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DISTRIBUTION: Supply routes

RoadAs international asset managers help regional investors diversify their portfolios, even European equities are sparking interest. Nick Fitzpatrick looks at the businesses of three managers expanding in Latin America.

The number of European asset managers making significant steps to increase their Latin American distribution business has been increasing in recent times.

Natixis Global Asset Management (one of the 20 largest managers in the world), Old Mutual Global Investors and Henderson Global Investors are ramping up their activities in the region’s wealth management and pension fund markets.

They are following in the footsteps of Schroders and Pioneer Investments, to name just two, which have worked to build local client bases and increase revenues from Latin America as it follows the same broad wealth-creation and demographic trajectory as Asia.

The aim of European and North America fund managers is to bring diversification to a regional client base that is heavily allocated at present to local markets and similar emerging markets. A natural inclination for investment in emerging markets similar to their own is often said to characterise the behaviour of individuals and institutions based in emerging markets, and Latin America is no exception.

“As they are already based in the emerging markets, it is natural for them to have looked at other emerging markets for investment,” says Sophie Del Campo, managing director for Natixis GAM in Latin America and Iberia.

But there is now a pattern for domestic-based investors to diversify from local investments and from basic emerging market allocations.

Del Campo points out that much of the client base for private bank distributors is made up of business owners. “Entrepreneurs want to diversify away from the risks they have locally, and they can do this with international assets,” she says

Similarly, Warren Tonkinson, head of global distribution at Old Mutual Global Investors, says: “It is a region of wealth creators. They are entrepreneurs who have built up a business and want to diversify their investment portfolios.”

A 2014 Latin American industry report by Swiss bank Julius Baer noted that much of the wealth that has been accumulated by high-net-worth individuals in Latin America is a result of entrepreneurial efforts and family businesses, particularly in the construction, technology and exports sectors.

The report noted too that high-net-worth individuals are, on average, far wealthier in Latin America than those in other regions. The average investable assets of each highly wealthy person is $13.5 million – roughly four times more than in Europe or North America.

At the same time, mandatory enrolment to pension schemes is creating an asset management opportunity in the institutional sector. In some countries, this is driving pension funds away from domestic assets. 

Greg Jones, Henderson’s head of retail distribution in Europe, the Middle East, Africa and Latin America, says auto-enrolment in Colombia, Mexico and Chile has, effectively, led to pension fund assets growing at a faster rate than GDP. 

As for internationalisation, it seems that Mexico and Colombia are following the example of Chile, which has one of the oldest pension systems in Latin America and one of the most advanced in the world. Funds there now invest 50% of their assets outside the country, according to Jones.

“These countries have a bias to local markets but as pension systems grow, like in Chile, then their assets under management in the domestic market grow too and over time, as pension funds become more mature, barriers to investing overseas are coming down,” says Jones.

Between them, European asset managers have a plethora of offerings to catch investor interest as they look to diversify. High up in the mix are European equities. 

A few years ago, emerging market investors would have baulked at this asset class. 

But in May, Henderson Global Investors had Nicholas Sheridan, the lead manager of the Henderson Horizon Continental European Equity fund, talking to fund selectors in the region, along with Ignacio de la Maza, Henderson’s head of sales for Latin America and Iberia.

Jones says European equities are increasingly sought by clients in emerging markets. 

“Global clients had a very small portion of European equity three years ago. Chile, for example, had zero. But we are good at European equity and we decided to stand out as experts in it.”

For a year and a half, Henderson’s European equity strategy attracted no Latin American money, except from a few private banks that took an early bet on Europe’s recovery.

Distribution boxes

But the fortunes for Henderson’s equity strategy turned – and in a very ironic way.

In 2011 Henderson bought Gartmore, a UK fund manager, in a deal that left it with a large Latin American equity strategy, with around $1.5 billion of investments from Latin American clients. That money has since switched to Henderson’s Europe strategy, Jones says.

“We saw all of it go out, and we picked it all up again in the European strategy.”

His colleague, de la Maza, says the percentage of assets that Chilean pension funds now have in European equities is 4%. Although this allocation has been larger in the past, the money was in exchange-traded funds and was less sticky. What is significant now is that the allocation is a strategic one.

Del Campo, at Natixis GAM, says the client base in Latin America is looking cautiously at Europe. 

“Our managers say it makes sense for investors to increase their European asset allocation and we are working out with them the best strategy. This will consist of low-volatility equity and some small and mid-caps.”

Investors, she says, are focusing on diversifying fixed income assets and investing in alternatives, such as private equity and infrastructure. They are also interested in illiquid alternatives.

At Henderson, de la Maza also notes the need for fixed income diversification with alternatives. He says liquid alternatives are capturing people’s interest. “As returns in fixed income are becoming more limited, people are going back to long-short equities,” he says. He also highlights an interest in property.

Asset managers are finding investor needs are usually homogenous across the globe.

Tonkinson highlights the demand for non-correlated sources of return and the need for income assets, such as bonds and dividend equities. He says these are common global trends and are just as relevant in Latin America.

Del Campo says an annual Natixis GAM survey of investors internationally identified demand for strategies to cope with volatility and preserve capital, and which will compensate investors better in a low interest rate environment.

“In general we find some very similar trends in Latin America,” she adds.

Perhaps it is not surprising that investment themes are global, given that in many cases, the distribution partners asset managers work with are themselves global.

Del Campo says: “We decided to focus our distribution business in Uruguay. The country has a high profile and we have some existing clients there, such as international private banks that we have global agreements with.”

In part, the significance of Uruguay to Natixis (and to Old Mutual, which has a major distribution partner, Aiva, there) is that it is a significant centre for Argentine money, not to mention an access point for Chile.

But Natixis GAM will take only tactical opportunities on Chile’s pension funds, locally known as AFPs. “The DNA in our company is about long-term partnerships and this is very different from how AFPs work. They get in, they get out,” she says, referring to their high rate of fund-switching.

The Natixis offering is offshore and draws from its Luxembourg, Ireland and France funds.

Operating offshore closes off the Brazilian market, where regulation requires funds to be domiciled locally. Offshore access is possible through the fund-of-funds route.

Henderson is selling its Luxembourg Sicav and UK open-ended investment companies into the market and has deals with Pershing, Merrill Lynch and HSBC among others.

In addition to this, it is finalising an institutional agreement with a consultant in Mexico, says Jones.

Aiva provided administration services for Old Mutual Global Investors for a number of years. The firms’ current agreement means that Aiva’s dedicated sales team of three sells Old Mutual funds to banks. 

“We are leveraging off the experience of Aiva’s sales team,” says Tonkinson. “We have had an offshore presence there for some time but the agreement gives us greater coverage of the global banks.”

International asset management businesses operating in Latin America are driven significantly by global distributors, global investment trends and a local client base that wants global assets. But is it also driven by global regulatory trends?

When it comes to the ending of fund rebates in the advisory channels, it appears not – or at least, not much.

In December 2014, the Brazilian Securities and Exchange Commission said it would end rebate fees within investment funds that invest in quotas of other investment funds, with some exceptions.

Distribution box2Del Campo at Natixis says rebates are not a “hot topic” for regulators in Latin America, but suggests that global banks may cause the rebate issue to transmit through business lines across organisations as they adopt groupwide practices.

“Rebates are a key topic in all the countries that we are in because our clients [the banks] are global and they would normally try to have a global approach applied to their markets. Over time, these global entities tend to move towards one unique business model,” she says.

“But there are other kinds of clients that want to be in line with their local market, and they still want rebates.”

What is important for regulators in Latin America at the moment, says Del Campo, is the transfer of skills from foreign managers to the local sector.

“Regulators ask us to work with clients in transferring technology and transferring skills around diversification. There are not many big actors in the local asset management market, so foreign managers are bringing diversification, and international diversification is something that regulators want to control.”

These three fund managers are just the latest to increase their Latin American businesses. They will be looking to emulate some of the success of Schroders and Pioneer, the first foreign managers to gain mandates from the Afore Banamex pension fund in Mexico. 

Afore Banamex, a subsidiary of Citigroup, is diversifying its investment portfolio with international investments. Other Mexican funds are expected to follow. 

In all likelihood, asset managers from Europe will have a role to play too.

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