Peru and Mexico are being forecast as the next Latin American countries to open up to international fund managers. A report by research group Cerulli Associates claims the evolution of the pensions systems in the two countries points to a greater appetite for foreign equities, increasing the need for international managers.
Looking farther afield
The pension systems of both Peru and Mexico are one-fund systems, investing only in domestic securities. Cerulli argues that as annual returns on domestic bonds fall short of the 8% to 10% that is required, and as local equities are volatile, international investment will become an "increasingly viable alternative".
Chile took the leap into international securities in 2002, when it converted its one-fund pension system into five risk-diversified sub-funds to cater for different maturity profiles. Thomas Ciampi, the report's author, believes Peru will follow suit by mid-2004, and Mexico in 2005. Both are expected to offer a three-fund system. And with insufficient stocks available in local markets, investors will be forced to look to foreign equities. Cerulli predicts that Brazilian pension funds will have as much as $20 billion invested in offshore assets in 2008, and Peru $4 billion.
But while many international managers will be tempted to muscle in on Mexico's asset management space because of the growth potential of pensions investments, Cerulli is pushing Chile as a more suitable market for the medium term. Ciampi believes that Chile's limit on offshore assets for pension funds will be increased from 25% to 50% by 2008. This, he says, will result in a flow of $39 billion into international holdings.
Furthermore, Chile's headstart in the modernization of its pension system will mean that international investing relationships will be easy to expand when restrictions are eased further.
At the end of August 2003, Chilean pension funds' allocation to international funds exceeded $7 billion – accounting for more than 80% of Latin America's total offshore pensions' assets under management. Ciampi says: "Fund managers in Mexico, on the other hand, are really still waiting for the starting gun."