As Latin America continues to open-up to foreign funds, it is no surprise that UCITS fund managers are looking to the region to increase their product distribution. While some are seeking to increase subscriptions from existing investors and further penetrate existing distribution markets in other markets, those who already have the UCITS passport in their back pocket have gained early entry to a gradually opening door.
And, as we highlighted in our UCITS: A Global Smash Hit article earlier this year, these funds have a strong legacy and reputation across the Latin American financial landscape. In this article, we look at which participants and markets in that landscape are driving the growth and how to access the distribution opportunity.
Historically, asset managers have approached the region with a sole focus on the Chilean, Colombian and Peruvian pension fund market, and this Administradoras de Fondos de Pensiones (AFP) route continues to produce strong results.
Although the AFP’s (seven in Chile and four each in Colombia and Peru) are obligated to comply with certain local regulatory limitations on investments directly in foreign funds, they retain the discretion to invest in foreign funds and have continued to utilize this discretion to invest with foreign asset managers. The current limitations are listed below.
Chile’s sophisticated and long-standing AFP ecosystem, where almost $200 billion is managed, has more than 125 foreign managers offering multiple products. More than 100 funds per year have been added to the regulators’ ‘permitted list’ in Chile, indicating no sign of any slowdown from foreign managers looking to win additional mandates.
With over 50% of the region’s population between them, Brazil and Mexico4 are the two big fish waiting to be caught.
Optimism grew in 2019 when the Mexican regulators (the Chamber of Deputies) published an amendment to the Pension Savings System Law (LSAR) that aims to enable pension fund managers, or AFOREs, to expand their investment options to increase their returns5 and for foreign managers to raise assets. While the latter has been a slow burn, figures show that 33 global asset managers are now registered in Mexico, with more than 120 funds available for sale,6 and these numbers continue to grow.
With the maximum foreign manager exposure set at 20% by the regulator, which is still on the lower end of scale, there’s plenty of upside for managers seeking opportunities to invest the assets of Mexico’s 10 AFOREs. In Mexico, environmental, social and governance (ESG) investing has been a focus for institutional clients, especially the AFOREs, and the country’s regulation is mandating that by 2022 these pension funds will have to incorporate sustainable criteria in their methodologies and prioritize ESG investments in their portfolios. Under the regulation, they will also need to publicly disclose whether they integrate ESG factors in their investment process, and how they do it. Those fund managers with strong track records in both their ESG products, but perhaps more importantly, in how they provide data points to help investors such as these pension funds comply with their ESG requirements, will clearly have better opportunities to raise assets.
Brazil, on the other hand, remains a harder nut to crack, and has therefore seen the development of a different distribution and product approach. With local interest rates in double digits as recently as 2016, the journey to the present rate of under 3% has helped tilt many investors’ heads away from their historically favorable local market.
According to the local asset management industry body (Anbima), assets in offshore funds at the end of January 2021 were worth $11.3 billion. However, unlike the AFP opportunity elsewhere in the region, the preferred distribution channel favors creating a local feeder fund model. These type of feeder funds are designed to target the country’s institutional and retail markets by offering Brazilian local currency share classes but invest directly into the manager’s offshore product.
An increasing number of global managers have taken this approach in the last several years and their success’ have inevitably drawn their competition to explore similar opportunities.
The American Connection - the National Securities Clearing Corporation
Across Latin America, intermediaries such as private banks, broker-dealers, family offices, fund of funds, insurance companies and independent financial advisors are also seeing business growth.
Asset gathering from these Latin American non-pension fund intermediaries has traditionally been incorporated within the US Offshore distribution strategy of fund managers, and almost inevitably overlaps with them gaining membership to the DTCC’s National Securities Clearing Corporation (NSCC) offering.
With an increase of 10% in both NSCC members listing foreign products, and in the volume of share classes listed (now over 16,000) in the past two years, this distribution channel continues to grow in prominence.
More than 130 managers now list offshore funds on the NSCC, and as approximately 40% would not be considered traditional US based managers, this pathway to raising assets seems to be both better understood and accessed by fund managers outside of the US.
There are three ways for managers to gain membership to the NSCC and the distribution opportunity that it provides:
- Via direct membership. For managers with non-US funds, this is a relatively new option, and is rarely used.
- Via some European domiciled funds that have utilized parent or affiliate relationships in the US, with this later entity sponsoring the non-US entity in their membership application.
- The use of a third-party member not corporately related to the non-US entity is quite common as well. For both an onboarding and annual fee, the third-party will form a legal relationship with the fund. Once done they will own and guide the non-US entity through the membership process. About a third of the fund managers offering UCITS on the NSCC use this model.
Approaching the US offshore market, and by extension Latin American opportunities, also means a concerted strategy of working with onshore broker/dealers, distributors and for many managers, third party placement agents. With US hubs such as Miami and New York and increasingly Montevideo in Uruguay, acting as centers for asset gatherers to focus on, selection of distribution partnerships is an essential step within their growth strategy.
The clearing broker Pershing remains ubiquitous in this space, and many successful managers work with or endeavor to work with Pershing and the 2000 independent broker dealers connecting to their platform. With wire houses such as Morgan Stanley, Merrill Lynch and UBS forming the most common tier one targets to work with, partnering with placement agents that understand the product needs and expectations of these key players is evident.
For fund managers familiar with AllFunds, it’s notable that they have been gradually expanding its presence in the region over the last few years, and while they have yet to replicate their leading position in Europe, their track record of penetrating new markets suggests that this is a space to watch.
1 page 423 for Chile https://www.oecd.org/daf/fin/private-pensions/2021-Survey-Investment-Regulation-Pension-Funds-and-Other-Pension-Providers.pdf
2 Cerulli Report Latin American Distribution Dynamics 2018
3 Page 458 for Peru https://www.oecd.org/daf/fin/private-pensions/2021-Survey-Investment-Regulation-Pension-Funds-and-Other-Pension-Providers.pdf
Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2021. All rights reserved. IS-07694-2021-10-15