Changing investment performance in Latin American countries is prompting local asset managers to team up with European firms to distribute wrapper funds in the region, according to BNP Paribas Securities Services.
The custodian’s latest whitepaper, titled “Building Your Gateway to Latin American Investors: A Guide on How to Access the Top Fund Distribution Markets in Latin America”, highlights the impact of tapering by the Federal Reserve and general liquidity squeeze in developed markets on investors in Latin America.
It notes that a slow down in emerging market performance has prompted the region’s investors, who were traditionally using currency and fixed income instruments, to show increasing appetite for foreign assets. This is a crucial driver for business expansion by international asset management companies in the region, says BNP Paribas Securities Services, who has been steadily increasing its footprint in the region. The custodian went live with a local custody offering in Columbia in the third quarter of last year. In Bogota BNP Paribas completed the migration of the assets from Citi in October 2013 and expects to announce a mandate win in the coming weeks. It is also present in Brazil and will open another market shortly.
BNP Paribas notes a trend whereby currency as an asset class had attracted the large local investors to the “easy money” in 2008 and 20009 but recent events have had a direct effect on currency depreciation for those investors. Recent quantitative easing by the Federal Reserve also created a panic effect, which had an impact on the currency investors, notably the drop in the value of the Argentinian Peso. “We saw currency depreciation and emerging market downside caused by Central Banks and the tapering effect,” says Andrea Cattaneo, head of asset manager solution. The decrease is driving local investors to look outside.
Brazilian institutional investors, in particular, began to see a reverse trend in 2013. They were traditionally investing in local economies where interest rates were higher and inflation rates were lower. This meant that the actuarial target for Brazilian institutional investors of inflation rate plus 6% was no longer achievable, says BNP Paribas. The custodian highlighted research from Brazilianbubble.com, which shows that the amount distributed abroad from Brazil rose from BRL13 billion in 2011 to BRL37 billion in 2013.
“There are still opportunities in the emerging markets in terms of small caps,” says Andrea Cattaneo, head of asset manager solutions. “But the overall emerging economy is slowing down in respect of large cap investing with Brazilian stocks being affected by China slow down, and we see a trend for the local investor going abroad while locally there are still small cap equities, particularly in the education sector, that are behaving differently to the large caps.”
Fund distribution into Latin America is gradually liberalizing and is today allowed through funds of funds structures, brokers, private banks and platforms. Since 2012, the regulator in Mexico has allowed local managers to mandate external managers. In Brazil, institutional investors are allowed 10% of their investment outside of local borders.
There have been significant increases in the outflows from Chile, Columbia and Peru and Mexico is also modifying its mandates for international management in the last year, notes Cattaneo.
Cattaneo says that the downward trend in Brazil, with interest rates rising from 7% to 11%, resulted in increased investment by local investors in the country. However, this will stabilize and significant outflows will result. “Brazilian managers are creating UCITS funds in Luxembourg as investors show a preference for regulated funds,” he says. “They are setting up in Chile and Peru and cloning local fund types as these UCITS funds are only allowed in Chile, Peru and Columbia.”
UCITS funds are permissible in Brazil only if wrapped by a local product. Brazilians meanwhile have been investing in U.S. dollar as a currency because the depreciation of the local currency means they would get twice their money if they invested in a foreign currency, notes Cattaneo. “They were also investing in local money market funds and this is no longer enough,” he says. “In Brazil the trend in the short term is partnering or setting up in Brazil and launching local funds of global funds asset management companies.”
The trend towards overseas investing is creating significant opportunities for foreign managers as they target growing pension fund markets worth $280 billion in Brazil, $ 29 billion in Peru, $15 billion in Mexico and $15 billion in Chile, notes BNP Paribas. This is particularly notable in the case of Peru, which increased its quota for local investors in foreign assets to 60-80%.
Latin America is the third largest buyer of UCITS after Europe and Asia and managers in these locations, particularly in Chile, Peru and Columbia, now have the capabilities to partner with the asset managers in developed economies.
Asset classes are changing and there is a huge link up between the local investors and European managers, says Cattaneo. “There is more local investment into foreign funds and joint ventures to give Latin America investors access to Europe. EU fund managers are reacting by establishing companies in Latin America in order to distribute flagship products and setting up joint venture with local asset managers.”
Cattaneo notes Aberdeen Asset Management has established a presence in Brazil to sell investment capabilities in this market. Edmond de Rothschild is also forming partnerships sell their funds as a wrapper to local investors and Italian fund manager Azimut is also present. “It’s all about a move towards the easy money given there is less liquidity in developed markets and less opportunity for investors in emerging markets.”
BNP Paribas Sees Opportunity In Latam As Local Investors Target UCITS Funds
Changing investment performance in Latin American countries is prompting local asset managers to team up with European firms to distribute wrapper funds in the region, according to BNP Paribas Securities Services.
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