Latin American Private Pensions Fuel Demand for Cross-Border Allocation
December 1, 2020 — Boston
Eased regulation paves the path for pension managers to increase flows into cross-border funds
Continuing to diversify out of local-government instruments, Latin American pension funds increased their allocations to cross-border securities by 19% in 2019, according to The Cerulli Report—Latin American Distribution Dynamics 2020: Emerging Opportunities in Uncertain Times.
The research sizes total assets under management (AUM) for the four administradoras de fondos de pensiones (AFP/Afore) systems at $574 billion at the close of 2019. Including Brazil’s complementary pension system, which also had a positive year, total regional AUM stands at $1.05 trillion.
Flows into the AFP/Afore pension managers in Chile, Mexico, Colombia, and Peru reflect a gradual upward trend that mimics increasing formality in labor markets and higher salaries. The inflows are also among the most reliable in Latin America. “Contributions into AFP/Afore systems of Mexico, Colombia, Chile, and Peru are obligatory and deducted directly from worker paychecks,” according to Thomas Ciampi, director of Latin Asset Management, Cerulli’s Latin American research partner. “For cross-border managers, they represent opportunity for strategic expansion.”
While cross-border mutual funds were the clear winners in 2019—adding $11.7 billion in total allocations to end the year at $87 billion—exchange-traded funds (ETFs) are steadily accumulating assets. At year end, assets gained more than $8 billion from the year prior. The research projects demand in cross-border securities to remain strong, with gains of 12%-13%, compared to 8% for domestic vehicles. By 2024, the securities could reach 21% of the industry total.
Relaxed regulation is providing a tailwind for asset flows. In early 2020, the Mexican Afore began adding cross-border mutual funds—vehicles long considered ineligible—to their investment portfolios. Some 100 cross-border mutual funds had been added to a list of approved vehicles since. “Regulation is often what’s holding back additional investment in cross-border funds and ETFs,” remarks Ciampi. “In Brazil, for instance, regulation of pension investment in cross-border instruments has eased considerably, allowing the pension managers to partner with global fund firms in a number of ways.”
The long-term outlook is bright for cross-border asset flows. In the short term, however, the research suggests that AFPs could begin to realign their investment portfolios to combine a long-term strategic asset allocation with availability of sufficient liquidity to cope with massive withdrawals by participants. “The COVID-19 pandemic impacted AFPs and Afores significantly, not only because of layoffs from formal employment, but also due to Latin countries’ very weak social safety nets. Governments have yielded to popular pressure to allow laid-off workers to redeem some of their pension savings to help them make ends meet in the absence of universal unemployment assistance,” according to Ciampi. The report recommends that global fund firms stay focused on potential changes to AFP portfolios in light of the pension managers’ need to stay liquid.
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