Mexican Pensions Take Pride in Success in the Face of Market Turbulence

(December 6, 2011) — Mexican pension funds have enjoyed strong returns this year in the face of volatility. 

The country’s schemes have shown an average real return of 2.6% this year through October, according to Mexican pension fund association Amafore. Association President Oscar Franco told the Wall Street Journal that the return is excellent considering the volatile and turbulent market environment. 

Despite the relatively high returns by Mexico’s funds, known as Afores, the schemes have historically yielded average real annual returns closer to 6%, according to the WSJ.  

In terms of asset allocation, Mexican pension funds are mostly invested in government securities, which account for roughly 58% of their portfolios. Regulatory changes, however, has recently spurred greater diversity of asset classes. In July, rule changes resulted in a potential release of up to $6 billion into equities. Mexican pension regulator Consar upped the amount that worker retirement fund managers may invest in equities by 5%. “The idea is to do everything possible to increase returns,” Vanessa Rubio, spokeswoman for Consar, had said. “We did a calculation that shows that every 1 percentage-point increase in return on investment translates into a 28% increase in a worker’s pension.”

Another relatively recent change by Consar is its decision to allow Afores to employ external managers to oversee a portion of their assets in order to gain added value in the international market. “It is a positive development for the system, because it will allow workers’ funds to be invested in a better way and be in a better position to take advantage of the current limitations to investments,” Isaac Volin, country head for Mexico at BlackRock, told the Financial Times in June following the decision.

Consar issued a directive in March 2011 allowing Afores, which have about 10% of Mexico’s gross domestic product, to employ external managers to oversee a percentage of their assets.

When outsourcing pension fund assets, fund managers and their teams must have a minimum of 10 years of experience and a minimum five years managing the specific asset classes of the mandates, according to the FT. Additionally, managers must have at least $50 billion in assets under management, the support of a custodian bank and independent valuators, and be supervised by the authorities of the countries in which Afores are allowed to invest.