Distribution efforts pay off in Chile

SANTIAGO — While international managers face continued roadblocks when trying to distribute their mutual funds to institutions in major Latin American countries, they have had the pedal to the metal in Chile for a good year now.

And their efforts have paid off. Since August 2002, more than $3.3 billion in Chilean pension fund assets went into international mutual funds. The primary driver behind the growth is a loosening of investment limits by the Chilean government. International mutual fund managers have enjoyed a doubling of previous limits for mutual fund investments by privatized Chilean pension fund managers, known as AFPs.

In August 2002, the Legislature approved giving the Central Bank authority to set maximum overall AFP international allocations at 30%, up from the previous 20%.

For mutual funds, the old limit had been unattainable because all equity investments and all mutual-fund investing were capped at 10% by the Central Bank and the pension regulator, the Superintendencia de Administradoras de Fondos de Pensiones.

This 10% sublimit began rising in small increments until it reached 20% in conjunction with the legislative action in August 2002 where it remained until May, when the Central Bank exercised its authority and raised the ceiling on all international investments to 25%.

In that sense, the potential allocation to mutual funds jumped from about $3 billion of the $30 billion in the AFP system at the close of 2001, to $10.3 billion of the $41 billion that the AFPs administered as of Aug.31, 2003. In reality, the AFPs were allocating $7.2 billion to international mutual funds and $1.6 billion to fixed-income instruments — a combined 21% of overall assets under management.

AFPs have already begun pushing for the Central Bank to authorize the full 30% investment.

Driving the shift toward international allocations has been the AFPs' continued search for alternatives to shrinking, illiquid local capital markets. AFP managers worry that shares are overpriced because of the requirement that most assets be channeled into the local exchange.

For his part, Guillermo Larra%ED;n, the pension fund superintendent, said he is aware of the AFPs' concerns but argued that there is still ample time to raise the limits. He agrees that Chile should continually move toward a system in which affiliates have more pension savings allocated internationally than locally, but he said there is no set timeline for that to occur.

Also propelling the growing interest of the AFPs in international instruments has been the launch of a multifunds system, the improving global stock recovery and the strengthening ties between the international community and AFP portfolio managers.

The launch of the multifunds system separated each AFP's long-running fund into five varying risk portfolios. The most risk-averse fund — the E fund — is 100% fixed-income, while the most aggressive fund — the A fund — must invest between 40% and 80% of its assets in equities. The C fund — into which participants were automatically placed soon after the kickoff of the multifund system — still claims $7 out of every $10 held by the AFPs. Though more conservative, it can still allocate up to 40% of assets to equities.

The stock market recovery provided a strong impetus for the AFPs to direct new flows toward international mutual funds — some $3.1 billion was pumped into international mutual funds in the first eight months of the year. Equity funds have gained more than three points of market share in that period, holding three-quarters of overall Chilean AFP investments. Meanwhile, the share going to fixed-income funds has increased to 24% from 18%, while money market funds lost nine points, down to 1%.

The AFP allocations have pushed three managers — Fidelity Investments, Dimensional Fund Advisors and J.P. Morgan Fleming — over the half-billion-dollar mark each in assets. Like most managers, the three outsource distribution and advisory services to local firms.

Rodrigo Alamos, director of Santiago-based Capital Advisors SA, the firm representing DFA in Chile, noted that index managers like DFA and Vanguard, and firms offering exchange-traded funds, have gained in market share since the launching of the multifunds system, given the increased portfolio oversight that the AFPs must handle. "It's clear that active managers add an extra level of risk through tracking error and style drift, that AFPs are trying to harder to avoid," said Mr. Alamos.

Pioneer Group has also had a banner year, having grown from $123 million at the start of the year to $331 million as of Aug. 31. Steve Phillips, Pioneer's Miami-based senior vice president, head of international sales and distribution-The Americas, attributed the company's success to its value-added approach to relationship building with Chilean AFPs. "Our strengths are the access we give to our portfolio managers, competitive pricing, striving for excellence in client servicing and offering a broad array of products," said Mr. Phillips.

Pioneer is one of the few top-tier players in Chile that has succeeded in attracting AFP assets for its fixed-income products. The other is Pacific Investment Management Co., with $318 million in fixed-income funds. In the case of Fidelity, $581 million of the $590 million it has received from the AFPs is allocated to equity mutual funds.

Regionally speaking, J.P. Morgan Fleming, Fidelity and fourth-ranked Morgan Stanley have the most diversified portfolios, with significant holdings in three or more major regions. Between them, Fidelity and J.P. Morgan Fleming manage 30% of the AFPs' allocations to Asia.