BUENOS AIRES - The high volatility brought on by the seemingly inherent instability of Latin emerging markets is leading the Argentine Pension Fund Superintendent (SAFJP) to support measures that would open up this $11.5 billion industry to the global mutual fund market.
With the objective of diversifying the investment portfolios of the 15 Argentine AFJP pension funds in order to avoid repeats of the dismal -1.16 percent average system return obtained in 1998, sources from the government department said that its goal is to improve the possibility that pension fund affiliates over time earn an average of eight percent to nine percent annually.
The move by Argentina, whose pension fund system began in 1994, would follow by only a few years the steps taken by the Chilean pension fund authorities to permit offshore fund sales directly to the much more mature Chilean AFPs, which manage $31 billion in assets. Today, Chilean AFPs invest $1.7 billion in foreign instruments.
In both countries, these private pension systems replaced in whole or in part government-run pay-as-you-go plans. Direct mandatory contributions from workers' pay stubs and matching company contributions are funneled into the AFJP of the workers' choice. At retirement the size of a worker's pension directly reflects the success of the pension fund chosen.
Before international mutual funds can actually be offered to the Argentine pension funds, however, a few barriers have to be eliminated. Some relate to bureaucratic measures and others to simple laws of supply and demand.
Currently, the Superintendent forbids AFJP investment in instruments that lack a risk rating similar to that given to a bond or insurance company. The rule even applies, which many view as absurd, to local and foreign stocks and mutual funds. It is for this simple reason that Argentine stocks and mutual funds have ratings and that the AFJPs have been unable to capitalize on the impressive run-ups in the stocks of US blue chips or to even buy a plain-vanilla Vanguard index fund.
If offshore funds were to obtain ratings, doing so would probably be expensive because of the relatively small amounts of assets in question. To some companies, the size of the market may make the prospect unpalatable. But to others, especially those who have already set up office in Argentina primarily to sell offshore products to private banking operations, the cost may be a necessary one in order to start competing in this market. U.S. entities that have set up offices in Argentina include Templeton Asset Management, Fidelity Investments, Putnam and Massachusetts Financial Services.
Another obstacle to investing in offshore funds is that the local version of the Securities and Exchange Commission, the Comision Nacional de Valores, decides which markets are authorized to accept AFJP investments, and since mutual funds, unlike stocks and some bonds, are not quoted on an exchange, technically they are excluded from the AFJPs' investment menu.
But there is hope. The SAFJP appears ready to argue that funds whose portfolio includes only stocks or bonds that trade in authorized markets should be allowed to accept AFJP allocations.
The Comision Nacional de Valores would still have the final word, but it is often pressured by local mutual fund managers against foreign participation since local funds are prohibited from investing more than 25 percent of their assets outside of Argentina, Brazil, Chile, and Uruguay. This restriction has devastated local equity-oriented mutual funds in terms of their ability to avoid the volatility of emerging markets and as a result has limited their attractiveness to local pension funds.
Meanwhile, there is talk as well in the markets of legislation that would free local funds to invest up to 100 percent in developed countries.
Pension funds are currently allowed to invest up to ten percent of their assets in foreign markets, with sub-caps of seven percent for equities and corporate bonds. The AFJPs have not shown much interest in buying individual overseas stocks, primarily because of the research, tracking and brokerage costs involved. Mutual funds would be much more attractive, given that management fees are reflected in the funds' net asset value and can therefore be passed on to clients.
That said, funds domiciled in tax havens would be more likely targets for the AFJPs because they could then avoid the taxes in regulated markets.
It should be noted that closed-end funds quoted on the New York Stock Exchange have always been eligible to receive pension fund investments but have remained off-limits for their lack of a risk rating. But, for open-ended funds, the situation is somewhat different because the Superintendent wants to allow only those fund managers with $10 billion in assets to sell their funds in Argentina. The Superintendent also seems determined to allow funds that invest in developed markets that have little correlation to local equities.