LIMA, Peru - The end of March should mark the first sales of international mutual funds to Peruvian private pension funds, and companies such as Alliance Capital Management LP, Morgan Stanley Dean Witter & Co. and Chase Fleming Asset Management already have received the green light from the government to distribute their funds.
The private pension fund industry in Peru is quite small even by Latin American standards, with four pension companies managing $2.7 billion, mostly invested in local equities and fixed-income securities.
The entrance of offshore funds into this market was made possible by two key factors.
First, the lack of local instruments in which to invest, as capital markets activity dried up on the heels of a failed presidential election in 2000 and ensuing corruption scandals.
Second, a year ago, Telef¢nica de Espa?a swapped all of its local subsidiaries' shares for depository shares of the Spanish holding company in Madrid. The pension fund companies, known as AFPs, were key holders of Telef¢nica de Per£ shares, and retaining their positions in the company required regulators to increase the permitted overseas allocation to 7.5% from 1%, since depository shares are considered foreign investments.
The AFPs now can begin selling the Telef¢nica stock and allocating up to 7.5% of their holdings to international funds. However, limits to ensure diversification dictate caps of 2% of total assets per manager and 1% per mutual fund.
After Chile
With the move, Peru has become the second Latin American country to allow its pension funds to allocate assets to offshore funds. The practice has existed in Chile since 1997, and today that country's AFPs hold more than $3.2 billion in international mutual fund shares. In essence, the distribution framework in Chile will provide an easy launch pad for entrance into the Peruvian market. Meanwhile, in Argentina, international fund companies hope for an opening in the $22 billion market this year.
In Chile, the offshore funds must pass muster with an industry-supervised Risk Classification Commission, after first being nominated by at least one pension fund. In Peru, the nominations are followed by an authorization from the Banking and Insurance Superintendent, which already has OK'd Alliance, Morgan Stanley and Chase Fleming.
Fidelity Investments is in the process of being authorized, said Fernando S nchez Alcazar, the Buenos Aires-based head of Latin American operations. "We are doing our own due diligence and have made contact with all the players there," he said. "While Peru isn't a market whose size alone makes it tremendously appealing, if we already are in Chile and in Argentina, it makes perfect sense to be there."
While in Chile the AFPs have eaten up emerging markets funds, in Peru the focus for the moment will have to be on developed markets. For international funds to be sold to the AFPs, they must quote in U.S. dollars, invest in countries with AAA long-term debt ratings, and invest in large-cap companies. In addition, the funds to be sold must have a risk rating from an international rating agency.
Want to widen menu
In the meantime, industry participants already are discussing with regulators the possibility of widening the investment menu to include emerging markets funds, especially those investing in Asia. Pension fund managers view this as a development, as there have been concerns that the local market could face an oversaturation from institutional players such as pension funds, insurance companies and mutual funds.
Fidelity eventually will be looking to gain Peruvian authorization for the 30 Luxembourg-registered funds it offers in Chile, said Mr. S nchez Alcazar.
At the moment, pension fund portfolios invest 47% of assets in corporate and government bonds, 36% in equities, 16% in time deposits and less than 1% in closed-end private-equity funds.
