Brazilian pension funds that manage more than 425 billion reais ($215 billion) may be allowed to move all of their money out of fixed-income assets and into investments with higher potential returns such as stocks and private equity, the industry regulator said
Brazil Pension Funds May Get Approval to Boost Stocks (Update3)
Share | Email | Print | A A A
By Andre Soliani and Paulo Winterstein
June 19 (Bloomberg) -- Brazilian pension funds that manage more than 425 billion reais ($215 billion) may be allowed to move all of their money out of fixed-income assets and into investments with higher potential returns such as stocks and private equity, the industry regulator said.
The government drafted the proposal as the benchmark interest rate fell below 10 percent for the first time this month. Current regulations allow funds such as Previ, which manages the pensions of government-controlled Banco do Brasil SA employees, and Petros, the fund for employees of oil company Petroleo Brasileiro SA, to put no more than 58 percent of their money in equity and other non-fixed-income assets.
“The funds will have to prepare to take higher risks and to better assess the risks,” Ricardo Pena, Brazil’s 40-year-old pension fund secretary, said in an interview in Brasilia. “The scenario we see is one of inflation under control, economic growth and low interest rates. We need more adequate rules for this new scenario.”
Policy makers cut the benchmark overnight lending rate 1 percentage point to 9.25 percent last week in a bid to pull Latin America’s biggest economy out of recession. The rate, known as Selic, is down from 13.75 percent in January and from 25 percent in January 2003, when President Luiz Inacio Lula da Silva took office.
Brazil’s National Monetary Council, a three-member group led by the finance minister, is considering the proposal, Pena said. A Finance Ministry spokeswoman said she couldn’t comment on when the council will vote on the proposal. The next meeting is scheduled for June 25.
Stocks Rebound
Brazil’s benchmark Bovespa stock index is up 37 percent this year after tumbling a record 41 percent in 2008. In dollar terms, the index gained 60 percent this year, compared with a 28 percent return on Brazilian local fixed-income investments, according to data compiled by JPMorgan Chase & Co.
Pension funds had 27 percent of assets in so-called variable-return assets as of February, down from as much as 37 percent in 2007, according to the most recent data from the country’s association of closed pension funds, known as Abrapp. Almost half of that, or 13 percent, was invested in stocks in February, down from a high of 21 percent in December 2006.
Brazil’s open pension funds, which don’t restrict participation to employees of a company or members of a professional group, aren’t governed by the same rules as closed pension funds. Open pension funds managed about 379 billion reais of assets as of April, according to the Web site of regulator Superintendencia de Seguros Privados.
Hyperinflation History
As interest rates drop, fund managers will seek new investments to try to keep returns in line with benefit payments, said Ricardo Zakalski, who helps oversee 280 million reais in assets as director of BI Asset Management. Funds will shift money from government bonds into assets including stocks and real estate and infrastructure funds, he said.
“Our framework for pension funds and banks was built for an economy with interest rates of 20 percent and out-of-control inflation,” Zakalski said.
Annual inflation will slow to 4.4 percent this year from 5.9 percent in 2008, according to the median forecast in a June 12 central bank survey of economists. That compares with a peak of more than 6,800 percent in 1990.
Zakalski forecasts pension funds will boost investment in non-fixed-income assets to 50 percent over the next five years. Pena predicts that figure may reach 55 percent over that time.
Brazilian pension funds posted a loss of 1.6 percent in 2008, pulled down by a drop of 27 percent in variable return investments. Fixed-income investments gained 13 percent.
‘Unsustainable’ Targets
“You’re going to have to begin taking more risk,” said Jorge Simino, who oversees $7.8 billion as investment director in Sao Paulo of Fundacao Cesp, Brazil’s fourth-largest pension fund. “And you’re going to have to change the actuarial targets. There are two sides to the equation.”
Brazilian pension funds on average have an actuarial target of inflation plus 6 percentage points a year, said Paulo Veiga, chief economic analyst at Mercatto Gestao de Recursos in Rio de Janeiro.
This target is “unsustainable” and will likely have to be reduced after “the reality changed” in the market, Veiga said. Pension funds will need to boost contributions from participants, he said.
“It’s no use running after risk, investing in stocks, and thinking that now you’re going to meet actuarial targets,” Veiga said. “You have to talk to your contributors and say that the rate of contributions isn’t enough.”
Calpers Shift
The move into riskier assets should be gradual, Simino said. He said he doesn’t “see any need” to raise contributions from Fundacao Cesp participants.
Some U.S. pension funds are also moving into riskier assets. The California Public Employees’ Retirement System, the largest U.S. public pension fund, on June 15 voted to increase its allocation to so-called alternative investments, including private equity and hedge funds, to 14 percent of assets from 10 percent as a bet on an economic recovery.
The fund, known as Calpers, which has about $183 billion under management, says that its alternative investments lost 28.8 percent in the 12 months through April. The fund also says that private-equity investments generated $14.2 billion in profits from 1990 to Sept. 30, 2008.
Under current Brazilian rules, closed pension funds are able to keep 50 percent of investments in stocks. Real-estate investments can make up as much as 8 percent of holdings.
Foreign Investment
Real-estate and infrastructure funds pay inflation-adjusted rates of return of as much as 12 percent, while fixed-income funds and government bonds offer no more than 6 percent, Zakalski said. As pension funds and other investors seek higher yields, that return differential will narrow, he said.
The government also limits the amount funds can invest outside the country to 3 percent of assets. The Social Security Ministry may push to ease those limits, according to Carlos Eduardo Rodrigues da Cunha Gomes, a director at the ministry.
“For various reasons, from diversification of risk to searching for new investments, the need to improve external capital flows, maybe it’s time to break the 30-year-old paradigm that bans investment abroad,” Cunha Gomes said at a May 26 conference in Sao Paulo.
To contact the reporters on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net; Paulo Winterstein in Sao Paulo at pwinterstein@bloomberg.net. |
