Managers seeing room to grow by looking south of the border

A spurt of asset management M&A activity in Mexico signals a new push by money managers into what has become one of the hottest markets in Latin America.

Money management giant BlackRock Inc. is just the latest manager to bet on an expanding asset management market in Mexico.

BlackRock announced Nov. 28 it had signed an agreement to acquire the asset management unit of Citibanamex, a unit of Citigroup Inc., a deal that will double BlackRock's assets under management in Mexico to $62 billion. BlackRock has a total of $120 billion under management in Latin America.

BlackRock's building of its business in Mexico is reflective of a growing middle class in the country, a phenomenon that is occurring in other parts of Latin America, said Axel Christensen, BlackRock managing director and chief investment strategist for Latin America and Iberia, based in Santiago, Chile.

"A very important cohort of citizens, of workers, are seeing their incomes increase and realizing they have to save for retirement," Mr. Christensen said.

In October, Principal Financial Group announced it had agreed to acquire MetLife Inc.'s Mexican retirement fund management business, MetLife Afore S.A. de C.V., and would combine it with its existing business to create the fifth-largest pension administrator, or afore, in Mexico. Mexican workers are required to pay a portion of their wages into an afore in exchange for a defined contribution retirement benefit.

Earlier in October, outside of the afore system, Dutch money management firm Aegon NV and its Transamerica Corp. subsidiary announced they had entered into a relationship with Mexico City-based wealth management company Administradora Akaan to create a money management firm called Akaan Transamerica that would sell Mexican and international mutual funds and other investment strategies to retail and institutional investors.

Another transaction in October involved Mexico's largest bank, Grupo Financiero Banorte, which also runs the largest afore. It agreed to buy Grupo Financiero Interacciones SA, another major Mexican bank and its money management unit.

Money managers are interested in the Latin American market because of improving economies, a growing middle-class and an embrace of free markets not only in Mexico but also in Argentina, Brazil, Chile, Uruguay and Peru, said Federico Cervantes, a Toronto-based senior investment consultant with Willis Towers Watson PLC.

"Those countries are going through a more market friendly political shift, right now, that will really provide really good opportunities," he said. "The asset managers recognize that."

A Dec. 14 report by Moody's Investors Service said the outlook for asset managers in Latin America is stable, "with Argentina and Brazil emerging from recession, which will support industry growth."

In Mexico, the report notes, midyear presidential elections in 2018 and NAFTA negotiations with the U.S. and Canada could cause market volatility. But it said Mexico's afores "are still in the accumulation phase and will not experience outflows over the next 10 to 15 years."

The report also said few Mexican citizens are invested in bond funds, which is a positive sign for the asset management industry in Mexico. "The funds low market penetration represents a significant growth opportunity for asset managers, not only in terms of AUM but also in the number of investment vehicles," it said.

Potential money management growth in Argentina comes as the country is shaking off its status as an international pariah after it resolved in 2016 the last cases around the country's default on more than $80 billion in sovereign bonds 15 years earlier.

BlackRock's Mr. Christensen said the manager has interest in Argentina's asset management market, but is proceeding cautiously.

"The degree of involvement depends on how things happen to develop in Argentina, it's a gradual kind of comeback to market," he said.

He said BlackRock Chairman and CEO Laurence Fink and President Robert Kaputo recently met with Argentina's President Mauricio Macri to discuss asset management opportunities in Argentina.

Franklin Templeton Investments also is looking at the Argentina market for asset management expansion. The company is in the early stages of considering when it would put a local investment team in Argentina, said Andrew Ashton, San Mateo, Calif.-based managing director and head of the Americas region.

"From an investible assets perspective, it still needs to be developed significantly," Mr. Ashton said of the Argentina marketplace.

Meanwhile, protests occurred in Buenos Aires last week after the country's Congress approved Mr. Macri's plan to apply a new formulas to the state's pension system, tying benefit increases to consumer inflation instead of individuals' wage growth and the amount of taxes paid. The move is expected to reduce pension increases to individuals, reducing system payouts in Argentina's low-inflation environment, while cutting the government's deficit.

Two other Latin American hot spots of late have been Brazil and Chile, which have long-established retirement systems.

In Brazil, plans to trim costs from government's pension system, its equivalent of Social Security in the U.S., by cutting benefits and raising the retirement age, have stalled in the country's Congress.

In Chile, protests have continued by citizens angry at the low retirement benefits, averaging less than $300 a month, generated by the country's retirement system. As in Mexico, workers are required to contribute part of their pay (10%) into a defined contribution style retirement plan, managed by pension fund administrators, know as AFPs.

The more than three-decade old system, considered a model for other countries, is being tested as more workers become eligible for retirement and find their income replacement is much smaller than expected.

While a switch away from a private system was advocated by some candidates in the country's presidential election, which could have hurt money managers running AFPs, the issue now seems off the table, with the election of a new president.

On Dec. 17, Sebastian Pinera was elected as Chile's new president, which could be a positive business development for Principal and the five other AFP administrators. During his campaign Mr. Pinera, who had served previously as president, said he would increase the mandatory contributions to the pension system to 14% from 10%, with employers contributing the additional 4% on top of the 10% workers contribute.

Mr. Pinera has said he favors keeping AFP system intact and in private hands. His final opponent, Alejandro Guillier wanted the government to manage an expansion of contributions.

Uwe Schillhorn, Santiago, Chile-based chief investment officer for Latin America at Principal, said the company believes the election of a new president will help the Chilean economy end a low-growth period, and also help restore faith in the AFP system by bringing in new contributions as employment grows.

Principal runs one of six AFP programs. It has $36 billion in assets under management in Chile, 20% of the system's approximate $180 billion in AUM. The Principal AFP covers 603,000 participants.

Mr. Schillhorn said Principal is hoping "growth will accelerate, investments will accelerate, meaning more people will be employed in Chile. "And that more people will contribute to the (AFP) system."

Rich Nuzum, New York-based president of the global wealth business for consulting firm Mercer LLC, said the Chilean system should be kept in place.

"There are a lot of good things with the system, " Mr. Nuzum said. "I think what's getting lost is this is a problem that's not unique to Latin America. That is, when long-term interest rates drop as they have globally, a given account balance buys less annuity income at retirement."

Mr. Nuzum said the solution is not to scrap the system, but rather to find some type of minimum guaranteed income option, in which the investment risks would be hedged and participants would give up some upside, in exchange for a guaranteed payment at retirement.​