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The big shift: Colombian AFPs upping mutual fund allocation

The big shift: Colombian AFPs upping mutual fund allocation

As many pension funds around the globe increasingly turn to passive vehicles for their investment needs Colombia’s pension funds are taking the opposite approach and embracing active management.

Mutual funds are gaining traction among Colombia’s pension funds as the industry's growth has led them to increasingly turn to foreign investment, piquing the interest of global asset managers.

Assets under management of Colombia’s four AFPs rose from $61 billion in 2013 to roughly $79.8 billion in March, according to data from the Organisation for Economic Co-operation and Development and from Latin American asset manager and fund distributor Excel Capital. 

This rise in assets has encouraged the AFPs to diversify outside of their borders as they have found limited opportunities in their local equities market, whose market capitalization came in at $103.8 billion in 2016, according to the World Bank. The market cap for US public companies was roughly $27.4 trillion that same year.

The search for better returns has led the AFPs to dramatically increase their foreign investments over the past four years, from 4% in of AUM in 2013 to a record high 25% at the end of January this year, according to data from the OECD and Excel. Their foreign allocation had previously peaked at 16% in 2010. 

Most of that growth has gone through ETFs, said Erika Gil, portfolio manager at Colombian pension fund Old Mutual, but their active allocation has also risen as more global asset managers have entered the Colombian market and expanded the mutual fund offering.

The AFPs increasing sophistication as international investors has also contributed.

‘What we’re looking for is to make our portfolios more efficient and profitable,’ Gil said. ‘The only way to do that in the long term is through active management.’

In the first quarter of this year, mutual funds accounted for roughly 29% of the AFPs' foreign investments, while ETFs accounted for 45%, according to data from news and research site Fund Pro Latin America. Of the remainder, 13% was in private equity funds, 7% in direct market investments and 7% in deposits and structured products.

Almost 10 years ago close to all of the AFPs’ foreign allocation was in passives, said Jose Luis León Dugand, country business head for Colombia, Panama and Peru for Natixis Global Asset Management.

The interest in active management was one of the reasons that led global fund house Natixis to open a representative office in Colombia in 2015, León said. The pension funds rank among the firm’s key target clients.

‘The institutional business is really important here in Colombia,’ he said. ‘They’ve come much more sophisticated, especially pension funds,’ León said.

He believes the move toward active investment will continue, and that it will lead the pension funds to give ETFs and mutual funds an equal weight in their portfolios.

‘It’s a matter of months,’ he said. ‘I can’t tell you exactly when, but the trend I’ve seen among clients is that there’s a strong incentive to balance out the equation.’

Recent boosts

For many years, Colombian law had banned the AFPs from investing in mutual funds in which a single owner held more than 10%. That rule didn’t apply to ETFs.

‘That also limited investment in mutual funds,’ Gil, the Old Mutual portfolio manager, said. ‘There were many funds that had positions of 10.05% and that made them inadmissible.’

The government soon loosened its stance, updating the regulation in May last year to allow ownership of more 10% as long as it's disclosed. 

Interest in regions other than the US has also been a factor to rising demand for mutual funds.

‘There has been increased appetite toward emerging markets with the recovery of oil and better fundamentals,’ Gil said. ‘What we’ve been looking for are options that potentialize that strategy more.

‘It’s been the same for developed countries,’ Gil added. ‘There has been increased appetite for Europe following a substantial improvement in fundamentals in the past year.’

Equities in these regions look cheaper than US stocks, which are trading at about 24 times earnings, Gil said.

The pension funds hold the bulk of their exposure to the US in passive vehicles, said Carlos Martinez, Excel’s country head for Colombia.

‘Historically there aren’t many funds that have had a good track record vs. the S&P 500,’ Martinez said.

‘It’s a general convention that exposure in the US is better carried by ETFs vs. other regions where there’s enough evidence that active management gives better results.’

As attention shifts to regions outside the US, Gil said the JP Morgan Europe Strategic Growth fund,  run by Citywire + rated Michael Barakos and A-rated Ben Stapley, has garnered the AFPs’ attention. 

The fund has returned 14.56% in the past twelve months. Its Citywire-assigned benchmark, the FTSE World Europe TR EUR, has risen 11.46%.

For his part, Léon said that among Natixis's range of funds there has been increased interest in funds such as the DNCA Invest Value Europe, run by Citywire A-rated Don Fitzgerald, as well as by Isaac Chebar and Maxime Genevois. In the past year, that fund has returned 8.21%, while the FTSE World Europe TR EUR has risen 11.46%.

Another popular fund is the DNCA Invest Europe Growth, which Citywire AAA-rated Carl Auffret manages along with Yingying Wu. The fund's return was 9.57% for the past 12 months, while its Citywire-assigned benchmark, the STOXX Europe 600 TR EUR, fell by 31.23%.

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