Latin American pension funds have a greater appetite for alternative investments than their global counterparts, led by growing allocations to Peru, Colombia and Mexico, according to a recent Mercer report.
The report, which tracked information on $5.9 billion in assets under management (AUM) from corporate and government pension plans in 15 markets over eight years, found that the average allocation across markets in Latin America to alternative investments was 6.6%, compared to a global average of 3.9%.
Within the region, Mercer’s report included data from Argentina, Brazil, Chile, Colombia, Mexico and Peru for a total of $836.5 billion in assets under management in plans private and public defined-benefit and defined-contribution pension plans.
Current asset allocation data from Mercer shows that, cumulatively, Latin American pension funds are invested in equities (38.5%), fixed income (49%), alternatives (3, 9%), cash (4.1%) and others (4.6%).
While a high allocation to fixed income securities has largely defined institutional attitudes among investors in the region in recent years, the study also noted that at an aggregate level in Latin America, fixed income allocation decreased – particularly in Colombia, where it fell by 9% during the reference period mainly due to market movements.
However, the study’s authors noted that a return to fixed income strategies may occur to “maintain strategic allocation objectives.”
Mercer’s study tracked $48.11 billion in Argentina’s social security system and voluntary corporate and individual pension plans, comprised primarily of the government’s Fondo de Garantia de Sustentabilidad plan.
Currently, the approximately $48 billion is invested in equities (12.3%), fixed income (76%), alternatives (2.8%), cash (1.3%) and others (7%).
Over the past eight years, Argentine investments in fixed income securities have increased from 62% to 76%, while investments in alternatives and cash have fallen from 13% to 2.8% and 7.1 % to 1.3%, respectively.
Equities account for a slightly larger share of Argentine pension fund investments than eight years ago, rising from 9.4% to 12.3% currently.
Brazil’s retirement income system is one of the largest in the region, holding $206.5 billion in assets spread across multiple government pension association plans.
According to the Mercer study, significant economic events and fiscal challenges like the Covid-19 pandemic, a large public stimulus package and a turbulent political environment have affected attitudes towards saving, risk and investing. diversification.
Thus, more and more pension fund managers and contributors have gradually turned to equities, liquid alternatives, multi-asset funds and international strategies like REITs in recent years.
In 2021, pension plan investors allocated $11.6 billion to equity funds and hedge funds, while nearly $9.7 billion was withdrawn from fixed income funds over the course of the year. same period, according to the report.
Currently, Brazil’s $206.54 billion is invested in equities (21.5%), fixed income (71.7%), alternatives (4.5%) and cash (2.3 %).
The Chilean pension fund scheme includes about $177.8 billion invested in its mandatory privately managed plan and has steadily increased its equity allocation.
Last year the equity allocation rose from 28% to 38% as the asset class outperformed fixed income, although the report’s authors said a reversal would likely occur this year.
Chilean investors have also warmed to alternative investments; regulatory constraints on asset class allocation have recently been lifted.
Currently, the $177.8 billion in the Chilean pension fund system is invested in equities (38.7%), fixed income (57.7%), alternatives (2%) and cash ( 1.5%).
In Colombia, pension fund investors have been driving the broader Latin American shift towards alternative investment strategies in recent years.
The country’s $91.3 billion pension fund scheme has allowed for a greater allocation to these types of investments, which fell from 11% to 14% while the allocation to fixed income securities fell by 5 % to 3% in 2021, according to the report.
Currently, the US$91.3 in Colombia’s pension fund scheme is invested in equities (42.2%), fixed income (41.6%), alternatives (14%) and cash ( 2.2%).
AUM’s largest pension fund scheme in Latin America, Mexico’s $279.65 billion pension fund investment industry has warmed towards international equities and target date funds since 2020.
Last year, Mexico formed its pension fund system to raise contributions, raise the minimum pension, cap the fees private pension fund managers can charge, and lower minimum retirement requirements.
As such, more money in Mexico’s pension fund system has been invested overseas, especially in its stock investment pool.
At the end of 2021, around 15% of the total funds of Mexican private pension fund managers were invested in foreign investments, or 71% of their total equity portfolios, according to the study.
Currently, nearly $280 billion of Mexican pension funds are invested in equities (21.7%), fixed income (67.2%), alternatives (8.2%), cash (0 .3%) and others (2.5%).
The Peruvian pension fund system operates similarly to that of Chile in that it is mainly made up of a private sector scheme, although it is much smaller in terms of assets under management for a total of $33 billion.
Recently, the allocation to alternative investments has increased and will continue to increase as the appetite for riskier strategies grows, predicts Mercer. Specifically, the managers shifted money to emerging market equity strategies in Asia.
Additionally, Peruvian pension fund managers have sought to invest more in passive strategies to reduce fees and have incorporated more ESG standards into their investment criteria, according to the study.
Currently, Peru’s $33 billion program is invested in equities (46.6%), fixed income (36.4%), alternatives (16%) and cash (1%).