LatinFinance - May/June 2015 - 43

PENSIONS
CHILE

Chilean pension funds had a 2014 to brag about. As regulatory scrutiny
on the system heats up and markets turn sour, it's unclear whether the winning
streak can last. By Jennifer P. Roig

Keeping up

hen it comes to powerful institutional investors in Chile, everybody
points to the six pension funds administrators
- the AFPs. When borrowers hit the road to
raise capital, AFP asset managers tend to be
among the first to get a call. The system as a
whole had amassed capital worth CLP104.766
billion ($170 billion) by March 2015, achieving
a startling 12.7% real-term growth year-to-date,
way above the OECD average.
Such impressive performance is based
primarily on diversification, especially as the
private pension funds allocate resources in
foreign markets. Pamela Auszenker, head of equity research and strategy at BCI Investment
Bank in Chile, says that "having invested in US, Europe, and other markets paid out. Last
year was very good in the US and so far 2015 has been good for Europe." Moreover, in 2014
interest rates dropped in Chile, following the Central Bank cuts to monetary policy. "And
because AFPs have both long- and short-term instruments in their portfolios, this played in
their favor," says Auszenker.
The depreciation of the Chilean peso throughout 2014 further benefitted the pension
administrators. In fact, converting foreign currency payouts into Chilean pesos doubled
returns, says Pablo Castañeda, finance professor at University Adolfo Ibáñez.
The question is: How long can the AFPs keep up the lucky streak?
Revving up the AFP engine
More than three decades after its creation, "the pension fund system has surpassed initial
expectations," says Roberto Fuentes, director at Chile's AFP Association (AAFP). He calculates that just 30% of today's total assets come from membership contributions, with 70%
accumulated through profitable investments.
Each AFP is equally divided into five funds, from a riskier A-level investment strategy to a
conservative E Fund. Although the C Fund has the most active assets (37.3%) and the largest
number of accounts, the A Fund has the better long-term track record. "AFPs have structured their funds in line with the premise of higher risks-higher returns," says José Ramón
Valente, partner and executive director at investment and advisory firm Econsult.
Valente tips his hat to the AFP investment strategy. "AFPs allocated resources to the
emerging markets while commodity prices were high, between 2003 and 2013. Before that
they took advantage of the Asian markets' rally."

©REUTERS

W

STRIDING FORWARD: Rising numbers of Chileans are subscribing to pension plans under
the AFP system

For the past three years, pension funds
have largely divested from the national
stock market, while keeping a long-term
presence in fixed income. This bet has paid
off, argues Valente. "While the international
stock markets have performed well in the
past three years, interest rates in Chile have
reached historic lows. AFPs have had all the
gains from lower long-term interest rates."
Certainly, the funds enjoy lots of flexibility when allocating their portfolios, but they
must follow a carefully drafted legal framework. Regulations establish how much they
can invest in various types of instruments.
And the law leans "toward liquidity", Valente says. "There's more room to bid on
equity or debt rather than on alternative
investments, such as infrastructure projects, real estate, or private equity."
May/June 2015 - L ATINFINA NCE.COM 43


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LatinFinance - May/June 2015

Table of Contents for the Digital Edition of LatinFinance - May/June 2015

Contents
LatinFinance - May/June 2015 - Cover1
LatinFinance - May/June 2015 - Cover2
LatinFinance - May/June 2015 - Contents
LatinFinance - May/June 2015 - 2
LatinFinance - May/June 2015 - 3
LatinFinance - May/June 2015 - 4
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