BUENOS AIRES - Mutual fund managers in any of the Mercosur countries of Argentina, Brazil, Paraguay and Uruguay will soon be able to offer their products in all of them, according to an agreement in principal among regulators of that trading bloc.
The deal, which should receive final approval by the end of this year, should benefit investors and money managers. While investors - both individuals and institutions - would gain a broader choice of funds, managers would win access to new markets for their investment vehicles.
Fund managers in Argentina and Brazil are expected to benefit most from the deal, given their larger populations and capital markets and overall higher income levels. While Brazil now has more than 2,000 investment funds and Argentina has 195, Uruguay boasts only 15 and Paraguay has fewer than 10.
Broadly, the accord would allow the sale of a fund based in one country to be sold throughout Mercosur, using the distributors in neighboring countries.
According to the text of the agreement, which will continue to be refined during the year, local fund managers would obtain approval to market in Mercosur countries from their local authorities. They then would create shortened model prospectuses of their funds for investors in these neighboring countries.
Each prospectus would provide such information as the objective of the fund, its investment policy, fees, subscription and redemption policies.
In addition, regulatory agencies plan to draw up a summarized list of major local fund norms with which funds must comply. The two documents would have to be presented to neighboring-country investors when they purchase shares in a fund.
Experts believe foreign-based managers with offices in the Mercosur area will benefit most from the agreement. These managers -including the South American offices of Fidelity Investments, Invesco and Alliance Capital Management - could avoid the bureaucratic nightmare of having to seek regulatory approval in each of the Mercosur countries.
Fidelity Investments, for example, plans to launch local funds for the institutional as well as the retail market in Argentina in 1998, and these could be offered throughout the region upon approval of the accord. However, the general manager of FMR Investments Argentina, Fernando Sanchez-Alcazar, emphasized the principal aim of Fidelity's branches in Argentina, Brazil and Chile continues to be finding ways to offer existing international Fidelity funds to local investors. These offshore funds now cannot be offered publicly to Argentine or Brazilian investors, although they can be sold through private banking channels.
The agreement has the potential to lure other global managers to the region, although restrictions could trim some enthusiasm. Among the restrictions:
At least half of the assets of any fund must be invested in the original authorizing country, and just 25% of the assets may be invested outside the four Mercosur countries.
In the first year a fund is being offered in a neighboring country, it can be offered only to still-undefined "qualified investors." After the first year, it would be available to all investors.
The agreement covers only equity funds, which make up about 25% of the fund industry in Brazil and Argentina. Fixed income is excluded because Brazil's Central Bank, which regulates fixed income products in that country, has not yet participated in the discussions about cross-border selling.
According to the text of the agreement, all the funds must allocate a minimum of 51% of their assets to stocks.
Given Brazil's tight controls on money flows - severe restrictions apply to investors seeking to send money out of the country and there are few local dollar-denominated instruments - it is unlikely the Central Bank will soon allow fixed-income instruments into the agreement. Doing so would place the Brazilian fund industry at a disadvantage, because local investors would then have a chance to invest, for example, in Argentine certificates of deposit and bond funds denominated in dollars, an interesting alternative to the vulnerable Brazilian real.
Nevertheless, leaving non-equity funds out of the equation for the moment eliminates roughly 75% of the Argentine and Brazilian fund industry.
Figures calculated by Latin Fund Management, a Buenos Aires-based newsletter, show that more than $4 billion of the $5.3 billion in total industry assets is allocated in fixed-income and CD funds, while in Brazil almost $90 billion of the $122 billion in assets is targeted at fixed-income funds. The weighting toward such funds reflects the conservative nature of most South American investors.
