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Passive pensions: Chilean firm eyes ETF-powered AFP

Passive pensions: Chilean firm eyes ETF-powered AFP

A Chilean investment firm is looking to launch a pension fund that would mostly invest in exchange-traded funds (ETFs) in a bid to offer a cheaper alternative to the country's savers.

On November 6, Santiago-based Alagna Capital applied for a permit with the local market regulator to open AFP Progreso, according to Jim Varas, who set up Alagna earlier this year to invest in projects in Chile.

The project emerges at a time when Chile’s AFPs are on the hot seat, with savers claiming the firms aren't delivering adequate pensions. Many pin part of the problem on so-called 'hidden fees,' or the costs AFPs pay to invest through asset managers and which are deduced from savers' returns.

AFP Progreso would aim to 'maximize every cent clients can save' by charging savers lower fees than other pension funds, Varas said. To that end, he said he would run a lean shop and invest mostly in ETFs, which tend to carry lower fees than actively managed funds.

‘We want to put on the table a solution today doesn’t exist in the market: passive management of savers’ money through ETFs,’ he said.

The move would mark a sharp departure from the AFPs’ current approach to international assets, which make up roughly 40% of the pension funds’ $201 billion total assets. About 81% of their international assets are allocated to actively managed funds, 18% in passives and the rest in money market instruments, as of the end of November.

'When you compare these two approaches, i.e. active and passive management, we're convinced that in the long-run passive management generates higher returns than active management, net of fees,' Varas said.

He added: 'It's not that [active] asset managers are bad. The problem is that many of them are caught in a short-term logic. That doesn’t adapt to the profile of  AFP clients, which have time horizons of decades and where ideally long-term returns is what counts, and not how many times you beat the index each year, quarter or month.'

However, while he wants to take a passive approach, he is open to using active management where needed.

Eventually, AFP Progreso would also seek to offer a platform similar to a robo-advisor that would let savers run their own money. The pension regulator doesn't currently allow that approach, but Varas said it could eventually work for voluntary pension schemes.

'It would be a controlled, guided and low-cost platform offered by players like us,' Varas said. 'It would be controlled and guided only because you can't expose people to do things they don't completely understand.'

Next steps

AFP Progreso expects to hear back from the regulator on the status of the permit by January 15.  If it does not get approval by that date it will not be able to participate in the bidding process through which the government decides what AFP will run the money of new savers.

In the meantime, Varas is working to hire the firm's investment team, a process he aims to finalize by January.

From 2009 until mid-2017, Varas worked as an investment manager at Exor, a holding company owned by Italy’s influential Agnelli family, which as of June held stakes in companies such as Ferrari and The Economist. Previously, he worked at UBS’s London investment banking division, and in mergers and acquisitions at BNP Paribas.

This year, two other start-ups announced their intention to open AFPs in Chile, but both ultimately decided to drop their ventures. Citywire Americas understands neither group sought approval from the regulator.

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