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Offshore Mutual Funds Gain Ground in Peru

PERU - The National Securities and Exchange Commission (Conasev) has altered the diversification criteria with which Peruvian mutual fund investments have to comply. The regulatory body considered that, since mutual funds are composed of voluntary saving contributions, it was appropriate to widen the range of the products that fund managers can offer, to allow greater diversification of both country risk and exchange-rate risk. This approach will also reduce the risks of concentration of mutual fund investments and encourage portfolio management with a global outlook.

The approved text eliminates the diversification criteria requiring at least 50 percent of mutual fund investments to be held in securities traded through centralized market dealing mechanisms (stock markets and elsewhere), or in deposits or securities issued or guaranteed either by the government or by Peruvian financial institutions.

The removal of this requirement will allow Peruvian mutual funds to expand their investments to the international market and thereby obtain more balanced rates of return by combining those returns obtained abroad with returns in the local market. The mutual funds will thus be able to allocate their resources toward assets such as hard currencies, shares in foreign mutual funds that invest exclusively in securities traded on other markets, balanced by region. They may also invest in funds of funds.

Apart from this, the new diversification criteria include several financial instruments that were not covered by the initial regulation.

Certain instruments are specified as eligible for fund investment, such as shares in other mutual funds and closed-end long-term investment funds, time deposits, instruments representing such deposits, bills, promissory notes, repo operations conducted on the Lima Stock Exchange, and notes issued through securitization processes, among others.

Mutual funds will also be allowed to invest up to 100 percent of their assets in financial instruments or operations representing debts or liabilities of governments, central banks and international organizations of which Peru is a member, always provided such investments comply with Conasev conditions on liquidity, risk, reporting, information and diversification.

Finally, much greater precision has been given to diversification criteria aimed at limiting concentration in just a few instruments or operations of a given commercial entity or economic group.

When consulted on these points, a number of executives from the Peruvian mutual fund industry claimed that while certain legal aspects have been smoothed out, which will facilitate the mutual fund investment process, the most problematic aspect still remained to be resolved, namely, the application of the income tax on the capital gains earned by these investments.

The executives said that until the tax issue is fully clarified, mutual fund investments on the international market will not make any real economic sense either for fund companies or for investors.


This article originally appeared in the August issue of Latin Fund Management, which is also published by Thomson Financial.