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Brazil’s pensions segment grows in importance


Moody’s outlook for the Brazilian asset management industry is stable, reflecting the firm’s expectation that the country’s economic progress will continue to support the growth of the capital markets and the investment sector.

In addition, Moody’s expects the pensions segment to become increasingly important to the asset management industry, given Brazil’s ageing population and a growing awareness of retirement planning.

Challenges for Brazilian asset managers include pressure on fees due to the availability of substitute products and concentration of assets under management (AUM) on domestic affiliated companies. In addition, sustained low interest rates likely would affect investors’ asset allocations since the bulk of AUM are concentrated on fixed income securities – most notably on government bonds.
The Brazilian asset management industry has grown significantly over the past decade. Fundamentals continue to point to positive growth trends, supported by the country’s economic strength, as well as the sector’s modest size as measured by its percentage of GDP. Challenges posed by the global economic slowdown appear to be moderate at present.
Moody’s outlook for the Brazilian asset management sector takes into account industry-specific fundamentals as well as our macroeconomic and microeconomic expectations for the country. It incorporates the firm’s view that, notwithstanding downside risks related to the global economic slowdown, the industry’s prospects for the next 12 to 18 months remain positive. In addition, CVM’s strict oversight limits the extent to which local companies can become leveraged, as well as their exposure to more volatile asset types.  

Brazil’s exposure to global economic stress is mitigated by the country’s improved macro-economy and strong domestic demand, which helps shield local asset managers from global pressures. While the current general deleveraging will constrain the growth of the Brazilian economy and, consequently, that of the local asset management sector, local asset managers are well positioned to face current challenges, given their limited exposure to foreign assets and controlled operating environment.

The Brazilian asset management sector, measured by total net assets, accounted for 40 per cent of GDP in 2011 compared with 25 per cent in 2001, indicating its growing importance to the country’s economy. Nevertheless, while the ratio for Brazil is well above that of other countries in the region – including Mexico, eight per cent; Chile, 13 per cent; and Argentina, one per cent – it still lags that of some developed markets such as the US and France, suggesting there remains significant potential for growth.

The interest rate in Brazil stood at 8.50 per cent at 30 June 2012, down from 12.50 per cent at 31 August 2011. If interest rates continue to decline and remain low for a sustained period, expected returns on a number of asset types will go down, in which case Moody’s would expect to see investors reallocate their portfolios. Under this scenario exposure to credit risk would increase as investors seek to compensate for lower expected real returns on government bonds by increasing their allocations to corporate bonds, commercial paper, CDs and CRIs. Similarly, allocations to equities and alternative investments (e.g., private equity, real estate, multimarket funds and venture capital) likely would increase and approach asset distributions seen in more developed markets. 
In addition, the growing capital markets likely would contribute to this change, generating demand for different asset types for diversification purposes. 

All these developments would represent a significant change for Brazilian investors, who have enjoyed historically low volatility, high liquidity and high returns on their investments. However, asset managers may benefit from the transition by offering investors vehicles that create value even in the new environment. The impact of lower interest rates, for example, is already being seen. Pension funds, which are normally linked to inflation indexes, are increasing their allocations to corporate bonds and equities in order to meet their actuarial targets.

Management fees have been on a declining trend for referenced DI4, fixed-income, multimarket and equity funds in Brazil. The reasons for this include declining interest rates, increasing competition and the growth of AUM, which has a dilutive effect on fixed costs.

As of 31 December 2011, the weighted average management fee charged by fixed-income and referenced DI – that accounted for 43 per cent of total AUM – was 0.85 per cent, compared with 1.01 per cent at 2008. The main driver of this decrease was the decline in interest rates, which reduced the attractiveness of fixed-income investments. If interest rates continue to go down, Moody’s expects this trend to continue. 
In addition, Moody’s expect fixed-income and referenced DI fund fees to remain under pressure due to the competitive environment and the availability of substitutes such as Tesouro Direto and savings accounts. Tesouro Direto is an alternative channel for investing in government bonds. While no management and performance fees are charged, and despite trading, custodial and service fees, it is still in most cases less costly than investing via funds. Further, for many individuals, savings accounts continue to be the preferred investment option due to their low volatility, high liquidity, relatively high returns and tax-exempt status. 

Weighted average management fees charged by equity and multimarket funds have also decreased in recent years. As of December 2011, these two categories accounted for 30 per cent of total industry AUM. These funds’ higher fees, compared with those of fixed-income and referenced DI, reflect the higher degree of differentiation and greater proportion of active funds among these funds types, as well as their higher embedded costs. Moody’s expect fees for equity funds to come under pressure for the foreseeable future due to increasing competitive and the availability of substitutes, including passive investment products such as exchange-traded funds (ETFs). 

ETFs have seen significant growth in trading volume and AUM in recent years. As of 31 December 2011, 10 ETFs were traded in the equities segment, and held about R$ 3 billion in AUM. Moody’s believes passive equity funds are likely to come under more pressure than active funds to reduce their fees, due to increasing competition from ETFs.

While Moody’s expects fees for multimarket funds to remain under pressure for the foreseeable future, the high degree of differentiation among these funds allows companies to maintain their fees even in a decreasing interest rate environment. In addition, bank-affiliated asset managers have been favoring plain vanilla funds over multimarket funds in order to reduce reputational risk, further alleviating the pressure on fees for this category of funds. 
Pension funds’ AUM have been growing at a compound average annual rate of 49 per cent for the past 10 years. As of 31 December 2011, the segment held BRL230.9 billion (U$123.1 billion)  in AUM, or 12.0 per cent of the industry total. As noted in Moody’s "Brazilian Insurance Outlook as of February 2009,” the main drivers of the significant growth in the retirement savings market are the tax benefits afforded by the two leading products in this segment, PGBL (Plano Gerador de Beneficio Livre) and VGBL (Vida Gerador de Beneficio Livre).

Contributions to the PGBL are tax deductible (up to 12 per cent of the investor’s gross income), but surrenders are taxable according to the chosen tax regime (either progressive or regressive).

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