Latin Finance - July/August 2010 - 26

mexican buyside

Afores Open Up
by Nacha Cattan exican pension funds are bouncing back from an economic crisis with renewed appetite for risk and more accommodating regulation to help them stretch for more yield. They will likely increase exposure to both local equity and corporate debt this year, reviving a push toward private investment that was derailed by crisis, managers of leading pension funds tell LatinFinance. Regulatory changes allowing Afores to invest in off-index equity, purchase more foreign assets and prevent forced selloffs of risky assets during crisis help them diversify portfolios, chief investment officers (CIOs) say. But the race to higher returns will be more of a crawl than a sprint, fund managers acknowledge. “The 16.0% [of assets] invested in corporate debt [as of April] could jump to close to 20.0% during this and next year, while local stocks could go from 9.0% to as much as 11.0% or 11.5%,” says Eduardo Reyes, Profuturo GNP’s CIO. Afores are renowned for concentration in less-volatile government debt to protect assets – which totaled 1.2-trillion pesos in April, up from 1 trillion pesos a year earlier. Some Afores say that more aggressive investment this year could help boost returns by a couple of percentage points above last year’s 14.4%, so long as Europe’s troubles do not impact Mexico’s hastening recovery. However, the move to buy corporate assets will be no faster this year than it was pre-crisis, predicts Reyes, whose 130 billion peso fund is the fourth largest Afore of 14 in Mexico, according to April data.

After retreating to safer waters in years of economic uncertainty, Mexican pension funds are taking on risk. How quickly they shed plain vanilla instruments remains to be seen.
in structured instruments, AmAfore says. A shift to foreign equity is expected this year, albeit gradually. Consar spokeswoman Vanessa Rubio says new limits are set to be approved raising equity caps from 0%, 15%, 20%, 25% and 30% of assets depending on risk level, to 0%, 20%, 25%, 35% and 35%. The new rules were expected to be published in June. Tonatiuh Rodríguez, director general of Afore XXI, says his fund will move slowly from well-performing government MBonos to international investment. XXI has 79 billion pesos in funds, making it the sixth largest Afore as of April. At Bancomer, which owns the second largest Afore, CIO Leonardo Díaz grew his investment team by 50% this year in order to improve returns and more quickly process new asset classes, such as the new debt-equity hybrid Certificados de Capital de Desarollo (CCDs). Afore Bancomer managed 191.7 billion pesos of assets in April. Díaz predicts a push to higher yields and an improved regulatory environment could raise local and foreign equity to 20% of Afore holdings in the next couple of years.

Buying more corporate debt: Reyes In the first four months of 2010, funds recovered from investment lows in equity and sloughed off excess government debt taken on as protective padding last year. Funds doubled interest in local stocks from 4.5% in February 2009 to 9.0% in April 2010 and reduced a 70.0% high in government paper to 64.7% during the same period, Consar data shows. But the funds have made little or no gain in local debt and foreign equity compared to pre-crisis. Afores are only spending under half of the roughly 20% they are allowed to invest in foreign companies. At the end of April, Afores held 64% in government debt, 16% in local corporate debt, 9% in Mexican stocks, 9% in international equity and debt and 1.2%

Relaxed Rules, Markets Align

Overseas Equity Entices

So far this year, Afores have seen robust 14.3% yields as of April compared to 13.3% one year ago, and a 13.7% annual average since funds opened in 1997, says AmAfore.
26 LatinFinance

Industry analysts say increased market activity this year, aided by recent regulatory reforms, could also help Afores increase yields. A recent change allowing Afores to invest in off-index equity could help funds take advantage of a possible flurry of IPOs in Mexico. And pension fund regulator Consar eased value-at-risk

July/August 2010

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