Capital IV General Partner
PLA Inmuebles Industriales
AMB Mexico Manager
Infraestructura Institucional
PROMECAP
Artha Operadora
MARHNOS
Vertex Real Estate
Capital Inmobiliario
Grupo Inmobiliario MEXIGS 3
Grupo Inmobiliario MEXIGS 3
Fibra Uno Administración
GRUPO MRP
Credit Suisse
Finsa Real Estate Managment
Axis Capital Management
Planigrupo Management
LATIN IDEA
Grupo Bursatil Mexicano
Northgate Capital
Pine Bridge
Fibra Hotelera Mexicana
Macquarie México Real Estate Managment
Asesor de Activos PRISMA
PLA Administradora Industrial
EMX Capital
2008
2009
2010
2011
2012
2013
Source: CONSAR April 2013
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35. Mexico – There is plenty of room to invest in CKDs and FIBRAS
Capacity for CKDs and FIBRAS focused on infrastructure, housing and real estate:
US$13,783 mn
Capacity for CKDs focused on private equity and other projects:
US$ 8239 mn
Net Asset
Total of Limit
Consumption
Available
S1 S2 S3 S4
Total
137,687 -
621,527
62,153
16,603
45,550
649,593
84,447
23,754
60,693
635,992
82,679
21,514
61,165
2,044,799
229,279
61,871
167,408
Net Asset
Total of Limit
Consumption
Available
S1 S2 S3 S4
Total
137,687 -
621,527
31,076
5,026
26,050
649,593
45,472
8,077
37,394
635,992
44,519
7,894
36,625
2,044,799
121,067
20,997
100,070
Complementary Savings
Complementary Savings
Source: CONSAR. April Exchange rate: MXN/USD. *
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36. Mexico – Losts of capacity vs Regulatory Limits
For CKDs and FIBRAS focused on infrastructure, housing and real estate
For CKDs focused on private equity and others projects
The challenges to the AFORE are to find relatively-secured and profitable projects and more sophisticated tools to analyze them.
Source: Consar April 2013
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37. Mexico – Pensions’ Holdings in CKD and FIBRAS
Total Local
Cy. mn
AFORE Holdings
Instrument
CKDs
69,204
90.0%
FIBRAs
100,987
20.4%
IPO
109,688
13.8%
Source: Consar April 2013.
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38. Other Exposures to Alternative Investments
Brazil, Peru, Mexico – listed companies provide heavy exposure to many types of commodities (oil, precious & base metals, agricultural) and infrastructure assets (power, telecoms)
Colombia – Commodity funds and Commodity index-linked ETFs were almost 2% of total assets end-2012
Chile, Colombia – Emerging Stock Market exposures via ETFs represent almost half of all non-domestic stock market investments
Infrastructure (power generation, ports/airports)& Housing via Trust Fund bond issues – recent public-private project funding innovations in Uruguay, Costa Rica, Panama, Dominican Republic & El Salvador
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39. LatAm Pension Funds’ Portfolios – Current Trends
Greater permitted diversification among asset classes (especially to alternatives and foreign assets); AND
Growing actual investment in alternatives and foreign assets, as more attractive opportunities appear (domestic public-private infrastructure projects; domestic & foreign PE Fund options; rising foreign interest rates & improved foreign equities and currency outlooks).
Remember – most LatAm currencies were appreciating vs. the USD throughout the 2000s; their domestic interest rates & yields were higher than foreign credits; and most foreign credit & risk ratings & stock markets were deteriorating, at least from 2008.
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40. LatAm Pension Funds’ Systems A Look Forward
Brazil adding a Federal employees’ Variable DC plan – likely to be huge in a few years’ time;
Public demand for reduced costs and better returns/pension payouts by plan participants in mandatory DC plans likely to result in system changes;
Region’s good demographics for retirement assets accumulation and historically highly profitable asset management fees bringing in competition – new AFPs & owners (in Peru– AFP Habitat; Grupo Sura, Principal Financial Group, MetLife & Scotiabank to several markets 2013);
Possible Policy/Political Backlashes – Bolivia (abolition of AFPs underway), Chile (presidential elections ), Uruguay (‘opt-out’ option under discussions).
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41. Summing Up….
Funded PFs in LatAm are large, institutionally diverse, & manage increasingly diversified investment portfolios
Investment barriers & buffers - are being loosened
Strong favorable secular trends – region’s generally young demographics and trends to formalization of their economies ensures high levels of savings contributions & PFs’ asset growth
new business opportunities & partnering - PFs’ growing asset diversification will require working with experienced money managers and financial service providers of all types = new business opportunities
new competitors - Large & growing asset bases & high historical profitability by PFs’ asset administrators are attracting new multinational competitors (taking over existing AFP’s business, or as licensed start-ups), looking for new ways to do business
Consumer dissatisfaction – Get ready for Change Affiliates frequently feel overcharged grossly and then have seen their ‘multifondo Agresivo’ returns well below that earned by the Conservador funds – for years, in some recent cases. Yet, the AFPs make good money. Mandatory participation and/or contributions systems are in question.
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42. To close, a little about us …
About Campollo Consulting LLC – Campollo Consulting LLC, a minority owned firm, was established by Carmen Campollo. Over the past 20 years Carmen has worked for firms such as the World Bank, International Finance Corporation, Standard & Poor's, FTSE and Russell Investments. In addition to the Guide to Latin America Pension Funds, Investment Context and Regulations, Campollo Consulting has developed a data base for 11 Latin American countries, including a 6 year history of asset allocation across 23 categories for over 400 pension funds. In addition Campollo Consulting created a methodology for manager searches, Fund of Funds, designed and developed indexed portfolios and financial investment products. You can learn more about Campollo Consulting at Contact us at ext or:
Wall’s Street Advisor Services LLC (WSAS) specializes in innovations in financial information services for investors and researchers interested in emerging markets and socially responsible investing. Founder and CEO Peter Wall has over 30 years’ experience in developing and marketing financial information services, with International Finance Corporation (IFC), FTSE International, and Microfinance Information Exchange, Inc. (MIX), as well as in his own capacity. Besides his contributions to The Guide to Latin America Pension Funds, he is the creator & compiler of the WSAS MFI Shareholder Value Index series. More can be seen about WSAS at
The information and materials presented in this document have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. The authors of this document disclaim any and all liability relating to these materials and make no express or implied representations or warranties concerning the accuracy or completeness of the document, the content of which may change without notice. Nothing in this document is intended to be or should be construed to be legal advice or investment advice.
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