The joys of having a well-developed pension fund industry.
Via Credit Suisse:
| Mexico’s private sector pension funds (the so-called Afores) managed the equivalent of $112bn at the end of December 2011 (roughly 11% of [Mexico’s] estimated GDP). This figure was unchanged from December 2010, largely due to the depreciation of the peso. In peso terms, however, assets under management rose 13.1% in 2011. Inflows into the system averaged the equivalent to $790mn per month in 2011, versus an average of $786mn in 2010. Data through December 2011 show that the average three-year gross return posted by Afores was 11.5% in nominal terms. Average returns ranged between 9.5% for the most conservative family of funds and 13.1% for the most aggressive family of funds. The average commission charged by Afores was 1.5% on the stock of assets under management, down from 1.6% in December 2010. Investments in foreign securities were equivalent to 12.5% of total assets as of December 2011, up slightly from 12.3% in December 2010. The increase in Afores’ exposure to external markets in 2011 was in the equities market, where holdings in foreign equities rose to 9.6% of total assets in December 2011 from 9.1% in December 2010, while investments in foreign fixed income securities fell from 3.3% to 2.9% in the same period. |
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Just a couple of takeaways for now: - Mexican pension funds then are enjoying strong real returns and declining fees and commissions. But calls are growing for this pool of liquidity to provide a strong technical bid for domestic equities to aid portfolio diversification. In previous years, Afores were only allowed to invest in index trackers rather than directly in individual stocks, so equity investment will no doubt rise from a modest base as portfolio management skills gather pace.
From the WSJ on January 10:
| “... the growing participation of Mexican pension funds, which manage close to $120 billion in assets, should continue to support equities as the funds only have 19% of their resources in stocks versus a limit of 35%.” |
- The Afores’ firepower provide regulators with ammunition if capital outflows and precipitous currency weakness rear their head during bouts of global market stress. To wit, in the 2008 crisis, the Mexican government imposed a 20% cap on capital outflows of pension funds to shore up the currency and government bond markets, a rule that remains today. - In the coming years, debate will no doubt rage about the foreign/domestic investment limits.
- The depth of liquidity in Mexico shines an unfavorable light on Brazil, which has a relatively weak domestic investor base, one reason for its structurally-high interest rate environment, especially at the long-end.
- All said, the LatAm pension story this decade should be less about the growth of the domestic industry and more about the growth of the offshore pension fund bid. After all, foreign institutional investors can generate decent real yield at the long end of the peso-denominated curve in a liquid market while global credit fortunes are converging. But don’t hold your breath: US pension funds are famous for their home bias, unlike their Dutch peers, for example.
Further reading:
Latin America Sovereign Debt Roundtable
Mexico allows pension funds to use external managers - FT