Mutual fund managers look to growing Peruvian market

LIMA — With the prospects for additional allocations from Chilean AFPs fading fast, international mutual fund managers have flocked to neighboring Peru's privatized pension managers to grab a piece of their growing assets.

The four-fund, $6.8 billion Peruvian system pales next to Chile's $49 billion, but it is growing at a 20% annual clip, and international managers are betting that overseas investment limits are ripe for an increase from their current 10.5%; the AFPs already invest 9.5% of their combined assets outside Peru.

The Central Bank has the power to raise the limit to 20%, the maximum authorized by law, but has insisted so far that an increase is not on its agenda.

Nevertheless, reforms to be instituted shortly by the pension regulator, the Superintendencia de Banca y Seguros — which include the breakout of each AFP's portfolio into three funds with different risk levels — portend a much higher demand for international investment. The local equities market is too small to absorb major capital inflows from the AFPs, according to AFP managers. (Each AFP now offers a single conservative portfolio with a mix of stocks and bonds.)

"For this (multifund) structure to function, we need a wider availability of financial instruments to invest in," said Pablo Moreyra, investment manager at AFP Horizonte, Lima. "For the most aggressive fund to work, we need to have instruments that are more liquid" than equities listed on the local exchange.

Nevertheless, in a recent interview, Central Bank President Javier Silva Ruete stressed that local investment alternatives, such as infrastructure projects, needed to be considered to help stimulate job creation in the country.

Market share of the AFPs is divided as follows: Integra (controlled by ING Group), 32%; Uni%F3;n Vida (Santander Central Hispano), 27%; Horizonte (Bilbao Vizcaya Argentaria), 25%; and Profuturo (Citigroup), 16%.

Of the 9.5% of their overall portfolio dedicated to overseas investments as of June 30, the AFPs as a group were allocating 8.1%, or $560 million to international mutual funds, reflecting a 12-month jump of 65%. Also, the number of offshore fund families with investments from the AFPs nearly doubled, to 14 from eight as of June 2003. Spurring the growth has been the regulator's relaxing of rules that limited investment to funds allocating 90% to AAA-rated countries.

Firms with strong Asian and European offerings are taking in the most business. Franklin Templeton Investment Services SA leads with $91.7 million under management from AFPs as of June 30, followed by Morgan Stanley Investment Management, State Street Bank & Trust Co. and J.P. Morgan Fleming Asset Management.

To enter this market, most offshore managers are resorting to their local representatives in Chile, who in turn are deciding how best to serve the small but growing AFP market: through the establishment of a local office, finding a local partner or flying in regularly from Santiago. Vision Advisors, Celfin Capital and Larra%ED;n Vial are among the Chilean representatives that have leaned toward a partnership with a Peruvian firm, while Capital Advisors and State Street will run things out of Chile.

Vision Advisors, through its association with the local Grupo Privado de Inversiones, already has funds registered and invested in Peru, from managers such as Vanguard, Morgan Stanley, Templeton, UBS, Alliance Capital and Credit Suisse. "Our job there is centered mainly on advising the AFPs with regard to portfolio design and asset allocation," said Silvia Fernandez, international sales manager at Vision.

In the same line, Larra%ED;n Vial is working with the local firm Grupo Santa Cruz to introduce a line of products similar to the Chilean one, in addition to two managers that it has registered for some time. Celfin Capital, which represents Capital Group and other fund families, is also seeking a local Peruvian partner.

Another manager that has its sights placed in Peru is Dimensional Fund Advisors, the leading asset gatherer in the Chilean AFP market. Through its distributor in Latin America, Capital Advisors, it is registering funds before the Peruvian regulator simultaneously with its new product strategy for Chile, where it invests more than $1 billion in assets. Compass Chile, which fronts for J.P. Morgan Fleming, Legg Mason and Pacific Investment Management Co., has already gotten significant allocations for the first two firms.