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How Mexico’s biggest Afore plans to capitalize on mutual fund rule change

How Mexico’s biggest Afore plans to capitalize on mutual fund rule change

It’s official, Mexico’s pension funds are now allowed to invest in mutual funds. News of the regulation change spread quickly and will likely have asset managers pondering how they can get a piece of the action given that the Afores run over $170 billion.

While the Afores’ international exposure is curbed at 20% of their overall portfolio, most aren’t even close to that limit and the prospect of allowing them adopt the easy and potentially cost-efficient option of investing in mutual funds could lead to a rise in demand for international investments.

'I believe it’s a very good opportunity for the smaller Afores that have not been able to access mandates and diversify internationally,' said Mauricio Giordano, country head of Mexico for Natixis Investment Managers.

For Sergio Méndez, CIO of the $39 billion Afore XXI Banorte, Mexico’s biggest pension fund, the regulatory change will allow his group to use mutual funds to go deeper into the regions it has investment mandates for.

‘We consider it a good thing that we will be able to access international mutual funds because this allows us to have a better and more adequate portfolio for the type of investments we manage,' said Méndez in an interview with Citywire Americas.

‘It is something that we are working on because we already have investment mandates for European, Asian and North American equity, and these are assets we prefer. We aren’t just wanting to diversify for the sake of diversifying but rather find the best vehicles for these investments,’ he said.

Prior to the regulation change, Afores were able to access international markets via exchange-traded funds (ETF) listed in Mexico or via investment mandates awarded to international asset management firms.

Afore XXI Banorte is one of the biggest proponents of investment mandates, awarding ones to managers such as Schroders, Pioneer Investments, JP Morgan Asset Management and Investec.

His investment team is led by Leonardo Villa and Méndez said he doesn’t expect to have to add hire new people following the regulation change.

‘We don’t want to have a fund universe that is so big it is unsustainable to manage, I think we can have a limited number of partners and fund providers and that number will cover the ones that are approved by Consar risk analysis committee. With that we could expect to have sufficient coverage.

‘The truth is we tend to favor providers that have a local office or presence because it’s important to know the local restrictions.’

New tool

Méndez said the inclusion of mutual funds won’t lead to the end of mandates, as they offer tailored and long-term investment solutions, but rather offers a tactical and strategic tool for XXI Banorte to deploy in its international portfolio.

This new tool won’t radically change their current international strategy, he added, and he expects their fund selection process will continue to focus on equity vehicles rather than fixed income.

‘The yield you can get in Mexican fixed income is high and it’s hard to find a country that offers better in fixed income terms so that’s why we favor international equity.’

Their use of mutual funds will be driven by their focus on regions rather than specific themes, he said, and will help complement their current allocation to Europe, Asia and North America.

‘We are going to introduce a process where we use managers that will be approved and fit within these strategies. Within the regions, we will need to study which will be the sectors we will be looking to invest in depending on the economic cycle.'

New restrictions

One key element that is still missing is what restrictions Mexico’s pension regulator Consar will implement as to which funds will be allowed. Mendez is hopeful that any requirements will allow for an expedited investment process.

‘I think it’s a bit early to talk about what kind of restrictions the regulator will introduce but I think it will be pretty close to those of the mandates. At the moment, every pension fund has certain restrictions in terms of costs, size of the asset managers, size of the strategies so I believe that is something we will be able to extrapolate.’

Natixis Investment Managers Giordano believes we could know what restrictions will be introduced within a couple of months.

‘The one thing that is missing are the rules, and that’s important. Consar left open what the Afores can do and the rules need to be established by its risk analysis committee, the tax regulator and Bank of Mexico, and that is set to meet in February so we could have the rules by March.’

Like Mendez, Giordano believes that we could end up with a similar process as that used for approving listed ETFs in Mexico, where the authority delegates to the Afore the choice of what to invest and the regulator doesn’t get too involved.

‘I believe that could be the most efficient way of doing, if the Amafore [the Afore's tradebody] has to approve each fund then there could be a bottleneck and slow down the whole process,’ said Giordano.

He agrees with Mendez that the greenlighting of international funds doesn’t signify the end of mandates but instead opens up a new line of business for global asset managers, especially for those like Natixis who already have a mandate with an Afore.

‘Mandates will not disappear now that they have mutual funds, the potential to enter and exit tactical positions will complement very well how they make investments to diversify their portfolio.

‘We feel that we are in a good position. It’s exciting because we have to reassess our strategy a little bit but without dropping the one we have because it’s very solid and people know us.’

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