Traditional sources for asset gathering in Latin America have narrowed as political populism, low returns from fixed-income products, and a public health crisis have created headwinds for managers. However, new research from Cerulli, Latin American Distribution Dynamics 2021: Charting the Future for Latin American Retail and Institutional Asset Gathering, identifies pockets of the region ripe for change: the Brazilian onshore market, the Mexican Afore pension market, and the U.S. offshore market.

The Brazilian onshore market, which is worth over $1 trillion but with a traditionally extreme bias toward local bond funds, has been energized by the locally domiciled feeder-fund business and other vehicles allocating to third-party offshore funds and ETFs. Inflows during the first quarter of 2021 reached $2.6 billion, proceeded by $4 billion in the second quarter. Of the opportunity, Thomas Ciampi, director of Latin Asset Management, Cerulli’s strategic partner for Latin America, adds, “With the right product mix, an asset manager may reasonably expect to accumulate $500 million or more during its first three years of offering feeder funds in Brazil.” According to the research, greater acquisition activity could be on the horizon as managers assess their market entrance options. “There are more than 700 local managers active in the country, most of which are of the pure-play variety and struggling as their fixed-income products yield negative returns in the current low-rate environment. A local player with strong relationships and expertise could serve as a springboard to an international manager to raise assets quickly,” he adds.

The Mexican Afore pension market, sized at $225 billion, also serves as a bright spot of opportunity. These pension funds are now allowed to invest internationally using active funds. Mexico’s Afores enjoyed a large rise in AUM, as flows into the system were not significantly impacted by the pandemic and returns of the funds themselves—now structured as target-date funds—are yielding better results due to a broadened investment spectrum and lengthened time horizon. “Managers in Mexico suddenly feel liberated to take on more long-term investments, right at a time when active funds from abroad are being approved for sale in the country. Compared to the troubles faced by pensions in Chile and Peru, Mexico is shaping up as the country to watch for active managers abroad,” suggests Ciampi.

Re-emerging as an attractive option for retail investors, the U.S. offshore segment is picking up after a period of muted growth. At $150 billion, the U.S. offshore market has soared as affluent Latin Americans move assets out of their home countries due to pandemic-induced policies, the crippled state of regional economies, and low yields on local fixed-income bonds. “Individuals in the region seek state-of-the-art investment capabilities and a more investor-friendly environment,” adds Ciampi, and they are finding it in Houston, Miami and on the West Coast. The report cites demand for flexible bond funds investing in various debt instruments, thematic and sector-oriented equity funds, and Asian equity funds and European equity funds as the most popular product types. It also notes a rising interest in products with environmental, social, and corporate governance (ESG) angles.