Report: Chile Ranks as Top Latin American Destination Among Pension Managers

(May 2, 2011) — A new report by asset management consulting firm Cerulli Associates shows that assets in Latin American pension and mutual funds will hit $1.4 trillion over the next five years.

The most attractive market for asset managers within Latin America: Chile. “Chile was most popular because of its pension industry and privatized social security system,” head of Latin Asset Management’s Thomas Ciampi, co-writer of the report, tells aiCIO.

The report — titled Institutional Asset Management in Latin America — reveals that private pension fund managers in Chile have benefited from heightened regulation championing diversification and urging greater investment in equities and overseas investments. “Chile has the most liberal investment policy for portfolio managers of its pensions, due to the small size of its capital markets with increasing amounts permitted to invest internationally,” Ciampi says.

“Chile is a prime example of a hybrid social security system, and pensions have been undoubtedly growing there,” Russell’s Cynthia Steer tells aiCIO. “I think its natural that Chile that has been on the forefront of pension design in emerging markets and the region should be the focus and target of large asset managers today,” she notes, adding that Chile is also in the process of liberalizing its asset allocation constraints, with greater flexibility to invest more internationally between stocks and bonds.

According to Steer, Chile’s pension system is seen as an archetype not only in Latin America but globally. “Latin American countries are credit worthy countries looking for prudent solutions for the same demographics that developed countries have considered,” she says. “The solutions may be different, but the questions are the same.”

Since 2007, Chile’s regulator has made it easier to invest its $114 billion pension assets in other countries. By the end of 2009, 43.7% of Chilean pension assets were invested outside Chile. In November, the Central Bank of Chile raised the amount of assets pension funds can invest internationally to 80% from 60%, and the move abroad is expected to continue gaining support.

“We expect Latin economies to continue to do very well in light of their commodity-dependent economies and the relentless demand for raw materials by growing nations around the globe,” the report stated, echoing earlier results from the Emerging Markets Private Equity Association and London and New York-based Coller Capital that found that investors are shifting their gazes to the less penetrated markets of Latin America and Southeast Asia.

Private pension managers in Latin America were allocating one-third of their assets under management — $115 billion — to equities, both domestic and foreign, as of September 2010, according to Cerulli’s findings. Chile was by far the leader in this area, with near 45% exposure to equity securities, either via direct investment or via cross-border mutual funds.

Exchange-traded funds have been popular investment vehicles to help Latin American pension fund managers gain quick exposure internationally while maintaining liquidity. “For many managers, it’s more convenient to invest in ETFs to maintain liquidity and not feel tied down to one position,” Ciampi tells aiCIO. Cerulli found that some 23 global fund managers and ETF sponsors captured $1 billion or more in the Chilean pension fund market, with Fidelity, Schroder, Franklin Templeton, and JPMorgan ranking as the leading active managers.

Meanwhile, Cerulli’s findings show that mutual fund flows in Latin America have averaged $60 billion to $70 billion per year since 2008, about 75% higher than historical averages. The vast majority is still targeted to fixed-income funds, but equity and hedge funds have been gaining ground steadily.