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Are you a fund manager looking for new business opportunities? Perhaps it’s time to look to Latin America.
State Street, a Boston-based fund manager and service provider, has identified the region as “a strategic marketplace for money management”. Recent expansion of pension funds, sovereign wealth funds and mutual funds makes it make it “particularly attractive to asset managers looking to sell products or for places to invest, as well as for financial service providers”.
So where should overseas professionals pitch their tents? State Street breezily talks of the region’s five “major” economies as being Brazil, Mexico, Chile, Colombia and Peru – possibly putting a few noses out of joint in Argentina and elsewhere. But in terms of opportunities for fund management, few would question that choice. State Street estimates that central bank reserves, sovereign wealth funds, pension funds and mutual funds in the five countries add up to $2.2tr – with projected annual growth of 10 per cent to 15 per cent over the coming five years.
Take the pension fund industry. While Brazil has lagged in terms of reform – much of the industry is still in closed sponsored funds, with the biggest run by public sector companies – the other four, with Chile in the lead, have developed thriving industries expected to go on growing, as this chart shows:
State Street writes:
Spurred by mandatory participation and a large working-age population, the pension fund systems of the major five have seen rapid asset growth. The privatized pension systems of Chile, Colombia, Peru and Mexico account for some $400 billion in assets today, of which approximately $120 billion are cross-border.
That opens opportunities for managers who can advise, for example, on investment outside the region.
While high exposure to local equities helped some Latin American pension funds rebound from the recent financial crisis, allocations for overseas investment are now climbing due to the limited capacity for domestic investments in these markets. However, room for growth in international investment allocations remains as the average overseas allocation is only 27 percent across all Latin American private pension fund managers.
Nor should Brazil be ignored. Its corporate pension fund market “is by far the largest in the region, with more than $440bn in assets, including open and closed vehicles” says State Street, although the country’s high interest rates and deep local markets – as well as regulation – mean fund managers have less incentive to look overseas.
Opportunities should develop, however, in Brazil’s growing voluntary pensions market which, says State Street, remains dominated by insurers owned by local banks but may expand to make room for offshore management expertise.
Turn to mutual funds, however, and Brazil snaps into focus. State Street estimates that assets under management amount to $1.1tr – half the five countries’ total assets.
It is also evolving. Recent regulatory changes, for example, set the overseas investment cap at 100 percent for multimarket/hedge funds with qualifi ed investors, 20 percent for other multimarket funds and 10 percent for other mutual funds. This sizable market has the potential to shift offshore quickly should market conditions warrant it.
The ETF (exchange traded fund) market is especially attractive from a distributor’s perspective, says State Street, because of structural similarities with the US including sophisticated, segmented distribution channels and a high level of institutional and retail interest. But “the Brazilian market is highly regulated, open only to locally domiciled and manufactured ETFs that invest solely in local stocks.” ETF distributors must have a local presence approved by regulators.
Other markets are already more open to offshore financial service providers. State Street finds Chile to be the most welcoming, with mutual fund and pension fund industries that invest overseas. Colombia and, to a lesser extent, Peru have followed a similar pattern.
Mexico looks uninviting at first glance, says State Street. Big banks dominate, leaving little space for niche operators, while in the mutual fund and ETF businesses, regulatory and tax rules work at cross purposes. Registration of cross-border funds on the Mexico Stock Exchange is prohibited.
But service providers should stay tuned.
Regulatory shifts now under way at Mexico’s pensions fund regulator suggest a recognition that future growth will depend on diversified investment strategies as well as more flexible investment strategies.
The bottom line? The region offers great opportunities but to exploit them requires a lot of hard work. The biggest markets are the toughest to get into – Brazil and Mexico are both dominated by big local players and have complex, fast-changing and at times contradictory regulation. That means professionals must be prepared to put in the time studying markets in depth. A challenge that holds out rich rewards.