Opportunities are opening up for fund managers in the US$300 billion Latin American managed funds marketplace, according to a report by Cerulli Associates Inc. and Latin Asset Management.
The report, Trends in the Latin American Fund Management Marketplace, is a joint venture between Boston-based Cerulli and its strategic partner in Latin America, Latin Asset Management, Buenos Aires. It predicts that by year-end 2006, managed assets of the four largest managed fund industries in Latin America - Brazil, Mexico, Chile and Argentina - should double, reaching US$600 billion, which would represent average compound annual growth of 18% a year.
Privatized pension systems invest conservatively but are obligatory in many Latin American countries and are expected to help fuel some of the growth.
When it comes down to actual investments, the report points out some problems and opportunities.
According to the report, banks' continued control of the mutual fund business has stunted the growth of funds as general investment vehicles instead of savings instruments. Latin American banks have a horrendous record when it comes to promoting mutual funds, it said.
Insurance companies are eclipsing banks in terms of average sales expertise and could eventually challenge banks as more credible sales agents for long-term mutual funds.
In Brazil, insurance companies are very active in the supplemental pensions business. In Chile, the report said insurers are expected to have better success in obtaining assets under the recently approved voluntary savings system.
Independent fund managers, according to the report, lack the distribution base necessary to be meaningful outside of the institutional arena. These "pure play" managers are fighting an uphill battle in Latin America because retail investors are not performance-conscious, banks mainly distribute proprietary products, and only Brazil has any form of fund-of-funds products.
So independent fund managers have focused marketing efforts on pension funds, insurance companies and corporate clients. The report said they have had better luck in this area, but because bank-owned managers also compete for these assets, there often is an oversupply of players competing for assets that have only small growth on a monthly basis.
International managers who want to participate in the Latin American retail and institutional markets have a rough road. Most assets in local funds must remain onshore by law, limiting the ability of international managers to make the most use of their portfolio management expertise and product base.
The prospects for pension funds in Brazil, Mexico and Argentina investing in offshore funds is unlikely because of local rules. International managers interested in getting into the retail or institutional markets in any of these countries have to use locally registered products to do it.
Chile, however, has taken the lead in allowing many different types of offshore investments. The country began allowing its AFP pension funds to invest in international mutual funds in 1997; it has become a US$3 billion market for global managers that could expand to US$23 billion in the long term.
Asset managers controlled by international banks that do business in the region are dominant among asset managers because operating costs are offset by the power of the banks' strong distribution networks.
Pension funds in Brazil and Chile present the best opportunities for independent fund managers, according to the report. These two countries are upgrading their regulatory systems to create platforms for increased competition, lower costs and more accountability.
The pension fund market in Brazil is the largest for third-party managers, but according to industry insiders, independent managers must have up to US$3 billion to operate at a break-even level, the report declares.
Independent fund distributors are beginning to attract business and become more visible, according to the report.
The rewriting of Mexico's investment company law in December 2001 mandated the creation of independent fund distributors whose only purpose is to sell third-party funds. In Brazil, new rules are making third-party funds available to investors. There have been new product launches such as Deutsche Bank's MaxBlue branches and other investment boutiques that have differentiated themselves from the local banks "by putting funds, professional management and financial planning in the spotlight," according to the report.
"Mexico could roll out the red carpet to international funds," the report said. The country's importance as a partner in NAFTA and its good relations with the United States could pressure the government to allow more U.S. asset management firms to market products there.
Not all rosy
But there are problems for some of the investments by funds.
In Mexico, there is a strong anti-equity sentiment among workers that will hurt any effort to allow allocations to even local mutual funds, according to the report. It's possible a 5% allocation to local equities in Mexico will be granted in 2002.
However, in Argentina the pension fund industry, which was created to stimulate the capital markets and decrease peoples' dependence on the government for their retirement income, "has gone full circle in the face of crisis," according to the report. The pension funds have agreed to put all monthly flows into increasingly risky government debt (Pensions & Investments, Oct. 29 and Sept. 3).
The Internet has not become a major force in the sale of fund products, according to the report. Although Latin America is one of the fastest growing regions in terms of Internet use, efforts to distribute mutual funds online have not succeeded. And independent online ventures have come under financial pressure.
The exception is Brazil, which has more than 10 websites dedicated to the sale of third-party funds, although growth projections are modest.