SANTIAGO, Chile -- Several major Chilean pension funds have been forced onto the selling block as poor investment returns and other factors have spawned a need to find new sources of capital.
The issues have prompted major changes at three of the pension funds -- AFPs Cuprum, Proteccion and Magister -- while a fourth, AFP Union, was sold outright in late April.
And the market is abuzz with rumors that AFP Summa, the sixth largest pension fund, with $2.25 billion in assets, will be taken over shortly by the smaller AFP Bansander.
Some of the buyers are foreign-based organizations. The new foreign partners are eager to participate in the pension system in order to gain all-important access to fund affiliates and offer them other banking, investment or insurance products. But below the surface, the system, which has become a model for the region, is beset by a persistently high-cost structure and weak investment performances.
Waves of affiliate transfers between funds provoked by aggressive -- and expensive -- marketing campaigns are the main cause of the high costs. Lagging performance stems from a weak equity market. The average annual returns for the system as a whole were 18.2% in 1994; -2.5% in 1995; 3.5% in 1996; and 4.7% in 1997.
Some observers saw the flurry of buying activity as long overdue, given that the three largest players in the 13-fund industry control 55% of industry assets, while the smallest five claimed less than 6% combined.
The largest transaction in the spending spree dates back to late January, when the Sun Life Group purchased a 31.7% stake in AFP Cuprum, the third-largest pension fund, with $5.3 billion under management.
Sun Life, a Canadian insurance company, had earlier expressed its interest in entering the Chilean insurance market when Chile's La Construccion opened a public search for a strategic partner.
A local player was behind the purchase of controlling stakes in AFP Proteccion and AFP Union. The number two AFP, Provida, easily moved ahead of its nearest rival, AFP Habitat, through the purchase of 99% of Union and 59.5% of Proteccion. The sale of Union meant the exit of American International Group from the Chilean pension fund industry.
The country's eighth-largest AFP, Union, has $1.19 billion in affiliate assets. Proteccion was previously controlled by the Security Group.
Meanwhile, an American consortium of Inverlink and Preferred Capital Markets bought 46% of AFP Magister, one of Chile's smallest funds, with $375 million in assets.
Another reshuffling is certain: AFP Summa is having difficulty managing costs and is openly looking for a new partner, and AFP Bansander is rumored to be a strong candidate. Meanwhile the two smallest pension funds, AFPs Qualitas and Fomenta, are said to be evaluating mergers -- Qualitas with AFP Magister and Fomenta with a foreign partner. But Fomenta has also declared its intention to convert its current affiliates into stockholders, through a stock offering of 32% of its holdings.
Representatives of the pension fund sector have repeatedly expressed interest in diversifying portfolios in order to reduce risk and boost return rates. To achieve these goals, they have been shifting more assets to fixed-income investments, although portfolio managers are reluctant to liquidate equity positions as they await a recovery in prices.
As of the end of March, the local IGPA stock market index shows moderate declines over the past 12 months, 24 months, and 36 months, before factoring in the effects of 5%-6% annual inflation.
The effort to diversify through foreign investment has also been slow.
The much-touted opening of the pension-fund market to foreign mutual funds has attracted 400 international funds to the region, but these have managed to attract only $500 million in AFP assets, or 1.6% of the industry.