Asia is an important and growing destination for Latin American investment capital, but so far it’s Western fund managers rather than Asian ones who are benefiting.
Strategic Insight has issued a report on Latin America fund management that shows both retail mutual funds and pension fund assets are increasingly investing internationally. The consultancy says demand for Asia, and emerging markets more broadly, has come to dominate certain allocations.
Today, Latin America’s combined funds industry has around $1.4 trillion in mutual fund assets and $850 billion in pension assets, the latter led by Chile (with $155 billion), but with growing buckets in Peru and Columbia. Strategic Insight estimates that these figures could reach $2.8-3.6 trillion (mutual funds) and $3 trillion (pensions) by 2020.
These pools are increasingly international. Chile, for example, allows its pension funds to invest up to 80% of assets overseas, and Strategic Insight says today 45% of Chilean pensions are held in cross-border Ucits funds.
Fund managers from the United States and Europe have successfully tapped Latin America as a sustainable source of mandates. But it’s not to run money in the US or Europe: it’s to run Asia mandates.
Although South Korea’s Mirae Asset has opened an office in Sao Paolo, Asian investment firms are missing out on this trend.
Some, particularly in Japan, have developed a big business with selling Latin America-themed products to their domestic markets. Nomura’s US high yield bond fund, linked to the Brazilian real, was the biggest selling fund in Asia in 2010.
Strategic Insight says this is partly due to stringent regulations in Latin American countries that hamper smaller, younger firms in Asia from competing effectively with US and European giants. But Asian managers need to build their brand awareness and establish partnerships with Latin American financial institutions if they have any hope of breaking through such barriers.
The demand is there. Strategic Insight notes that, for Chilean pension funds, the top-selling equity portfolios are led by an Asian fund run by Franklin Templeton, with Fidelity’s Southeast Asia Fund in second place. Investec and Fidelity’s China Focus Fund also enter the top 10. Overall, there are over 60 Asia-themed equity products available in Latin America, far more than the next available type of product, which is global emerging market equities.
In fixed income, there is clear demand for local-currency EM funds, along with US and global high yield. But no Asian manager has succeeded (or attempted) to market an Asian bond capability to Latin investors.
Strategic Insight notes that global branding is incredibly powerful, and explains the high concentration of assets in mutual funds among a relative handful of products, worldwide. Over time, the consultancy believes Asian managers can develop market share, but for now must begin with strategic partnerships with global brand leaders.
Japanese managers lead the way with their experience of creating Brazil-themed products for Japanese investors. Brazil country funds have raised $32 billion in Japan, and real-denominated funds have raised another $85 billion, since 2007.
In addition, however, Brazilian investment firms have also begun to penetrate the Japanese market. Bank Itaú has established sub-advisory relationships with Daiwa Asset Management, Nikko Asset Management and Shinko Asset Management, and runs $11.5 billion of Japanese money dedicated to real-denominated products. The Brazilian bank has since set up asset-management affiliates in Tokyo and Hong Kong to target local institutional investors.
So which Asian fund manager is going to be the first to return the favour, and when?