MEXICO CITY - The Mexican Senate this month voted to approve international investing by the booming Afore private pension funds.
But it also instructed the industry regulator, the Consar, to take up to a year to set rules and limits for global allocations.
The measure approved by the Senate allows the Afores to eventually invest up to 20% of their assets in foreign instruments. However, it imposed a 10% limit during the first 12 months following implementation. Vicente Corta, chairman of the Consar, confirmed implementation of the new rules would likely be postponed for a full 12 months.
The measure, designed to shield workers' pension assets from any national fiscal crisis, gained the support of all but a small minority in the Mexican Congress. Legislators were spurred to action after witnessing the sharp reduction in the value of the Argentine AFJP system, which became grossly exposed to government obligations in the months leading up to Argentina's default in December 2001.
82% in government instruments
Though Mexico has seemed to separate itself from the woes of Argentina and Brazil, Mexican legislators were taking no chances. The Afores invest more than 82% of assets in government instruments, according to official data, and the law that gave birth to the industry in 1997 made no mention of foreign investing.
Though mindful of internationally accepted maxims regarding diversification among asset classes and regions, regulators in Mexico say they have had to work within the bounds of a pension law that sought to assure that worker's savings would be put to use to finance public and private projects. In addition, most investors shun equity investments and liken the local stock market to a casino, so investment in equities was never included in the original law. Given this historic underpinnings, both the Consar and the Congress felt it would be prudent to approach international investing with care.
The 11 privately owned Afores controlled more than $28 billion in assets as of September 2002, a 28% increase over year-ago figures in local currency terms and 10% in U.S. dollar terms. Most Mexican workers - or some 26 million affiliates - make obligatory contributions to the Afores, which manage the U.S. equivalent of Social Security assets. Citigroup-owned Banamex Afore and Banco Bilbao Vizcaya Argentaria-controlled Bancomer Afore control nearly half the market with respective assets of $7 billion and $6 billion under management, according to the Consar.
The Consar already gave an early indication of the types of instruments that it will approve. It said in a prepared statement that its intention is to increase diversification, raise return expectations and increase the safety of pension assets, by approving for investment "the most highly rated securities in the world."
The creation of a comprehensive international investment menu for the Afores may be a boon to foreign mutual fund managers. Although the Consar does not have the authority to permit investment in instruments that are not currently contemplated in the pension fund law, Isaac Vol¡n, vice president of planning of the Consar, said mutual funds were mentioned in the law, just never authorized by the Consar's board of governors. "This is an area that will definitely be considered in mid- to late 2003," Mr. Volin said in an interview.
Mr. Volin did mention the Consar will begin with debt instruments, since these are currently allowed on the domestic level. He indicated that credit quality and liquidity will take precedence over country of origin.
Given the attractive rates paid by the government on its obligations and the state of the international markets, the industry maintained its less-than-enthusiastic stance toward the possibility of going global. In addition, the recent congressional amendments to the law opened up investment opportunities in state and municipal government securities - which are higher in risk than the federal government - and quasi-public companies.
With that in mind, Francisco Gonz lez Almaraz, president of the Mexican Afore Association, claimed that investing abroad is not so urgent for managers, since the recent changes to their investment regimen allow them to diversify while at the same time promoting development of the Mexican financial market.
He claimed that "although offshore investment is important to protect against internal economic risks, we must first ensure we are not incurring too much exposure, because taking significant risks is better done in Mexico."