Latin Finance - June 2008 - 32

mexican afores Fishing Yield from Choppy Waters by Greg Brosnan s the US rolls into a recession that could turn global, Enrique Solórzano has a daunting responsibility to more than five million Mexican workers: safely juggling $11.2 billion in savings to generate sufficient yield for them to retire comfortably. In doing so, the manager of ING’s Mexican pension fund – the country’s third largest Afore by assets – says he will rely heavily on home-grown treasuries while casting an ever-roving eye over stock markets like Brazil’s. He is also looking as far afield as New Zealand’s government bond market in search of new opportunity. Despite gloomy clouds on the world economic horizon, Solórzano has an optimistic view of 2008. “The global environment is uncertain and we’re talking about a volatile year, but in general I think returns are going to be decent,” he tells LatinFinance in an exclusive interview. “The slowdown is going to trump inflationary pressure, so interest rates will keep falling.” Solórzano attributes much of his bullishness to a relatively strong 2008 performance in Mexico’s peso government debt, which makes up about two-thirds of the investment by the country’s $84 billion pension system, and 60% of ING’s portfolio. With the US Fed Funds dropping to 2.0% in May and potentially falling further, yield is enticing in the government curve, underpinned by a base overnight rate of 7.5%. The central bank kept a neutral policy at a late April meeting and Wall Street analysts expect no change to rates for the rest of the year. Nonetheless, Solórzano believes Banxico’s next move will likely be a hike to stave off inflation, making domestic spreads even sexier. The differential also gives the peso room to firm to as low as 10 to the dollar, says Solórzano, calling the “long-peso, short-dollar” trade his favorite currency play. The peso was trading around 10.5 to the dollar mid-May. A Mexico’s third largest pension fund is turning to foreign markets for opportunity. It wants access to derivatives in the domestic market. pension plans into five age-based categories, freeing managers to chase yield more aggressively for younger savers by devoting more of their portfolios to riskier assets like equities. It is too soon to tell which pension fund will perform best in the three most aggressive categories. But Solórzano says Afores have been slow to boost exposure to equity in line with new limits, partly because of a chronic lack of new Mexican listings. “The stock of issuance is not growing . . . it’s the same old 15 to 18 [names],” he says. The investor adds that buybacks by big Mexican companies like América Móvil are actually shrinking the amount available. Solórzano says medium-sized family businesses are wary of opening up their books to the market, while the relatively high cost of a listing is also a major deterrent. But he adds that the relatively high price-earnings ratios of stocks already listed on the market – 18.04 and 16.13 respectively for homebuilders Urbi and Homex and 19.52 for microlender Compartamos, for example – should serve as an incentive for companies to start listing again further down the road. As Mexico’s fledgling options market deepens and more Afores get government approval to trade debt, currency and equity options, stock market liquidity will also likely increase, says Solórzano. Of the 18 Afores in the market, only Banamex and Bancomer are approved to deal in options. ING is hoping for authorization within three months. Drawn to Brazil: ING’s Solórzano Turning More Aggressive According to local pension fund regulator Consar, ING delivered annualized net yields of 9.08% and 9.85%, respectively, on its lower and higher-risk fund over the three years to March 31. Both return rates are just above the median for the industry in each category. By its own year-to-date calculations to April 25, however, ING says it earned the highest pre-commission gross return of any Afore in the most conservative fund category for workers aged 56 and older, yielding 11.49% versus an average of 9.69% for the 12 largest pension funds by assets. Although Solórzano declines to forecast 2008 returns for his fund, he expects pre-commission yields to hit 9.5%-12.5% for the system as a whole. A change in rules March 31 split Overseas Push Meanwhile ING is hunting further afield for equities in Europe, Japan, Hong Kong and particularly Brazil. “Brazil is a more 32 LATINFINANCE June 2008

Latin Finance - June 2008

Table of Contents for the Digital Edition of Latin Finance - June 2008