Change is coming in the Chilean pension industry, but AFP Habitat – the country’s largest pension fund – is refusing to fall behind. CIO Alejandro Bezanilla tells Atholl Simpson how he’s getting ready for the next generation of alternative investments
An alternative view of the future – that’s what Alejandro Bezanilla has on his mind these days. The chief investment officer (CIO) of Chile’s largest pension fund, the $54.6 billion AFP Habitat, is currently laying down the groundwork within his team to prepare for new regulation that will further open the doors to the highreturning alternatives sector.
The wide-ranging pension reform, set to come into force this November, will allow Chile’s AFPs to invest directly in alternative investments for the first time ever. The drafting of the reform has not been without its difficulties though, and the past year of discussions between the Chilean government and the AFPs has seen it go through a number of rewrites.
Currently, the reform looks set to allow the AFPs to allocate up to 15% of their total assets to alternatives – three times more than the current limit – but doubts still exist over the framework, including the contested notion that infrastructure investments count toward the private equity limit.
Despite these issues, Bezanilla is adopting a pragmatic approach and looking to expand his existing alternatives team.
‘Faced with the uncertain regulatory environment it is natural that some players are waiting until it is resolved to invest. We also have not invested and we will have to adapt. But in the meantime it does not make sense to take a decision that is irreversible in the long term on something we know will be regulated.
‘Our focus now is to prepare teams, systems and controls to start investing directly in infrastructure and real estate projects, as well as private debt and venture capital in Chile.’
The pension fund already has a minor exposure to the alternatives sector, less than 5%, but this is all done through external managers in the US and Europe. While he intends to increase this allocation, Bezanilla says the focus will be on the local side and he is not ruling out setting his sights on Latin American alternatives as a whole.
‘The novelty will be investing in assets which are an important part of the portfolio for most pension funds in the world, but for which there was no room in Chile’s case due to regulatory issues.’
A veteran of the pension industry, Bezanilla has been with AFP Habitat since 2005, after being hired to lead its equities team from local asset management firm Compass Group. Three years later he was appointed CIO and his influence, alongside that of other AFPs and their CIOs in Chile, is keenly felt in the debate over opening portfolios up to alternatives.
The origin of this interest can actually be traced back beyond Chile’s borders, he says. Following the financial crisis, large US and European private equity and foreign private debt firms realized their funding was heavily concentrated in North American institutions, with some having problems fulfilling their commitments. They soon started knocking on the door of Latin America’s biggest investors instead.
‘They decided to open themselves to foreign investors and went to seek more financing outside,
Within the Chilean pension system, AFPs’ portfolios have five distinct portfolios based on their savers’ profiles called multifondos, ranging from the most aggressive with around 60% in foreign equity to the most conservative with close to 90% in local Chilean debt.
Bezanilla may well be wary of the negative influence of passive products and ETFs on companies’ valuations, but that doesn’t stop him from using them within these portfolios. However, he insists that their use is focused primarily on developed markets, where fund managers often tend to struggle to beat the index, especially when fees are added on.
The explosive increase in passive investment is making the work of active investors very difficult.
July 2016, the allocation now stands at 66% in international bonds and 34% in international equity. Within the intermediate portfolio’s geographical allocation, excluding Chile, another key difference among which were the Latin American pension funds. For our part, we had the interest to invest but we did not have access, and from this mutual interest we began to develop a portfolio of alternatives that has evolved into a new regulation,’ he explains.
While the move into alternatives is a major development for his pension fund’s local investment allocation, Bezanilla believes there is one trend that is changing the wider industry more than any other.
‘The explosive increase in passive investment is making the work of active investors very difficult,’ he says. This trend has become more pronounced in recent years, he adds, with more and more flows being invested in companies at the same proportions as the index, without consideration of the fundamentals.
‘This implies that today, even in emerging markets where active managers have historically been able to generate alpha, it is costing them more. Apart from the consequences that this may have on the fixing of relative prices, on liquidity and potential systemic risks, for us this represents a challenge in the differentiation with respect to our competition.’
‘In emerging markets it’s easier [for fund managers]. The indices are very concentrated in emerging markets, so the universe the active managers have is much broader and allows them to find more attractive opportunities.
‘The other thing is that these are imperfect markets. There are benefits to having a more solid fundamental analysis.'
Of Habitat’s five multifondos, the most popular is their intermediate portfolio, which has more than $20 billion in assets.
According to its latest July factsheet, 43% of the portfolio is invested in international markets, with around half of that figure invested in emerging markets. Bezanilla says this allocation has remained fairly stable recently.
However, looking more closely at the international portfolio, it’s clear that the split between equities and bonds has changed over the past year. Twelve months on from a 54/46 split in since last year is the allocation to the US market, which has dropped by almost a third from 35% to 24%. This allocation was also reduced in their most aggressive portfolio, from close to 43% to 34% in the past 12 months.
‘We increased our allocation to emerging markets and Europe at the expense of the US allocation,’ Bezanilla says. ‘It was somewhat clear to us that the US economy and US markets were earlier in the cycle, so the other markets appeared more interesting both in valuation terms and earnings growth potential.’
When it comes to Chile, Bezanilla and his team invest directly in their local market, but a couple of years ago they decided to extend this to Latin America as a whole, with a dedicated team and investment process.
‘This regional portfolio has been a fairly natural extension of our portfolio of local stocks and bonds, as Chilean companies operate, compete or compare with Latin American companies. We already had some coverage of them to help us analyze our local groups better.
‘The experience so far has been good. We have been able to generate alpha for a good selection of instruments. In the case of direct investments, there is no administration fee to be paid on the returns you make.’
For its international investments, Habitat often looks to external fund managers to run part of their assets. Like every other manager selection progress worth its salt, Habitat’s team uses both qualitative and quantitative analysis to pick out the external fund managers it will entrust with its savers’ assets.
For the qualitative analysis the team is always backtesting the parameters it uses to analyze the funds. ‘It’s a dynamic process as we are regularly updating it,’ Bezanilla says.
For the qualitative side, his team has a very hands-on approach. ‘We put a lot emphasis on a AFP Habitat Intermediate porTFOLIO consistent investment process and that the team be stable. The only way to collect this information is to have daily contact with our managers,’ he says.
I’ve always had a vocation for us to be leaders, to go beyond and find new alternatives
‘A large part of our team is 100% dedicated to speaking to our managers, understanding their strategies, understanding their style, and how they invest at specific moments in time.‘
The minimum track record that a fund manager must have on a fund for it to be included in one of Habitat’s portfolios is three years. This criterion also applies to manager teams.
For Bezanilla, there are two reasons to ditch a fund manager: either they’re not doing what they should be or they’re producing consistently poor returns despite following their strategy.
However, in each case the onus is on the fund selector to know what to expect of the fund manager and the strategy they have selected, he says.
‘It would be unfair to a manager running a US small-cap fund to compare them to the performance of the S&P 500 and say that it didn’t do well. That then is our fault because we asked them to manage it on a small-cap basis.’
Improving his group’s fund selection process and asset allocation strategy is a core part of Bezanilla’s job, but he believes it also goes beyond that.
‘My job is to help develop the capital markets, develop the way in which portfolios in Chile are managed. I’ve always had a vocation for us to be leaders, to go beyond and find new alternatives.’
Chilean pension reform
There are three bills within the pension reform that will change Chile’s pension landscape, according to Bezanilla. The first and the second create a new compulsory contribution of 5% of the wages of salaried workers and a body to administer these new savings.
The third project proposes multiple changes to the regulation surrounding the AFPs. While Bezanilla agrees the system needs rethinking, he has serious issues with this aspect of the reform.
‘We disagree with this project because these savings, instead of going fully to the individual accounts of the workers, will be used as part of the defined contribution system.
‘It is also unfair that those who will, for different reasons, receive low pensions, will be financed only with contributions from those who have a paying job, and not from the whole society, who could be charged through general taxes.
‘We also believe that it is neither necessary nor desirable for a state or monopoly agency to administer these new savings. On the one hand, it eliminates the freedom of the people to determine who manages these savings, and on the other, given the way the commissions are charged, it would incur an additional cost.
However, if it were managed by the AFPs this extra cost would not exist.
‘It does not make sense then to create a new body to manage these new savings.’
This article was originally published in the October 2017 edition of Citywire Americas magazine. To subscribe and receive the magazine click here.