In that context and given that Chile is the most mature market when it comes to fund investing, with a stronger expertise in that field, we can see how the trends identified in the Chilean market are replicated in other countries across Latin America. Hence we can focus our trend analysis on Chilean institutions to get a grasp of the situation in the region.
We find a clear interest for medium to high-risk instruments over lower-risk alternatives, as Chilean investors are able to cover the needs of the latter with local bonds. Equities represent 67% of the international fund portfolios of Chilean pension funds (AFPs), and fixed income just above 30%, concentrated primarily in high yield. We also detect a lack of interest for balanced mutual funds.
Chilean AFPs are by far the main player in the region in terms of exposure to international mutual funds ($55bn was invested as of October 2012).
US funds are the major destination for Chilean AFP investments with more than 33% of the total, a trend that shows no signs of change in the short term (assuming a positive outcome of the fiscal cliff issue). Asian funds and global emerging markets follow with 28% and 17% of total AFP volume respectively. Next in volume are Latin American and global funds with 8% each, Eastern Europe and Europe with 5% and less than 1% respectively, and finally Japan with an almost insignificant exposure.
In absolute terms, Asian equity is the asset class to which Chilean AFPs have the highest exposure with 28% of the total, followed by US equity with about 20% and US fixed income at 13%.
Along the same lines, domestic Chilean funds of funds invest in relatively riskier assets, with around 89% exposure to equity funds and only 11% to fixed income. In terms of regional exposure, US funds are also the main destination followed by Asia (25%) and Latin America (16%).
We believe that investors are now also starting to show an increasing interest for European markets, which are now at remarkably low levels, especially after some recent positive news regarding the European debt crisis. This, together with a notable number of European corporations in a substantially strong financial situation with cash at record levels, could open a window of opportunity not only for equities but also for fixed income. Regardless, a common sentiment can be felt in the air – no one wants to be the first to get on that train.