BUENOS AIRES - A new decision by Argentina's pension regulatory body is likely to impede pension fund diversification.
It also will disappoint major global money managers eyeing the launch of mutual-fund products for the $4.6 billion and growing Argentine pension fund system.
Although the pension funds still will be able to invest up to 14% of their assets in mutual funds, wording in the new resolution issued by the Superintendencia de Administradoras de Fondos de Jubilaciones y Pensiones now allows investments only in mutual funds whose entire portfolios consist of securities rated for risk by rating agencies such as Standard & Poor's Corp. or Moody's Investors Service.
The trouble is, outside of Argentina and Chile, equities generally aren't rated. As a result, some fund companies that had planned to offer portfolios of foreign securities to the pension funds, are now back at the drawing board.
Since their inception in 1994, the pension funds known as Administradoras de Fondos de Jubilaciones y Pensiones, or AFJPs, never have been allowed to invest in non-rated instruments. All instruments and entities seeking pension fund investments - including mutual funds - require a continually reviewed rating from a local or foreign risk-rating company depending on the domicile of the security. Domestic issuers of corporate bonds normally contract with ratings agencies, but on the equity side, hiring has been slow with the exception of 20 or so large-capitalization issuers.
Given the need for ratings, the pension funds have been shut out of many enticing markets, such as small-cap domestic stocks, foreign equities and non-rated international and Latin American debt. Seeing this as an opportunity, foreign mutual fund companies such as INVESCO PLC, Franklin-Templeton Group, J. Henry Schroder Bank AG and SEI Global Asset Management arrived to offer specialized fund products - with ratings - to the AFJP market. But going forward, AFJP investments in mutual funds will be limited to those invested in certificates of deposits, rated bonds, domestic large-cap equities, real-estate, bundled loans and agriculture.
While the intention of Article 3 of SAFJP Resolution 721 was to close a loophole, observers say it also reflected a doubt that local risk-rating companies can adequately assess the risk of foreign securities when assigning ratings to mutual funds.
In an interview, Norma Riavits, financial control manager of the SAFJP, said the article's effect of closing off key markets for lack of ratings doesn't mean the agency is against foreign securities in AFJP portfolios. "The Superintendencia hasn't put any restriction on the menu of foreign investments," she said. "The only limitation is that they have an investment-grade rating."
Surprisingly, a number of pension fund managers interviewed said the decision was fair given the ban on non-rated securities in general and their ambivalence toward mutual fund products. But some more forward-thinking portfolio managers believe that, in time, the industry will realize the risk in allowing millions of clients' nest eggs to ride on the fortunes of an emerging economy facing considerable challenges (including 18% unemployment and mounting deficits) and susceptible to regional economic crises.
And while mutual fund managers cry that the resolution runs counter to commonly accepted diversification arguments, several other factors enter into the equation.
First is that the SAFJP's goal remains the protection of assets, and given the relative stability of markets in Argentina and the decent returns being reported by the pension funds (15% to 20% annually), the main emphasis is on avoiding scandal through exotic investments gone sour. Second, a cornerstone of the AFJP philosophy always has been for Argentine savings to finance Argentine investments. Third, portfolio managers have not proven to be risk takers, especially given rules that force AFJPs with the worst returns to reimburse their clients in order to ensure they receive the average annual system return.
Up until recently, when international money management companies began designing specialized funds, mutual funds were disregarded by AFJPs because they did not offer more diversification but did add another layer of fees.
According to Latin Fund Management, an Argentine mutual fund newsletter, AFJPs invested between 1% and 3% of their assets in mutual funds since January 1996. AFJPs can invest up to 50% in public-sector debt, 42% in corporate bonds, 28% in CDs, 35% in equities and 10% in foreign bonds. While they may invest 14% in mutual funds, they cannot invest more than 1% of their assets in any one fund.
Resolution 721 has severely struck Schroders, one of the first fund companies to go after institutional clients in the local market. Schroders' offering of specialty funds investing in small-cap Argentine equities, Latin American equities and international equities, has proven attractive to AFJPs: 45% of its $31 million in assets come from pension funds.
Meanwhile, INVESCO's plans to offer to AFJPs a utilities fund investing 75% in the Mercosur region (Argentina, Brazil, Paraguay and Uruguay) and 25% in other Latin American countries have been sidetracked. The firm will have to modify the strategy of an international bond fund to be able to market it to AFJPs, said Alejandro Bedoya, managing director of INVESCO Valores SA. The fund's initial strategy was to invest partially in lesser-developed offshore markets, often in non-rated instruments.
