Latin Finance - July/August 2010 - 20

brazil domestic buyside
mandates pension funds set themselves a offers defined benefits, says Alessandra year, a key difference to its predecessor, return target of between 3%-6% above the Cardoso, consultant at employee benefits a regulator of closed funds which was rate of consumer inflation, says Veloso. housed within the social security ministry specialist Towers Watson in São Paulo. Interest rates have covered this so which made it “timid,” he says. His aim is Interest Rate Fixation there is little incentive to move into riskier to bolster the reputation of closed funds Not surprisingly, independent external equities, leading most funds to concentrate for security and probity. asset managers are eyeing up the on government paper. Over the long-term, Pena expects growth in three key expanding pool of consumers for savings interest rates are unlikely to provide client areas for closed funds: small and products and wondering how they can enough returns to meet the targets, medium-sized enterprises; professional get a piece of the pie. Underlying growth however. Veloso expects rates to come and industry associations, such as liberal down to 6%-7% by 2012. professions; and public sector workers. He in assets will be accompanied by greater “The actuarial target needs to be notes that industry associations, including diversification into equities, credit funds, discussed profoundly. If the target rate journalism and lawyers, already have 700 private equity, venture capital and could be brought down, it would have an million reais in assets under management hedge funds, where fees are much more immediate effect [in getting funds to invest and represent a fast-growing segment. The generous, they expect. The government is doing its part in equities],” he believes. law association, for example, has 60,000 If that is true for the longcontributors registered, term, the short-term outlook representing about 10% of Brazil Closed Pension Fund Asset Growth (reias, billion) is clouded by a tightening the total. Building from a crisis-related dip cycle, market watchers agree. Pena acknowledges The Selic interest rate should that open funds are less 500 end the year at 11.75% versus onerous to join, but says 9.50% at the start of June the administration fee for a 450 according to the latest survey closed fund is much lower. of economists by the central Closed funds levied an annual 400 bank. administrative charge of 0.7% 350 last year. Fees for open funds Managing the Assets are 2.0% or more, he adds. 300 If short-term trends for Over 30 years, this can make asset managers hoping to a difference of up to 20% 250 sell equity and more exotic of performance returns, he investments are dispiriting, notes. 200 many are still determined to 150 have a crack at the market. Minimizing Liability “We do see a slowdown in the One legacy problem that 100 diversification process because some companies will need to 2002 2003 2004 2005 2006 2007 2008 2009 of the interest rate cycle,” grapple with is the oversays José Eduardo de Araujo, generous use of defined Source: ABRAPP head of sales and distribution benefit schemes, says Racicot. at Rio de Janeiro-based GAP Businesses started in the Asset Management, with 3.5 billion reais to stimulate greater diversification of 1970s during the so-called first Brazil in assets. However, he is confident that pension funds by liberalizing regulations, economic miracle created funds typically pension funds will start to invest more says Expedito Veloso, director at BB providing 100% of final pay, a figure with managers such as his. “If you look on Previdência with 1.17 billion reais, part unheard of today. Through the 1980s, US a three to five-year horizon, pension funds firms also set up schemes that are generous of Banco do Brasil. Last September, will start to send a lot of money to asset Congress passed laws that increased the by today’s standards offering 60% of final pay without contributions from employees, ceiling on equity investments from 50% to managers such as GAP,” de Araujo adds. Even if that is right, independent 70%, permitted funds to invest up to 10% he notes. managers face an uphill battle to secure abroad, Veloso notes. This produces long-term liabilities The problem for fund managers is that liquidity from a business dominated by for companies as retirees live longer major financial institutions. Not only government bonds still provide generous than anticipated. Fortunately, Brazilian legislation is flexible in allowing sponsors returns and fund sponsors are particularly are big banks less likely to fail than asset managers, they can also supply a conservative because of fiduciary duties. to move from defined benefit to defined full package of services to open funds, This means they tend to shy away from contribution, which will alleviate the risk including custody, record keeping and anything but the most conservative asset over time, he notes. administration, says Racicot. Moreover, The problem of over-generous benefits allocations, says Racicot. banks have deeper penetration thanks to A legally binding actuarial target for has not fully gone away. Even today, one branch networks. returns is not helping. The government of the most popular fund types in Brazil

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July/August 2010

Latin Finance - July/August 2010

Table of Contents for the Digital Edition of Latin Finance - July/August 2010