Latin America continues to be an increasingly fertile market to raise assets in for fund managers with European domiciled UCITS products, according to a recent webinar hosted by Brown Brothers Harriman. Managers should look to create two different pathways to asset owners pension funds based in three Latam countries – Chile, Colombia and Peru – and Mexico, and U.S.-based broker-dealers who invest for non-resident Latin American customers.
The ‘Navigating the UCITS Distribution Landscape: Spotlight on Latin America’ webinar brought together a group of experts on the region: Diana Roa, director at HMC Capital, Robert Carbone, director of National Securities Clearing Corporation Services (NSCC) at Foreside Financial Group, Killian Lonergan, head of distribution intelligence at BBH, and Kate Ahalt, a senior relationship manager from the fund services side of BBH.
Roa noted that Chile, Colombia and Peru have approximately US$270 billion in assets under management (AUM) invested in their pension funds, which are known as Administradoras de Fondos de Pensiones, or AFPs, and are increasingly open to foreign fund managers. In addition, pension funds in Mexico, with almost US$250 billion in assets, are going to be “a very big market” for foreign asset managers in the near future, she said.
Carbone said fund managers seeking to raise assets should also consider broker-dealers in Miami, Houston, New York and San Diego that specialize in handling investments for Latin American clients, who as non-U.S. citizens look to invest in non-U.S. based mutual funds. But he added that for a fund to gain traction with these gatekeepers, it is essential that they attain membership with the National Securities Clearing Corporation (NSCC). As so many broker-dealers only use the NSCC platform for their mutual fund trading and settlement, funds that aren’t on the platform are likely to be ignored even if they have a great track record.
Looking at the potential for growth in the AFP market, Roa, who is based in Bogota and works directly with many AFPs, said Chile is the most experienced and developed country using foreign funds, and its six pension funds have US$160 billion in AUM, with US$85 billion in mutual funds, including ETFs. Colombia has four AFP funds, with about $80 billion in AUM, while Peru has US$30 billion in four AFP funds.
“Chile has had more time to experience the investment process and is more knowledgeable,” she said. “When you look at their portfolio composition, they have roughly 50% equally in active and passive management, while Colombia and Mexico are still migrating from passive ETFs management to active management.”
All four countries presently have a strong preference for investing in Asian equities, although they each pursue a different strategy, such as Asia ex-japan or China-focused, she said.
What Pension Funds in the Region Want
Ahalt said that many of the Latam AFPs have limits set by their risk committees for how much of a fund they can own. At the same time, the AFPs need to be able to make sizable allocations in order to have impact on their portfolios. The result is that, generally, funds need to be fairly large to be investable for the AFPs.
“Generally speaking, in order for a fund to be attractive to a pension fund it needs to be fairly large in size, in an attractive asset class and have a competitive performance record against benchmarks and peers,” she said. Roa added that in Colombia there is a minimum US$1 billion AUM for a fund to be considered by an AFP.
Chilean AFPs tend to be more flexible about fund size, especially if there is a fee discount involved. Colombia and Peru still accept full fee funds, although Colombia is moving toward requiring fee discounts as well.
“Sometimes these countries move in lock step, and other times they move quite differently,” Ahalt said. “Having an approach that covers all three markets and then considering newer markets like Mexico might help from a diversification perspective.”
Roa said that Mexico’s regulator recently gave approval to AFPs investing offshore directly, rather than through mandates. The regulator currently sets limit of 20% on allocations to foreign funds, but the actual investment percentage is closer to 12%. Lonergan said he believed that only four or five of the country’s 10 AFPs are actively looking at foreign funds at the moment. He said that recent data indicates there were 130 foreign funds registered in Mexico, involving 30 managers, who have to meet a US$50 billion AUM minimum in Mexico in order to be considered.
Routes to Market
Lonergan began a discussion about gathering assets from broker-dealers in the U.S. who prefer to trade on the NSCC platform because it handles all aspects of the transaction. He said there are three ways for a manager to gain their membership on NSCC – by obtaining membership directly, through an affiliate fund company, or through a third-party sponsor such as Carbone’s Foreside Financial Group.
The NSCC “is not selling anybody’s product for them, it’s just putting it on the shelf in the shop window,” Lonergan said. “You now have the infrastructure, but you’ve still got a lot of work to do.”
Carbone noted that the NSCC was set to support the trading of liquid daily priced mutual fund products, and managers with European service providers based in Dublin or Luxembourg both wanted their UCITS products to be available via the NSCC, so they do not need a separate ordering or reconciliation systems, and the product’s only differentiating factor is not it’s difficultly to do business with!
“It's very simple for funds to plug into this process provided, they're working with a transfer agency/service bureau that has processing capabilities and they have the settling bank solution for end of day net settlement.” Carbone added, a fund only needs to open a participant account, link it to a transfer agency and it “very easily facilitates the straight through processing that these U.S. firms are accustomed to.”
Carbone explained that big fund firms in Europe began using the NSCC system to streamline their operations but now it is used by many smaller firms. “We've certainly seen it expand to more medium-sized managers and then more managers that started responding to very specific mandates in Latin America started coming to us,” he said.
ESG in Infancy
And finally, the panelists touched briefly on environmental, social and governance investing. Unlike in the U.S., UK and Europe, ESG is in more nascent stages in Latam. While it is a consideration in the region, it does not sit above performance for asset owners’ investment decisions.
Facing an Evolving Region
Going forward, as UCITS fund opportunities in the Latin American region continue to evolve, managers should resist the temptation to view it as one target group. Instead, distribution into the region’s highly regulated main pension funds markets of Chile, Columbia and Peru requires knowledge of their similarities and differences. Operational excellence on behalf of the fund manager and their service providers is essential. Mandates can be lost due to operational errors.
It’s also clear that two routes to market exist. Pension funds offer bigger but fewer trades, while the NSCC trading and settlement model opens the door for wealth management, private banks and family offices. For the NSCC route, working with, and having a strong understanding of the main broker/dealers' product and operational requirements, in tandem with a transfer agency capable of providing exceptional NSCC servicing will give managers an edge in the region.
Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term 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. 2022. All rights reserved. IS-07856-2022-01-06