Peru: Pension funds caged in


Chloe Hayward
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Pension funds in Peru are in desperate need of more investment options, according to analysts.

"There are not enough securities available to the pension funds in Peru – I think that they should definitely be allowed to diversify further. They need to do what Chile has done and increase the amount they invest in their neighbouring countries," says Walter Molano, head of research at BCP Securities.

The total pension savings pool in Peru is about $20 billion and contributions to the system are growing by 45% a year. This rate of growth is leading to a bubble in the stock market. The Lima stock exchange has surged by more than 1,000% over the past three years. "The rate of pension accumulation has caused the stock exchange to become distorted, which is concerning local and any potential international investors," says Molano. In Chile a similar problem occurred until the government relaxed restrictions on pension funds and allowed them to invest more abroad. Up to 40% of the Chilean pension portfolio can be invested in foreign assets, which contrasts with Peru’s limit of 10.5%.

These restrictions mean that pension fund managers are forced to focus largely on local equities. But the Lima exchange lists only a few companies and the pension funds are only able to invest in the most liquid of these, such as the mining companies Volcan, Southern Copper and Cerro Verde. Fund managers are also concerned that expected mergers and acquisitions in 2008 will limit their options further. In 2007, Peru Copper moved to delist after it was taken over by Aluminium Corp – and this is likely to be the first of at least five such deals in the next 12 months.

Some analysts are concerned about allowing funds to invest more abroad. "There are not many foreign investors in Peru so if the pension funds are suddenly able to invest a lot more elsewhere there is a fear that the listed stocks will plummet in price," says Pablo Bréard, head of international research at Scotiabank. Moreover, positions would need to hedge against any foreign exchange risk, which could be a costly exercise for funds. These issues make some analysts doubt whether the law will be changed soon.

Instead funds are hoping that other asset classes, such as structured credit, will develop locally to enhance their investment options. "We need more offerings of structured paper, and the sooner we have it, the better for the financial system," said Gonzalo De las Casas, the chief investment officer of AFP Integra, at a conference in October.

In early December, BBVA Banco Continental priced Peru’s first RMBS, testing the market with $23.75 million senior fixed rate notes. Over 60% of the paper went to pension funds.

In addition, Titularizador Peruana, Peru’s biggest home loans lender, has announced plans to do a $50 million mortgage-backed securitization by March 2008.