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Foreign Investments in a pension fund context by Eric Conrads

Foreign Investments in a pension fund context by Eric Conrads. Oct 2008. Brazil. KEY ELEMENTS OF ADDING FOREIGN INV. . IMPROVE EFFICIENT FRONTIER OF THE PORTFOLIO WITH A BETTER RISK-RETURN MIX ACCESS & EXPLOIT INVESTMENT UNIVERSE OPPORTUNITIES

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Foreign Investments in a pension fund context by Eric Conrads

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  1. Foreign Investments in a pension fund contextby Eric Conrads Oct 2008. Brazil

  2. KEY ELEMENTS OF ADDING FOREIGN INV. • IMPROVE EFFICIENT FRONTIER OF THE PORTFOLIO WITH A BETTER RISK-RETURN MIX • ACCESS & EXPLOIT INVESTMENT UNIVERSE OPPORTUNITIES • FREEDOM OF CHOICE – LESS CONSTRAINTS- FLEXIBILITY • EXPAND KNOW-HOW OF THE MANAGER FOR A BETTER UNDERSTANDING OF THE DRIVERS OF ITS LOCAL UNIVERSE • CURRENCIES DIVERSIFICATION (eg devaluation reais) • POLITICAL RISK (eg 2002 elections)

  3. MSCI LATIN AMERICA • MSCI LATAM 152 stocks / MSCI WORLD 1949 stocks. • LONG ONLY products are heavily concentrated countrywise and sectorwise! • ROOM for INTERNATIONAL INVESTMENTS to dig for value and smooth risk concentration. March 2008 2

  4. Foreign Investing: raising the Information Ratio IR = IC * TC * √N Skill Freedom Breadth • Assume that the manager already has the highest possible information coefficient and cannot introduce any more skill to the stock selection process • The manager has two non-exclusive options to further increase IR: - • Expand N – the universe of securities from which stock selection is made and / or • Increase TC – by reducing the constraint on active weights to allow the inclusion of short positions in the portfolio. This will allow the manager to take more active bets on stocks based on their forecast residual returns

  5. LATIN AMERICA AuM • Merrill Lynch expects $37bn a year for the next five years in domestic funds flow to equities via asset base growth, rotation to equities and investment returns. • Colombia pension funds $36bn and Peru $ 23bn. • AFPs $300bn…4% of AuM in hedge funds would mean a bit less than $15bn. March 2008 4

  6. Pension funds foreign investments As of October 2008, limits in Chile have been raised and investment products expanded to derivatives, swaps…

  7. Asset allocation in Chilean pension fund: the importance of foreign investments Fuente: Asociación de AFP

  8. Asset allocation in Chilean pension fund: the importance of foreign investments THE MANAGERS HAVE USED AT THE MAXIMUM THE AVAILABILITY OF INTERNATIONAL DIVERSIFICATION Fuente: Asociación de AFP

  9. MULTI-FUND SYSTEM: INTERNATIONAL EXPERIENCE • 2002: CHILE moves from 1 to 5 funds & MAX 30% internationally invested • Initially 2 funds for RISK needs: people close to pension preoccupied by volatility • Expanded to 5 funds for RETURN needs: critic was the lack of equities exposure in the fund. • 2004: MEXICO offers the choice between 2 funds with MAX 15% in equities • 2005: SLOVAKIA introduces 3 multi - funds: growth-balanced-conservative • 2006: PERU introduces 3 multi - funds: growth-balance-conservative • THE AFP have the freedom to introduce more if they want…3 was a CHOICE! • 2008: MEXICO moves from 2 to 5 funds and raises MAX equities to 30% CHILE reformed the system (more instruments, raised limits) PERU increased the foreign limit to 20% WHAT MATTERS? ? • TO OFFER CHOICE OF “TAILOR-MADE” FUNDS RATHER THAN ONE “READY-TO-WEAR” FUND • TO BALANCE INVESTMENT FLEXIBILITY WITH THE REALITY OF THE LOCAL CAPITAL MARKET

  10. ING Investment ApproachA fully integrated regional investment process leveraging the ING network Weekly “ideas” call Monthly deep sector analysis Mexico - 2 analysts - AUM $16bn Regional Focus Colombia - 1 analyst - AUM $4bn ING is the 2nd biggest pension fund manager in the region with a presence in 7 countries. Brazil - 4 analysts - AUM $8bn Peru - 1 analyst AUM $7.4bn Uruguay - FI - AUM $0.6bn Chile - 5 analysts - AUM $32bn Argentina - 1 analyst - AUM $7bn

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