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Chilean Pension Funds Raise Offshore Stakes

SANTIAGO - Over the last two years, competition for the assets of Chilean pension funds has grown fierce among international money management firms. In the two years ended January 31, assets that the country's AFP pension funds have allocated to foreign instruments have expanded from $150 million to $1.8 billion and the outlook is for that number to rise significantly over the next decade. AFP pension funds are privately run pension funds under government supervision.

While their business has undergone important growth here, very few internationally known firms have set up offices. They have found it more convenient to break into this small but potentially substantial pension-fund market through local representatives, consultants, brokers and others with established relationships among the eight remaining AFPs (Administradoras de Fondos de Pensin) in Chile.

A total of 466 locally registered and approved offshore funds are currently available to the AFPs, from firms such as Fidelity Investments, Templeton Investments, Newton Investment Mgt., Barings, Morgan Stanley, Goldman Sachs, Flemings, Merrill Lynch and Robeco.

Mutual funds normally account for two-thirds of AFP investments overseas, commanding a wide popularity over corporate bonds and ADRs. Corporate bonds and ADRs are also permitted investments but are less attractive to the pension funds because they require more intensive research both before and after the position is taken. As a result, they are more expensive. By investing in mutual funds, the AFPs also relieve themselves of some responsibility because they can count on experienced investment staffs that continually monitor diversified portfolios of foreign holdings. In addition, costs are hidden as fees are already wrapped into the mutual funds' net asset values.

Overseas investments in general seem destined to occupy a larger portion of the portfolios of AFPs, which in total control $30.8 billion in mandatory worker contributions. While at the end of January, the percentage of total assets allocated to foreign investments stood at 5.9 percent, the Central Bank recently raised the cap to 16 percent from 14 percent in foreign instruments, and lifted the foreign equities sub-cap to eight percent from six percent.

Just two years ago, the AFPs were investing only 0.54 percent of their assets overseas. Strong official encouragement from the Superintendent of Pension Funds and the Central Bank has helped boost that figure. Both entities have repeatedly emphasized their desire to see the funds diversify more in order to end a three-year run of lackluster results, due mostly to the poor performance of local equities.

The market leader among international mutual fund managers continues to be Fidelity, which controls 29 percent of the assets allocated to foreign funds, or $357 million. Next, according to Jan. 31 data, come Barings and Morgan Stanley, with 16 percent and 12 percent market share, respectively. Credit Lyonnais and Dean Witter follow and then Templeton, claiming five percent.

All of these companies have gone through the process of having a Chilean AFP sponsor them before the Comisin Clasificadora de Riesgo, which verifies that the company meets minimum requirements in terms of total assets under management, diversification of assets and other measures before adding its funds to the eligible list.

The sharp run-up in assets and competition among international players has paved the way for pricing wars that has led to drops in management fees of the offshore funds. The market will tolerate no more than two percent. Despite this relatively low rate for the region, the AFPs insist on personalized service, access to the mutual fund companies, and daily reports on their investments. The sheer number of funds and the trend for newer companies to promote these service aspects of their business has taken market share away from companies such as Merrill Lynch and Robeco, whose funds were among the first available.

The larger pension funds have also evolved to the point where their portfolio management staffs include asset allocation experts who are selecting funds to diversify risk and reduce volatility. As a result, it has become necessary for offshore companies to offer more specialized mutual funds - sector and country funds, for example - that complement current AFP holdings. Sources in the market indicated that Alliance Capital is considering entering the Chilean market with the launch of more specialized funds than are available.

The majority of the mutual funds being offered are domiciled in Luxemborg, the Cayman Islands, and Ireland. At the beginning of 1999, developed-market equity funds were garnering the most attention from the AFPs, followed by international bond funds.

Among the pension fund companies, AFP Provida, the largest in the market with $10.1 billion in assets, is investing 5.4 percent of its holdings, or $547.7 million, in foreign instruments. At the end of January, other smaller AFPs, however, such as Cuprum and Summa, were investing a greater percentage of their assets in foreign vehicles: 7.30 percent and 6.48 percent, respectively.