International increase OK’d in Colombia

BOGOTA — Managers of Colombia's AFP privatized pension system recently got the green light to invest 20% of their combined $8.1 billion in assets internationally, but for now many are continuing to proceed with caution.

The six firms that make up the privately managed obligatory social security system in Colombia were the beneficiaries of a more liberal investment regime authorized in March by the Superintendencia Bancaria de Colombia. The industry regulator raised the limit on offshore investment in international securities — including mutual funds — to 20% from 10%.

At the same time, the entity dropped its prior ban on offshore mutual funds that are not allocated either 100% to fixed income or 100% to equities; for example, now equity funds with some fixed income exposure can be purchased by the AFPs. (Foreign asset managers can only manage AFP assets through mutual funds.)

Colombia's AFP system, active since 1993, is the third largest in Latin America, behind Chile and Mexico. (On paper, Argentina's AFJP system is larger, with some $16 billion under management, but managers there are holding mostly government debt that is being renegotiated at just 25% of face value.)

The loosening of the investment restrictions is well in advance of any specific need: most AFPs are below the earlier 10% limit. AFP investment overseas totaled $565 million as of March 31, about 7% of overall assets.

Luis Fernando Alarc%F3;n Mantilla, president of the Asociaci%F3;n Colombiana de Administradoras de Fondos de Pensiones y de Cesant%ED;a, praised the regulator's foresight and understanding of the AFP's need for diversification. "The resolution shows that the superintendencia wants the expansion of international investments to take place in a orderly fashion, with the AFPs being able to widen their exposure without feeling constrained by the 10% limit," he said.

Mutual funds make up more than a fifth of that total. As of March 31, AFP allocations to international mutual funds grew to $127 million, more than double the $55 million held as of June 30, 2002. Active mutual funds ac counted for the lion's share of these assets, with almost $111 million, while index funds commanded only $16 million.

AFPs Colfondos and Santander have allocated the highest percentage of assets to international mutual funds: 4.76% and 4.05%, respectively. What 's more, more than half of their overall international portfolio is in mutual funds, vs. direct investment in stocks and bonds. The four other AFPs, for their part, have been more in favor of direct investing, putting less than 1% of assets in the hands of foreign managers.

Jaime Mart%ED;, executive of Compass Group Chile SA, a firm that acts as institutional investor representative in Latin America for J.P. Morgan Fleming Asset Management, Pacific Investment Management Co., Legg Mason, Janus and UBP Asset Management, said the caution of some AFPs is reminiscent of the Chilean pension funds in the late 1990s. "There is still a lack of incentives for the AFPs to go offshore," he said, because local interest rates remain attractive and currency exchange rates for the peso remain stable. When interest rates fell in Chile, he notes, international investment spiraled upward.

Very few offshore managers have a dedicated presence in Colombia. Templeton Investments and Vanguard Group, companies raising money from the AFPs, are both represented by Andean Consultants, a partner of Vision Advisors in Chile. Vision Advisors represents the managers before Chilean AFPs.

Beside the $8.1 billion in obligatory assets of the Colombian AFPs, there is also a $1.5 billion voluntary system that manages IRA-type accounts for individuals. This sector, which is more loosely regulated than the obligatory system, is dominated by foreign investments. As of March 31, 45% of all assets under management — or $401 million — went to offshore securities, including $286 million in mutual funds.