SANTIAGO, Chile - Chile's offshore stock market, launched in early 2000 in the hopes of creating a trading center for international securities and offshore mutual funds, may not ever prove to be an attractive transaction medium for Chilean AFP pension funds, despite the AFPs' avid interest in foreign investing.
Private pension funds operating here have 9.24% of their total assets, or $3.47 billion, invested in foreign-based mutual funds. But almost all of these sales are handled outside the new market, either directly via the overseas money managers or through local agents, keeping costs relatively low. Since the offshore-fund shares cannot be offered to the public, registration requirements are minimal: an AFP-financed risk rating commission must give its OK, based primarily on the overseas managers' financials and fund domicile.
Registering on the offshore market, on the other hand, requires the approval of the Chilean Securities and Insurance Superintendent. This lengthier process, however, allows local representatives to openly advertise, promote and market to institutions as well as individuals.
The expected near-term listing of funds from high-profile firms like UBS Asset Management, Morgan Stanley Dean Witter & Co. Inc. and Franklin Templeton Investments could provide the offshore exchange with some needed momentum. It wouldn't come a moment too soon: the market has transacted less than $20 million after one year of activity.
These companies see grand opportunities in offering local investors low-cost, world-class investment vehicles in a country where local, undiversified, high-volatility equity funds charge 6% management fees.
Given the costs associated with registering and promoting these offshore funds, distribution fees are likely to be charged to final investors through front- and back-end fees, which are tantamount to poison for the AFPs. And the offshore market offers few advantages to pension funds, said Marcial Marambio, president of Vision Advisors, a consultant to international managers selling in Chile.
The offshore market would be attractive to AFPs, he said, only if the funds traded there offered access to some instruments not available through current means or if the AFPs could use it to evade the 10% cap on foreign allocations. Neither of these scenarios is feasible under current regulations, he noted.
The AFPs are privately owned pension companies that manage the whole of the Chilean social security system. All Chilean workers must affiliate themselves with an AFP, and both the worker and the employer contribute to the employee's manager of choice. Each pension manager makes independent allocation decisions within government-imposed boundaries per asset class.
Arturo Alegr¡a, the assistant investment manager at AFP Habitat, Chile's No. 2 AFP with more than $8 billion, said, "if we can acquire these funds directly from overseas, why are we going to pay additional commissions to new intermediaries?" The government is hard-pressed to encourage AFPs to use the local market, as pension funds already are exempt from capital gains taxes.