Latin America's fund managers are experts at domestic equities, while some, and it is suggested the Chileans most of all, have a pan-regional expertise too. It is a natural next step, then, that asset managers look to expand overseas. Nick Fitzpatrick asks fund service providers about trends among this client base.
Alejandro Berney, head, securities and fund services, Latin America, Citi Transaction Services
Hector Lopez-Camacho, vice president, State Street Global Services, Latin America
Alvaro Camunas, head, BNP Paribas Securities Services, Spain
Zeca Oliviera, chief executive officer, BNY Mellon Asset Servicing, Brazil
Cedric Reynolds, executive director, JP Morgan Worldwide Securities Services
Funds Global: For Latin America’s fund managers that have ambitions on the global stage, which region – North America, Asia or Europe – appears to be the most important initial destination for them to start building their businesses?
Cedrick Reynolds, JP Morgan Worldwide Securities Services: As fund managers seek new investors and explore investments in external markets, Europe seems to be a logical next step. Funds domiciled in Ireland, Luxembourg and the Channel Islands offer investors standard investment instruments (that is, Ucits) that provide protection. Investors in Europe may also have stronger legacy ties to the region. Fund managers can establish master/feeder fund structures using regulated European vehicles to offer investors access to the region through familiar instruments.
Alvaro Camunas, BNP Paribas Securities Services: For Brazil it is North America, which currently has the highest inflows into Brazil, so there are investors there already. And Asia, which managers would plan to enter via Singapore. Their aim is to replicate and distribute their Brazilian expertise into those regions. Asia would be higher on the agenda.
Others also use the Cayman Islands for US investors, Dublin and Luxembourg for European and Asian investors, and feeder funds to attract investments into their local funds.
Alejandro Berney, Citi: In general, there are very few domestic managers in Latin America that are truly pan-American. This is due to the fact that although the region is seen from the outside as being very similar within its different countries, in reality, from an asset management perspective, each country is still very different from each other. As a consequence there are very few entities that have taken the step beyond their borders.
The first step for managers looking beyond their borders has been to offer their expertise on their home markets. To raise assets, vehicles have been set up according to the target audience. For example, Ucits for Europe and Asia, and Delaware and Cayman vehicles for the US.
The decisions on where to start have been different and tend to be related to where the manager thinks that they will have the most successful distribution. For example, Brazilian managers have leveraged the Japan cultural connection and been very successful at raising money for fixed income funds for retail sold through Japanese brokers. In other instances, managers that had distribution agreements of European products in their home countries, set up Ucits that were distributed in Europe.
While this latter channel still has significant room to continue, we are seeing several managers investing across Latin America as well. The large pension funds in Latin America have very small internal investment offices, with expertise only about their home markets. Therefore, they tend to invest the entire portion of their offshore exposure in funds. So we have also witnessed local managers setting up local investment vehicles that invest regionally (global allocations tend to be with global managers) aimed specifically to the pension funds.
Hector Lopez-Camacho, State Street: The United States is the most desired location for Latin American fund managers from an economic and strategic perspective. Brazilian firms in particular are building a significant presence in New York; they are more comfortable with the United States due to cultural and geographical proximity as well as time zone. Europe is a desired location as well, but fund managers are more reluctant and cautious due to the economic environment in the region.
Fund managers are also interested in Asia but they prefer partnerships due to distance and cultural differences.
Zeca Oliviera, BNY Mellon Asset Servicing: Initially, North America as the New York Stock Exchange offers managers in Latin America access to diversification and exposure to global securities with high liquidity.
Funds Global: Which are the most commonly used domiciles for their international products and why do you think they make this choice?
Reynolds: Luxembourg and Ireland are commonly used. Investors understand the laws governing Ucits and these laws provide them with protection. Ucits have clearly defined parameters around eligible securities, portfolio diversification, leverage, derivatives and cash deposits.
Camunas: It would certainly be via Ucits for Asia.
Berney: The most common domiciles tend to be Ucits and Cayman. In terms of the first one, we have witnessed a transition from Dublin to Luxembourg, mostly due to the fact that the Chilean regulations assign a rating to the country of domicile of the fund, thus affecting the appetite for Irish funds when sovereign ratings were reduced for Ireland. The reason as mentioned before, is to maximise distribution. European and Asian investors prefer Ucits, whereas US investors prefer Delaware and Cayman.
Lopez-Camacho: Latin American fund managers usually have a range of preferred domiciles where they feel comfortable in establishing their funds. Ultimately, the decision is made based on several elements such as tax implications, reporting requirements, origin and type of investors and time zone. Several fund managers are licensed to operate in the US, a reason why the Cayman/ Delaware structure is the preferred domicile. This jurisdiction offers a wide range of opportunities for cost-conscious companies as well as flexible regulations that allow these fund managers to establish cost-effective and efficient structures.
Luxembourg and Ireland are also very popular jurisdictions for fund domiciles.
Oliviera: Cayman is the most common domicile due to ease of set-up and cost, but there is increasing interest in Ireland and Luxembourg for Ucits compliant and Sicav vehicles to attract clients in Europe.
Funds Global: Which products (asset classes or strategies) have fund managers most focused on developing for the international market?
Reynolds: We’ve seen the majority of launches in private equity and long-only equity.
Camunas: Mostly investments in relation to their equities/fixed income expertise, and some of them are looking at distributing and replicating their ETFs [exchange-traded funds].
Berney: Asset classes have been balanced between equities and fixed income. As appetite from global investors for emerging markets has increased, strategies have evolved from blue chips and sovereign fixed income, to more complex ones such as small caps and high yield. Brazil, in particular, with its largest and most developed market, also offers more advanced strategies such as absolute return and private equity.
Camacho: Diversification is crucial, especially as interest rates in the Latin America region have decreased significantly. Fund managers are branching out of the region and beyond from the traditional fixed-income and plain equity-oriented strategies into increasingly complex investment structures, including hedge funds, private equity and real estate products.
Oliviera: Latin America market expertise especially focused on Brazil because of fundamental research capabilities.
Funds Global: What are the main back and middle-office operational adjustments they need to make when attempting international expansion?
Reynolds: The need to outsource will increase as fund managers branch into new jurisdictions and expand into external markets – outsourcing of accounting and administration functions along with trade settlement and the movement of cash and collateral.
Camunas: They need to expand their operating model. Organisation needs to be orientated to deal with third-party providers so fund managers have the means to service them in new regions. English becomes a necessity. The middle office through to trade capture needs to be adjusted to deal with foreign fund administrators and custodians. They need to provide distribution support and local expertise in the region they expand into or centres they use in order to build familiarity with regulations and other market players.
Berney: For those managers that are setting up offshore vehicles the services needed are the traditional custodial, trustee and fund services of those domiciles. These services are typically outsourced 100% since the local managers don’t have the expertise or the systems to be able to do it themselves.
Camacho: It is common for Latin American firms to work with different service providers for transfer agency, accounting, administration and middle-office functions.
The back office will benefit from a consolidated structure, where they will work with one sole service provider for their operations. The middle office will require better risk, performance and analytics tools. Leading global custodians can offer that integrated model, so that fund managers can focus on their core business.
Oliviera: Knowledge of regulatory and administrative requirements for setting up offshore funds. Latin American managers need to understand how each market works, including custody, restricted currencies/ foreign exchange.
Funds Global: Are there signs that these managers are expanding their international product range by creating products that invest beyond local equity or bond markets?
Reynolds: Yes, there are fund managers in Brazil that have global capabilities and are seeking investments in external equity (public and private) and fixed income markets. For example, a large Brazil based asset manager recently announced the launch of a $1 billion Africa-focused private equity fund.
Camunas: Examples are ETFs for niche areas – such as biotechnology and environment – even though the underlying instruments are Brazilian equities.
Berney: Definitively [there are signs], with differences per market. Mexican mutual funds only invest in offshore funds due to local tax definitions. Mexican pension funds have started to hire offshore managers to invest their offshore allocations. Brazilian mutual funds have begun investing in some offshore funds as well, but Brazilian pension funds can only invest in local funds that invest offshore and not directly offshore. Chilean managers are the most advanced in managing money across Latin America and are already managing funds that focus on Andean (Chile, Peru and Colombia) or Latin America (including Brazil and Mexico).
Camacho: Yes. Investment managers are now offering an increasing number of strategies including macro, long-short equity, event-driven, distressed debt, arbitrage, relative value, and products in real estate and private equity.
Oliviera: Yes, some are broadening their scope to global markets and others to global emerging markets.
Funds Global: Which custody/asset servicing products and services (a maximum of two) have been most in demand from this set of managers and why?
Camunas: When they go out, asset managers need all our suite of fund services… including global and local custody [and] contact establishment with local market infrastructures and regulators in the region they go.
Berney: Interest on global custody services has been on the rise. Fund services for offshore jurisdictions are also growing. Local services traditionally have not been outsourced, but interest in them is growing thanks to a rising trend in complexity of the markets, the breadth of products being launched and the pace of growth.
Camacho: We have seen fund managers in the region pursuing a platform that provides full service capability for back and middle office, including custody, accounting and investment analytics. This will increase operational efficiency and mitigate the risks associated with day-to-day operations. Fund managers have also expressed keen interest in online reporting tools which provide great transparency to their portfolios and trading activities.
Oliviera: Latin America ex-Brazil: global custody is in demand as the range of markets expands; foreign exchange; capital markets; middle-office services (performance and risk analytics). For Brazil: offshore funds set-up where we structured offshore investment platforms for two main reasons. First, it creates the necessary structure that allows local managers to expand their field of activity, increasing the exposure in global markets; second, it allows foreign investors to invest in the Brazilian market in an easier way.
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