LatinFinance - May/June 2014 - 42

INSTITUTIONAL
WEALTH
CHILE

Chilean pensions are a large and growing market for international
fund managers. But an industry that has served as a model for the rest of the
region is facing new risks. By Jason Mitchell

Changing the game

to allocate even more of their funds abroad.
chile's six private pension providers -
modelo, capital, cuprum, Habitat, Planvital
and Provida - have a total of $158 billion
under
management, while chile's mutual funds
industry amounts to an additional $40
billion, though only $2 billion of this is
invested overseas, according to investec.
chilean managers are keen investors
in emerging markets. around 52% of
their international equity investments are
allocated to emerging markets - mostly
asia - according to investec. around 56%
of their international fixed income assets
are destined to high yield bonds and 33% to
emerging market bonds.
active international fund managers such
as investec like the chilean market because

42 l atinfina nce.com - May/June 2014

Source: Ministerio del Trabajo

nternational asset managers already see chile as one of the
most important markets in latin america for distribution of their
funds. many firms - including fidelity, franklin templeton, State
Street, Blackrock, investec and aberdeen - distribute their products
here, usually through a local partner.
the chilean regulator allows private pension providers, known as
the afPs, to invest up to 80% of their funds overseas. today, 36% or
$55 billion is invested internationally, according to investec. increased
local stock market volatility over the past year, and the general illiquidity of chile's capital markets are among the factors pushing managers

STATE COMPETITOR: Chile's new labor
minister Javiera Blanco has been mandated
to set up a government pensions provider

local managers are prepared to take more
risk than their counterparts in Peru or
colombia.
chilean funds are more ready to partner
up with discretionary managers and add
alpha in return for higher management
fees, while in Peru and colombia, managers
tend to stick to less expensive, passive
international managers that try to mimic
a benchmark. However, there is debate in
chile about the pros and cons of investing
in active funds.
"it's worth paying the higher fees to
an active manager if they can prove their
ability to deliver alpha," says alejandro
echegorri, chief financial officer for latin
america at Principal financial Group, the
iowa-headquartered asset manager which
owns the chilean afP cuprum. "that's the
trade-off."
arturo cifuentes, academic director
at the University of chile's center of
Regulation and macrofinance Stability
and president of the financial advisory
committee of chile's sovereign wealth
fund (with a total of $22.19 billion under
management) disagrees. "as someone
who has managed a hedge fund in the past,
there are certain situations in which active
management works," he says.
"Yet, all the empirical evidence shows
that generally passive investments win
over time. i have been trying to press this
point with the new government in chile,
but there is no national debate about this
subject yet."
most chilean managers do not mandate
an international manager directly but tend
to invest through a pooled fund, which
works out cheaper for the local manager.
asset managers - such as investec,
Pimco, UBS, Vanguard, aberdeen, and
fidelity - use local fund management firms
to distribute their funds to the afPs. the
pension providers invest in the funds and
the international asset managers pay the
local distributor a fee, usually based on

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