BUENOS AIRES - Currency convertibility and economic stability are promoting the development of an unprecedented savings culture in Argentina.
Not surprisingly, several investment firms - including INVESCO PLC, Templeton Investment Management, SEI Global Asset Management and J. Henry Schroder Bank AG - have arrived to capture their share of the mounting pile of assets. But each has mapped out a distinct strategy.
The savings and investment culture in Argentina has been supported by three factors:
The strong educational impact of the private pension system, which at the end of August totaled $4.2 billion in assets. The continuing advertising campaigns among pension funds, known as AFJPs, to encourage affiliate transfers are reinforcing the notion of financial security and retirement nest eggs.
Inflation is almost non-existent, giving consumers a chance to think twice before rushing out to spend their paychecks.
Borrowing rates remain stubbornly high, owing to high bank cost structures and borrower default rates. There is a gaping spread between 30-day U.S. dollar-denominated certificates of deposit (with yields of 5% to 6%) and a 10-year U.S. dollar-denominated housing loan (with interest rates at 12% to 15); annual credit card interest rates can reach 40%.
Markets have been developing for institutional money managers as well.
The pension funds, Administradores de Fundos de Jubilaciones y Pensiones, pump $250 million to $300 million in assets a month into the financial system. They are seeking more diversification through alternative investment products and creative ways to evade asset-class percentage limits imposed by the government.
Insurance companies - the providers of death and accident benefits in the pension fund system and now handling worker compensation claims under the government-mandated system of Aseguradoras de Riesgodel Trabajos - are outsourcing much of their investment management. ARTs are private funds set up to cover workers compensation claims
Growth in these areas has led to a surge in local mutual fund assets. This long-neglected industry has tripled in size since 1995, according to Latin Fund Management, a Buenos Aires-based newsletter. Fueled by asset surges in the money market and fixed-income fund sectors, the industry was managing $1.3 billion at the end of August, and is viewed now by most banks as a major growth area.
On top of this investment wave, INVESCO and Templeton both are targeting the institutional market, and both are developing alternative specialty products to offer to AFJPs, ARTs and corporations.
INVESCO, which arrived in April, is seeking regulatory approval of two funds - a utilities equity fund and an Argentine corporate bond fund that will offer North American-style research to Argentine investors. The utilities fund - the first of its kind in the local market - will be guided by Jeffrey Morris, the current manager of the INVESCO Utilities Fund, and will invest 75% in the Mercosur region (covering Argentina, Brazil, Paraguay and Uruguay) and 25% in other Latin American countries.
The bond fund, to be managed by fixed-income specialist Donovan "Jerry" Paul, aims to offer pension funds access to offshore markets, such as Luxembourg, where they are prohibited from investing directly. Now, the pension funds can only invest domestically and in highly developed offshore markets such as Tokyo, New York, London and Zurich, but they may invest up to 14% of their assets in local mutual funds without regard to markets.
"The idea is to package products that are advantageous to AFJPs in terms of convenience and exposure to alternative markets," said Alejandro Bedoya, managing director of INVESCO Valores SA and the architect - through his prior role as capital markets specialist with custodian Banco de Valores - of the only two closed-end local Argentine funds.
"We prefer to design the funds locally while taking advantage of our research capabilities throughout the world," he said.
Templeton, which moved into the market last year, making it the first foreign fund firm to set up shop in Argentina, found the retail route here to be a viable option because of distribution limitations, according to South American distribution and product manager Michel Tulle.
In fact, it recently took its first concrete step to participate in the local market, signing on as financial consultant to a closed-end institutional credit fund, Renta Corporativa I, that will buy packages of loans from local banks. The fund, managed by the local Corporacin Metropolitana de Finanzas with Banco ING serving as custodian, will be offered in at least two share classes to reflect the risk profile of the loans in the portfolio. The target is $50 million from the fund, which is also awaiting regulatory approval.
(Major obstacles facing foreign investment companies wishing to set up retail products in Argentina are the ban on the public offering of offshore funds, requirements that Argentine-registered funds be at least 75% invested in Argentina or other Mercosur countries, and finding retail distribution channels outside of banks for local-registered funds, because most banks already have their own fund products.)
Although based here, Templeton's Latin strategy stretches far beyond Argentina, says Tulle. The company is opening an office in Sao Paolo, Brazil, which will carry out local research for Templeton's international funds and investigate the launch of local funds. Templeton just opened a distribution office in Chile where it is also marketing its fund family to pension funds, which recently were granted permission to allocate assets to international money managers.
While newest arrival, SEI, also has a long-term regional strategy, for now it has its sights only on Argentina, with initial plans to privately offer to high-net-worth investors two Cayman feeder funds that invest in the Dublin-registered SEI master umbrella fund and its six subfunds.
Believing that a general mistrust of the banking system and the previous lack of investment culture has left vast idle wealth in the hands of the upper class, the company has worked feverishly to set up a broker network as well as a loosely knit team of influential Argentines in various regions and professional fields to market the funds.
"We looked at all global markets and then chose Argentina because we see a market adopting an investment culture," said Joe Ujobai, vice president of the Argentine operation.
"With inflation under control and economic stability, Argentina is a welcome environment for global companies," he added.
Meanwhile, SEI is setting up a venture with a local money management firm and simultaneously buying a small percentage of an as-yet unnamed local pension fund, in order to take over the fund's portfolio management responsibilities.
In addition, the company is looking to buy a money manager that would incorporate SEI's philosophy and technical capabilities and handle security selection for a family of specialty funds it wants to launch in early 1997.
Schroders uses a small Argentine one-branch wholesale bank, Banco Mildesa, as its distribution channel to primarily institutional clientele, and the partnership illustrates the difficulties of attracting clients without the benefit of a large distribution network. Schroder-Mildesa has raised just $22 million since its funds were launched a year ago, almost a third of that from AFJPs.
The company, however, is hoping to add to assets with the recent launch of its fifth and sixth funds, a Latin American equity fund and an Argentine blue-chip equity fund, while continuing to promote its offshore portfolio management services to investors seeking international diversification.