BlackRock has published a research report about pension funds in Mexico, a report produced as part of its broader research project looking into the state of the pension fund industry around the globe. It shows that the cause of alternatrive investments as a group is the cause of diversification for institutional investrors whose long-tailed liabilities impose upon them long temporal horizons.
The Mexico report explains that the country’s Administradoras de Fondos Para el Retiro (AFOREs) operate in a regulatory environment more restrictive than that in many other countries, including other Latin American countries. It compares unfavorably, in particular, with Chile.
Chile introduced private pension fund management in 1981. In this millennium Chile has liberalized its rules for how these pension managers could run their business in several waves: in 2002, 2004, and again in 2008. These restrictions had the desired result; they boosted returns and allowed for a decline of administrative fees.
The managers of the Mexican AFOREs are unhappy with the restrictions imposed by the country’s Comisión Nacional del Sistema de Ahorro para el Retiro (CONSAR) especially as they related to investment outside of the country, because they believe that “international diversification is fundamental in reducing portfolio risk.”
Foreign Assets, Alternatives, Equity
The BlackRock report quotes the CEO of AFORE Banamex, Luis Sayeg, speaking to this and related points (bringing us around to alternatives): “For the system to deliver better pensions to our clients, we need to continue driving for the easing restrictions on [the diversification of] asset classes. The biggest priority […] is the limit on foreign assets, then alternatives and then equity limits. The easiest by law would be the alternatives space. We are seeing that and getting a good feedback from the regulator, which has increased our appetite for alternatives.”
Due to the restrictions, Mexican pension funds have taken to ETFs as what the report calls their “vehicle of choice,” and they are acquiring a taste for separately managed accounts as well. They are also increasingly exposed to infrastructure and real estate, as ways of assuring a steady return profile.
Fortunately, CONSAR recently raised the ceiling on the allocation it allows to real estate and infrastructure.
Mexico, Chile, and Peru
Still, CONSAR keeps the AFORES on a tight geographical leash. Globally, 63% of pension funds allocate between 21% and 60% of their assets outside of their headquarters country. But in Mexico, 71% of the AFOREs allocate between 11% and 20% of their portfolio to assets outside of Mexico. The remaining 29% stay in the 0 to 10% terrain.
Extending the comparison between Mexico and Chile: the BlackRock report observes that Chilean pension funds were allowed to invest outside the country very early on in the history of that industry, from the early 1990s, although at first this investment was limited to low risk fixed income investments. Investment in international equities has been allowed to Chilean managers since 1997.
As of 2001, Chilean pension investment abroad was 15% of the pensions’ AUM. It rose to 38% in 2007 and to 44% in 2015.
To take another point of comparison: Peru didn’t initiate a private pension management industry until 2000. But it has not only allowed, it has embraced, international investing: which amounted to 40% of the collective assets under management of this industry by 2015.
Still, the Mexican system has advantages over its peers in that region, including “a broader and deeper financial sector and a more sophisticated foreign exchange market.”
Infrastructure, Oil, and Policy
The report allows us to zoom in more closely at that infrastructure decision. As noted above, CONSOR recently raised the ceiling on the allocation it allows to infrastructure investment. A very large majority (71%) of AFOREs answering survey questions said they are “very likely” to invest in the near term in domestic infrastructure projects. This, too, distinguishes Mexico from the rest of the region. Only 37% of their peers in Latin America said the same: only 41% globally.
This is fortunate for the host country, because historically Mexico’s infrastructure projects have been funded by its oil revenue. The price of oil has of course declined drastically in recent years, and the AFOREs may be ready to step in to fill a gap.
BlackRock’s view is that “infrastructure investing has long been paramount to the growth of economies across the globe.” If Mexican policy makers want their AFOREs to play a role in enabling that investing, and that growth, they ought to concern themselves with four points: providing certainty to investors; focusing on transparency; determining funding structures that align the interests of the investors to those of the public; and developing a stable regulatory environment.