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"AFPs are investing more in economies that should come out of the crisis faster"

William Baeza

Financial analyst/EuroAmérica

Published  Friday, October 2, 2009

Chilean pension fund managers, the AFPs, are the country's largest institutional investors and they were challenged last year to come out with strategies to reduce losses on their portfolios during the worst financial crisis in 80 years, and also amid a highly regulated market.

BNamericas spoke with William Baeza, financial analyst at local group EuroAmérica, about the defensive strategies used by AFPs during the crisis, how those strategies are evolving these days and also about local regulatory issues.

BNamericas: Have the AFPs' assets recovered to pre-crisis levels yet?

Baeza: Measured in US dollars, they have already regained everything they lost in the crisis over the last 12 months. Probably, from now on growth compared to the same time 2008 will be significantly higher, given a low comparison base. So month-on-month comparisons become more useful to watch asset trends.

BNamericas: What investment strategy was used by AFPs during the crisis?

Baeza: Since August 2008, AFPs began incorporating international fixed income instruments to their portfolios, and they have increased them significantly to represent about 10% of total assets under management today, and that shows they are still in a defensive position. This was an instrument that almost did not exist in AFPs' portfolios. Coupled with this, AFP investments in variable income in Chile are highly concentrated in the energy and natural resources sectors.  

BNamericas: How do you see AFPs' strategy in fixed income going forward?

Baeza: It will probably be lower, as long-term rates are very low - for example, in the US - and at some point the developed world's central banks will act coordinately to design an exit strategy to begin raising rates and withdraw the monetary stimulus. This will affect the rest of the rates' structure, rising rates in the longer-term segments, which will make the price of bonds fall, and AFPs will probably not be willing to make that loss. So they will likely reduce their exposure to these instruments.

BNamericas: And what about variable income?

Baeza: AFPs are investing more in economies that should come out of the crisis faster than others, such as the emerging economies of Asia and Latin America. Variable income has grown so fast in the AFPs' portfolios that they are almost reaching the limits on all their investment caps. So you are in a position in which you have to make the loss in variable income or hold on to the fixed income not to surpass those limits, but know that those fixed income instruments will fall in terms of valuation. So it is a very awkward position AFPs face today.

BNamericas: Today, AFPs face limits as to how much they can invest abroad and how much they can invest in variable income, but they do not coincide. What limitations does this generate?

Baeza: AFPs have more room to invest abroad today, but these limits are not being fully used. Today, the system can invest up to 60% of funds abroad, but they only invest 40% and probably they will not surpass the 45% mark in the short term. So the 60% cap is purely symbolic today.

Where AFPs face restrictions is in variable income limits. The regulator could loosen these limits because when the AFPs reach them they are forced to sell, creating volatility in the market. So you bring both the stock market and the value of AFP assets down, which is twice as negative.

ABOUT THE COMPANY:

EuroAmérica is a Chilean financial holding that has over US$2bn in assets under management through its brokerage, mutual funds, factoring and life insurance units.

Chile's five AFPs had US$102bn in assets under management as of August 31, up 3.1% compared to the same time in 2008.

August marked the first time AFP assets under management measured over a 12-month period rose since May 2008, when they increased 1% to USS$118bn compared to the same time 2007.

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