Latin America’s private wealth industry is growing, and international asset managers have taken note.
Global fund houses are now introducing a stream of mutual funds to the Latin American market in an attempt to quench the thirst for new products among local investors, who want a wider range of products to choose from.
The past two years have seen a steady flow of new foreign-domiciled mutual funds, introduced by managers with a long-term presence in the region and by firms making their first forays.
Latin American investors turned to foreign assets when their economies were weathering recessions, sparking a pickup in the international fund supply. Now, as growth takes off again and as tax amnesties reveal just how much money is up for grabs among wealthy Latin Americans, asset managers from around the world are keen to ramp up their offerings in the region.
‘What fund houses and managers have realized is that emerging countries, including those in Latin America, have a lot of money that wasn’t visible before,’ says Sebastián Silva (pictured above), an investment advisor at Avante Financial Group in Colombia.
The bulk of the world’s largest managers have been active in the region for a long time and boast a certain dominance; as of the second quarter, BlackRock and GAM ran 16.6% of the international fund assets of Chilean pension administrators, according to data from the country’s pension regulator.
Against that backdrop, it has mostly been smaller asset managers that have come to Latin America for the first time – two recent entrants include the $13.6 billion Nordic firm Evli Asset Management and the $60 billion UK fund house Kames Capital. Overall, the majority of the firms entering Latin America belong to the alternative investments space, industry sources say.
‘More managers globally are reaching the scale necessary to participate in new markets, and because of that we are seeing more funds receiving the approvals for pension funds to invest in or to at least be registered in each market,’ says Santiago Arias, head of institutional distribution at Chilean firm HMC Capital.
Go niche or go home
In interviews with Citywire Americas, a group of Latin American investors said they welcome the expanded product range they’re now getting access to. They have been scouting for opportunities in a low-yield environment and have struggled amid a prolonged bull run that has pushed valuations higher.
Still, the fund offering can be mind-boggling. At the end of June, for instance, Chilean AFPs had access to at least 1,316 international mutual funds and ETFs, but had only invested in 269 vehicles, according to data from the local pensions and risk regulators.
This is significant because the AFPs’ investment decisions often lead the way for investors outside of the institutional industry, says Juan Rius (pictured below), founding partner of Chilean multi-family office Alcalá Inversiones.
Given the ample supply and the industry dynamics, it’s the managers who keep their offering focused that have a shot in the Latin American market, investors suggest. As Avante’s Silva puts it: ‘Do what you know. Don’t experiment with a bunch of stuff.'
Rius says that popular markets such as Europe are already covered by larger asset managers. Instead, his group is looking for specific opportunities in Argentine equities and emerging Asia sectorial funds.
‘There’s space for everything, but it’s better if [managers are] specialists and generate value. You’re spoiled for choice when selecting a US or European fund but it’s hard to choose. In emerging markets it’s even harder because there aren’t many,’ Rius explains.
In that context, Gonzalo Trejos, head of wealth management at Chilean firm Quest Capital and a former fund distributor, has noticed an uptick in the offering for Indian equity funds. Latin American investors had bought into the emerging markets rally through regional funds, but as valuations have risen, demand has surged for specific assets that don’t appear overvalued, Trejos says.
At least one asset manager has jumped on the opportunity. In July, Reliance Asset Management Singapore said it would distribute an Indian equities fund through an agreement with BTG Pactual.
As managers bring their funds to Latin America to meet local investors’ growing demands, they’re faced with one problem: the products clients want today will inevitably go out of fashion as market tides turn.
Until March, US stock funds ranked as the Chilean AFPs’ top international equities allocation, but they have since sunk to third as the pension funds retreat from the asset class on the back of higher interest rates and swollen valuations.
International managers tend to enter the Latin American markets through institutional investors because of their scale; collectively, pension funds in Chile and Colombia manage roughly $270 billion. However, these clients have a ‘dynamic view’ of asset allocation and can rapidly change their fund affiliations, says Felipe Monardez, founding partner of Chilean distribution firm Excel Capital.
Fund houses that have fallen into disfavor with their institutional clients could turn to wealth management or private banking clients, investors suggest. Monardez says wealth management firms tend to have more stable allocations and stay in funds longer, even if they still look to the AFPs for investment inspiration.
Boots on the ground
However, the wealth industry demands more attention from fund houses. Avante’s Silva, for instance, says the investors he advises sometimes ask to speak directly with asset managers before deciding to buy a fund. Such demands require fund houses to set up their own local salesforce instead of working through distributors, which many managers use to cover the institutional segment. Still, a local presence isn’t enough. Silva says he has found that some fund house representatives don’t speak Spanish, which hinders communication with his clients.
‘Many older clients have made their money differently than what you might do in the US – for example through commodities or by selling houses.
Someone in Colombia who might have sold a commodity like rice might have made a lot of money but they might not speak English,’ Silva says.
Only a handful of fund houses have succeeded at catering to wealth firms in Latin America, investors say, with MFS Investment Management highlighted as one of the few success stories.
Despite the challenges in both the institutional and wealth management segments, investors say fund houses shouldn’t leave Latin America just because the current asset allocation doesn’t favor their products.
‘There will always be new needs as new market events arise,’ Quest Capital’s Trejo says. ‘The cost of not having a fund available is high because asset allocation changes quickly, but registering a fund locally isn’t quick.’