(May 7, 2013) — It’s not just the Western world falling out of love with emerging markets; Brazil’s largest pension funds are reportedly courting asset managers, investment banks, and private equity funds from developed nations in an effort to bolster their returns.
The money they intend to invest is no small beer either — the potential outward flow from the South American pension funds is believed to be in the region of $25 billion and $45 billion, according to the Financial Times.
What’s driving this sudden exodus of cash is three-fold; firstly, the regulations change in Brazil four years ago to allow pension funds to invest up to 10% of their assets abroad, secondly the historically low interest rates providing next to no returns and finally, the flagging Brazilian economy.
Traditionally, Brazilian pension funds — which are estimated to have up to $450 billion in assets under management — have invested heavily in their domestic fixed income market, including a large chunk in government bonds, but the poor returns have forced CIOs to consider alternative investments.
Combine this with a depreciating Brazilian real and suddenly external investments look a lot more attractive.
Carlos Massaru Takahashi, chief executive officer of Brazilian fund manager BB Gestão de Recursos DTVM, told the Financial Times: “Pension funds are very interested in doing this kind of diversification as they have very tough actuarial targets. Probably this investment will happen this semester.”
By law, pensions have to invest abroad through a local Brazilian fund, but they are not permitted to own more than 25% of the local fund, meaning they have to invest collectively overseas.
The FT reports Brazilian pension funds are holding meetings with all of the major foreign asset management companies, including JPMorgan, BlackRock, and Franklin Templeton.
Bringing in the big guns from the developed world could spell bad news for the Brazilian alternative investment sector, which has been trying hard to win over its domestic pension funds for some time.
In April, private equity funds in the country were pushing the local pension fund regulator to ease caps in investments other than fixed income instruments.
ABVCAP, as the group representing private equity funds is known, told Reuters its goal was to get pension funds and insurance companies to funnel up to 15% of their investment pool into equities and other alternative investments.
In addition, the BRICS (Brazil, Russia, India, China, South Africa) nations announced their intention to launch a New Development Bank to help fund infrastructure projects across the countries and attract much-needed institutional investment.
The infrastructure requirements in these regions are huge ― 1.4 billion people still have no reliable electricity, 900 million lack access to clean water, and 2.6 billion do not have adequate sanitation, according to the Korea Herald.
But with the private investment market shying away from the huge upfront costs and the high cyclical sensitivity of global financial markets, governments are hoping institutional investors will come in to meet the funding gap.
It remains to be seen whether there is an appetite for these investments from local Brazilian CIOs, but with the Olympics and a football World Cup in the wings who knows what will happen.
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