This year, Chile's Administradoras de Fondos de Pensiones, companies that manage pooled pension assets, are expected to gain approval to invest up to 12% of their assets in foreign investment-grade debt securities. That figure is up from 3% now, according to Salomon Brothers, New York.
By midyear, Chile's Congress is expected to pass a law providing for a number of investment liberalizations. For example, AFPs - which manage $23 billion in pension assets - would gain more access to such severely restricted areas as: stocks of companies with low trading volume; debt instruments and convertible bonds for project financing; and foreign corporate debt instruments that lack any state or bank guarantees. In addition, allowable investments in foreign stock holdings are expected to climb to 6% of assets from zero.
But, Salomon Brothers reports, it remains unclear what investment limits will be placed on ownership of company stocks - and whether other areas will be opened up for investment, such as investment in mining companies' stocks and in infrastructure projects.
As of June, the leading six AFPs had investments that included an average of 32.82% in equities; 39.1% in government debt securities; 12.71% in mortgage bonds; 6.94% in time deposits; 6.07% in corporate bonds; and 1.13% in bonds of financial institutions, Salomon's data show.
In its report "Chilean Pension Fund System, Top of the Class," Salomon Brothers notes pension fund investment rules in Chile have eased significantly since the private system was founded in 1981. According to Salomon, "this has happened largely ... to prevent the growth in total pension fund resources from outstripping the investment alternatives" available to AFPs.
According to Salomon Brothers, expanded investment opportunities for the AFPs are certainly positive. "In particular, the new limits on company stocks and on foreign investments will contribute to the sophistication of markets and investors."
Already, the AFPs - now numbering 21 - have fared well. Although the system got off to a shaky start, between 1985 and 1993 assets have grown at a 34% compound annual rate, aided by Chile's red-hot stock market returns in recent years. The six largest AFPs had an average
23.8% return on equity in 1993.