Brazilian regulators, in January 2018, recommended the revision of the Resolution 3.792 responsible for the investment practices and the disclosures of relevant regulated entities. The objective? To create a common denominator between overseas investment/allocation rules for Brazilian pension and investment funds. As new doors open, setting the Brazilian capital market to a higher international standard, can the Brazilian pension funds impact international asset allocation? This is what we introduce in this article.
A new opening for overseas investment
Brazilian regulators (the Brazilian Pension Funds Regulator – “PREVIC” and the Brazilian Monetary Council – “CMN”) have recently amended Resolution CMN 3,792, aiming to provide Brazilian Closed Pension Funds (“Entidades Fechadas de Previdência Complementar – EFPCs”) with greater flexibility on the International Asset Allocation process.
The key objective of this amendment is to bring both the domestic Private Pension and the Fund Industry’s overseas investment/allocation rules to the same standard. On both situations, the “qualified investor” is the ultimate beneficiary. Their minimum overseas allocation is set at 67% of their domestic Brazilian Fund (“Feeder”), as opposed to 95% under the previous applicable regulation.
Since the domestic Brazilian Feeder directly investing overseas, comprises the Resolution, the concentration limit is now set at 25% of the Brazilian local fund’s units. Therefore, the applicable criteria is based on the position held at the local Feeder, as opposed to the previous rules in which the concentration limit was computed at the overseas funds level.
Yet, a domestic Brazilian Feeder investing solely in Funds abroad is no longer required to follow the maximum concentration of 25% of AuM at the domestic level: this limitation was revoked, thus creating an opportunity for EFPCs to set up their own domestic Feeder structure. At the same time, the Brazilian Feeder investing in a Fund abroad cannot hold more than 15% of the total AuM of the “target” Fund abroad.
The eligibility investment criterion now contemplates minimum requirements for both the abroad Fund and the foreign Asset Manager himself. Rating requirements are limited only to credit risk-bearing assets; requirements for portfolio managers are broader; and investment-receiving funds now have to present a minimum 12-month track and performance record.
Foreign Asset Managers are required to demonstrate experience of at least five years and a minimum AuM of USD 5 billion as of the relevant EFPC’s investment date, and the access to foreign markets is not restricted to funds anymore.
The new rule brings forth significant improvements in comparison with its previous version, thus enabling allocations in the “Overseas Investment” fund segment, which naturally meets the new Brazilian interest-decreasing and portfolio-diversifying economic context. The introduced changes are sure to enable the structuring of local vehicles that will access international markets, free of the restraints and restrictions in force until the enactment of the changes to Resolution CMN 3,792 by PREVIC and CMN.
What is the current Pension Fund scenario?
The total pension fund segment’s investments range north of USD 260 billion, 308 entities, and 64.14% thereof are allocated in Brazilian investment funds. Their allocation in overseas vehicles is sure to have a boost after the recent changes in the regulatory framework.
Brazilian pension funds are expected to open the current market to international holdings. Brazilian interest rates, though still very high for developed economies’ standards, have sensitively decreased, triggering portfolio reallocation opportunities for local pension funds managers.
Demand for passive and alternative strategies will grow quickly. While active management will continue to play an important role, its growth over the near term will be slower than passive. Firms must either have the scale to create multi-asset solutions or be content as suppliers of building blocks.
According to Euridson deSá Jr. (founding partner of 3Fund Consult), there is already an ongoing growing interest by EFPCs to set up their own foreign investment vehicles and structures, in order to cope with the need to diversify their portfolios and maintain profitability in a decreasing interest rates’ scenario.
What we think
Pension and Sovereign Funds are important engines on the Global Asset & Wealth Management scene, firstly because they represent one of the fastest growing segments in terms of AuM by 2025, and secondly due to their relevance in terms of “investment needs”. We believe that any Asset Manager should embrace carefully the opportunities arising from this segment, the Brazilian Asset Management industry holds today USD 1 Trillion AuM but with limited exposure internationally. Serving the Brazilian Pension Funds with suitable investments strategies abroad may represent a first step to unleash the full potential of international asset allocation of this major market.