Argentina - Despite heavy pressure exerted not only by the Argentine Mutual Fund Association, the AFJP Association and the Private Pension Fund Management Association (ASAP), but also by many of the affected banks, the Argentine AFJP Superintendent has announced its intention to stand firm on most of the language contained in Instruction 018, which imposed severe restrictions on pension fund investments in local mutual funds.

During the next few days, the Superintendent is expected to publish a note to clarify the instruction, aimed at clearing up a number of doubts. It will, for example, authorize the purchase of equities issued in Brazilian reals, an operation which according to Article 1, paragraph (b) was banned because of Brazil's poor risk-rating as a currency issuer. In addition, it will make clear that the enactments made by mutual fund company boards of directors constitute a valid safeguard for complying with Article 6.

This point has turned into one of the most controversial issues, as it had shifted responsibility for verifying the composition of mutual fund portfolios to the AFJPs themselves - a move that the pension funds consider unreasonable, particularly as it generates legal uncertainty in an area they cannot control.

The same argument was used by a number of investment managers to justify the decision to cut back on fund purchases. The superintendent put the level of disinvestment at about $4 million.

The issue has affected not only risk funds but also CD-products, given that the vast majority of these instruments have built in, either in their investment policies or in their management regulations, the possibility of acquiring options or other financial derivatives for purposes that go beyond hedging, in contravention of Article 1 paragraph (c) of the new rule. The point which has not finally been clarified relates to the ban on purchasing Brazilian equities issued by companies that do not have rated debt. The superintendent sees the issue as one likely to be resolved shortly, when Brazil changes its risk-rating system, but the funds themselves do not agree with this stance.

To reiterate its position, the mutual fund association sent a formal note to Francisco Astelarra, superintendent of the AFJP, listing issues on which it is seeking explicit changes. The points that the association is lobbying for are the following:

(a) The lowering from 80 percent to 75 percent the proportion of assets in each mutual fund that must have a risk rating similar to that of the AFJPs.

(b) Equal treatment for assets from Mercosur and Chile.

(c) Unifying of assets for identical funds with differnt share classes (for AFJP participation limit purposes).

(d) Shifting responsibility for portfolio composition on to risk-raters.

(e) Using the resolutions of fund management company board meetings as a way of complying with 018, and using a declaration that disallows any change in investment policy that has not been previously notified to a risk rating agency, to the AFJPs and the Securities and Exchange Commission.

The fund association called a meeting of its members to consider what steps to take, especially if the superintendent rejects the changes it has demanded. In that meeting, which was attended by a large number of members, a proposal was made to publish investment fund portfolios on the Association's web page, but with restricted access, so that AFJPs would be able to know the assets they were taking on board.

In the end, this idea was rejected in favor of trying to find a negotiated way out of the problem with the superintendent.

"On a conservation basis, we are halting fund purchases for the time being, and we don't know whether we will acquire this kind of asset again in the future," said Ricardo Bluthgen, portfolio manager at Orgenes AFJP. Attitudes at Previnter AFJP are very similar.

"We stopped buying into funds because we didn't want to run the risk of a sanction," said deputy investment manager Ricardo Torresi, who thinks fund investment policies are too broad and difficult for the AFJPs to control.

Pablo Sacheri, portfolio manager at Futura AFJP took a similar view.

"Given the lack of clarity in the new rule, and to avoid greater risks, we've decided to abstain from this type of instrument," he said.

The position adopted at Maxima AFJP would appear to be different, however. According to its portfolio manager, Gonzalo Jalles, the AFJP has made no changes to its portfolio composition, as it considers the precautions taken by fund managers to be sufficient to prevent any irregular situation from arising. Maxima also based its actions on a ruling by the ASAP legal advisers, accepting fund company board resolutions as valid.

Risk-rating agencies say they are not prepared to accept a change in their role. In fact, a source from Standard & Poor's disclosed that this leading risk-rater may withdraw operations in the fund market if responsibility for portfolio oversight is shifted on to risk-raters, as proposed by the association in its letter to the Superintendent.


This article originally appeared in the August issue of Latin Fund Management, which is also published by Thomson Financial.

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