Chilean Pension Funds an Important Market for U.S. Asset Managers

September 9, 2011 ( - As of Q2/2011, Chilean pension funds had $153 billion in total assets, with $66 billion, or 43%, held in offshore investments, mostly through cross-border UCITS funds.

A Snapshot report from Strategic Insight (SI), an Asset International company, says seven of the top 10 international fund managers in Chile by assets are U.S.-based, highlighting the importance of Latin America for U.S. firms, albeit often via a domicile in Europe with Luxembourg. Moreover, SI sees a mix of David and Goliath firms: Fidelity, Blackrock, Franklin Templeton, Vanguard, State Street, and JP Morgan on one, and specialists such as Schroders, Investec, and DFA on the other side.  

Typical distribution approaches are non-exclusive and exclusive third-party marketers, which in many cases also cover other cross-border pension markets such as Peru and Colombia. But as opportunities and assets are growing, fund managers are hiring dedicated Latin America teams to accelerate growth. Notably, the most prominent region in Chilean pension funds is Asia.  

Currently 80% of assets are allowed to be invested overseas (increased in Q3/2011 from 75%) – a reverse home bias that has benefited foreign fund managers and put the country in the spotlight for the region as a DC model similar to 401(k) plans in the U.S. or Superannuation in Australia. Cross-border equity funds are the second largest investment class ($46 billion/30%), after domestic fixed income ($60 billion/39%). Cross-border bond funds account for $20 billion, or 13%, of total assets.  

The report notes that 2011 marks the 30th anniversary of the Chilean pension fund reform, a mandatory public retirement system with 10% monthly salary contributions.

Asia Funds Most Prominent Investment  

The most prominent investment category in Chilean pension funds is Asia in various permutations, with Franklin Templeton Asia Growth, Fidelity South East Asia and China Focus, and Investec Asia Strategy near the top, according to a Snapshot report from SI. Dozens of Asia regional and country focus funds are part of the Chile Pension fund equity cross-border universe, almost entirely offered by U.S. and European houses.   

Assets in the top 10 bond funds total $12 billion (or 18% of all cross-border investments), and 8% of total pension AUM. Despite the concentration of assets, the league table shows ten different managers, split between U.S. firms (Fidelity, Blackrock, PIMCO) and European/global managers (Schroders, Julius Baer, Robeco, Pioneer, AXA, Investec, DWS). On the fixed income side, the table mostly shows variations of high yield themes, emerging markets and convertibles.  

SI sees a concentration of assets to flagship products of international fund managers. Total assets for the top 10 cross-border equity funds equal 26% of all offshore investments and slightly over 11% of total pension fund assets.  

According to the report, Chile’s Comisión Clasificadora de Riesgo (CCR) this month “disapproved” Dublin-based UCITS products from being invested into by Chilean pension funds due to credit rating downgrades and sovereign debt concerns (according to regulators and industry observers, Moody’s decision to downgrade Ireland to junk status in July 2011 was the trigger for the disapproval). $3.5 billion worth of existing Dublin-based assets in 35 funds are now considered restricted investments, with some of them exceeding allowable investment limits and thus at risk of immediate redemptions. A PR blow to Dublin, Luxembourg-based products and other hubs could benefit from the decision, but just as in Asia, a key concern for the industry is to maintain the overall reputation of UCITS as the global mutual fund brand of the industry.  

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