Analysis: Mexico pensions tap ETFs to expand foreign stock buys

By Patrick Rucker and Jean Luis Arce

MEXICO CITY (BestGrowthStock) – Mexican pensions have tapped some of the largest U.S. fund managers to help them expand their holdings of foreign stock and so boost returns but many emerging markets are still out of reach.

The pensions may bet about 20 percent of their roughly $100 billion in foreign assets. However, the funds are risk-shy and still skittish after the 2008-09 crisis. As a result, they have only 9.8 percent invested in foreign assets, 6.5 percent of that in stock.

If the pensions gain the nerve to expand their stock holdings, it could be a lift for established stock indexes and big fees for the money managers that handle pension cash.

“The growth prospects are very good,” said Sergio Guzman, a Vanguard sales chief in Latin America, noting that Mexican pension funds, known locally as Afores, have swollen by 26 percent in the twelve months through August.

The Afores may only scoop up foreign stock through exchange-traded funds (ETFs) that blend company shares. The securities are liquid and have built-in diversity since they sample stocks from an industry sector or index.

A mini-rally of equity investments and an expanding list of eligible ETF investments are two reasons the Afores expect to pocket more foreign stock.

“If you look at the performance (of stocks) this year, it does not justify us being so low in equity investments,” said Leonardo Diaz, investment chief for Afore Bancomer, the nation’s second-largest with roughly $17 billion in assets.

The Afore system will slowly push toward its limits if the global economy continues to recover, Diaz said.

BlackRock’s (BLK.N: ) iShares unit manages a little less than half of the 154 approved ETF funds while State Street Corp (STT.N: ) SPDR funds comes in second with 39 funds. Vanguard and Wisdom Tree combined manage 30 available funds.

Those funds give Mexican pensions the chance to bet on virtually every U.S. industry from banking to energy and dip their toes in Europe and Japan but most emerging markets – with the exception of Brazil – are out of bounds.

“We are going to see all emerging markets open in the years to come,” said Alejandro Echegorri, who as chief investment officer at Principal Afore, is bullish on stocks in Germany and Brazil.

But the Afores are already expanding their holdings of equity in developed markets. While the Dow Jones Industrial climbed roughly 5 percent in September, the Afores expanded their foreign stock holdings to 6.5 percent from 5.2 percent.

Pensions are turning to stocks, in part, because bond yields have been crushed. Foreign investors snatched up peso-denominated bonds – the Afores traditional bread and butter – ahead of Mexican sovereign debt being included on Citigroup’s World Government Bond Index (WGBI) this month.

“We see interest rates both in Mexico and in other countries very, very low and that obviously makes… equity investments more attractive,” said Echegorri, whose Afore, part of Principal Financial Group (PFG.N: ), is among the middle-tier with about $4.5 billion under management.

Early this month Mexico’s IPC stock index (.MXX: ) got a boost while regional peers and the U.S. slipped. Traders speculated Afores were reaping profits on local bonds and buying equity in the wake of WGBI.

While Afore chiefs talk about growing their stock holdings now, they have a recent history of behaving like the panicked retail investors that dumped stocks after Lehman Brothers failed in September 2008. The Afores held 7.8 percent foreign equity in May 2008 but that had dwindled to 3.7 percent in February.

Afore investment chiefs say that higher limits on stock investments and other tweaks to investment rules leave them in a better position to take advantage of opportunities in global equity markets.

“As a system, we have been very reactive to get this low in equity,” said Leonardo Diaz of Bancomer who expects the pension funds to near the limits on their stock holdings in the next few years.

Analysis: Mexico pensions tap ETFs to expand foreign stock buys