SANTIAGO, Chile -- October's market trouncing and a bearish regional outlook in the short term at least provided a little drama to the lives of Chilean Administradoras de Fondos de Pension, which have spent the better part of the year awaiting the outcome of key reforms languishing in Congress.
In October the country's 13 AFPs averaged a loss of an estimated 1.7% in net asset value, on the heels of a 0.5% setback in September. The back-to-back negative performances bring the accumulated return to 7% in 10 months, or just 2% after inflation. While the lackluster year-to-date returns could have been much worse considering the free falls in the stock markets of neighboring Argentina and Brazil, they have helped to refocus attention on the need to pass initiatives pending in Congress.
Two of the three measures -- one that would allow AFPs to create a second, more conservative pension fund for those nearing retirement and another that would give AFPs permission to allocate assets to individual managers -- are stuck in a controversial bill aimed at creating an unemployment-insurance fund. That bill probably will not go to the floor of the lower house of the Chilean legislature before the end of the year. The third -- allowing AFPs to collectively bargain lower fees with large groups of workers in order to lock them into the fund for a designated period of time -- is stalled in a congressional labor committee.
This last item, sponsored by the Superintendencia of AFP, the country's pension regulator, is aimed at lowering exorbitant costs passed on to members: annual fees run at about 3% of the employee's salary compared to local mutual fund fees of 1% to 6% on invested assets. The pension funds attribute the high fee levels to the costs of maintaining a sales force, whose principal activity is persuading workers to switch from one fund to another. In 1996, spending by AFPs on their sales forces reached $180 million.
The fee measure is last on the AFPs' priority list. Nevertheless, the AFPs realize that some action needs to be taken, and they have supported anti-fraud and verification measures to reduce the 1.5 million transfers between AFPs that take place per year. The number of transfers is tremendous, considering there are only 5 million participants in the system.
The pension funds are really gunning for passage of the third-party asset management proposal. This would open a wide range of possibilities to diversify the current asset mix of the AFP portfolios beyond domestic stocks and bonds and government securities.
Already, both local and foreign money managers are lining up in the hope of snatching a piece of the $33 billion pie that the system has amassed. According to Eugenio Valck, investment manager of Habitat AFP, the measure would allow the AFPs to spend more time analyzing the correct mix of asset classes (equities, bonds, cash, etc.) and employ global asset-allocation strategies without needing a formal presence overseas.
Mr. Valck stressed, however, that within Chile there are very few quality managers worth allocating to, especially in the fixed-income sector. But that could soon change. A separate banking law would permit banks to leverage their administration capabilities and organize asset-management units that could control up to 100% of the pension funds' domestic portfolio.
Smaller specialty firms see the potential in offering services to pension funds. For example, FCMI Chile Financial Corp., a money-management firm controlled by Toronto-based Friedburg Capital Management Inc., thinks it can boost AFP efficiency while providing expert analysis.
The sheer size of the pension funds and their growth trends will require, at least in the medium term, the need for specialized money managers, said Daniel Orezzoli, general manager of FCMI Chile. Maintaining research teams for each sector of the economy is too costly for AFPs, he suggested.
But it remains to be seen how eager the AFPs will be to give up some control of their assets. After all, their guiding principal is to stay within two percentage points of the average industry performance; if they don't, they are forced to dig into their own pockets to reimburse clients for the difference.
This provision is widely seen as stifling creativity and slowing the growth of allocations to foreign mutual funds.
While permitted to allocate up to 12% of their assets into the funds of internationally recognized fund families, the percentage of total industry assets invested outside of Chile as of Sept. 30, came to 1.08%, or $356.17 million. Nevertheless, this is a 100% increase from March 30, and industry estimates see foreign investments totaling 6% of industry assets, or close to $2.5 billion, in 2000.
