LatAm report 6 – Colombia builds strong asset management platform
In the last of the LatAm report series, we turn to Colombia, the fourth largest LatAm market in terms of assets under management.
Long associated with the drug cartels and paramilitaries, the country now provides the asset management sector with a stable regulatory environment, becoming one of the newest frontier markets.
The past ten years have brought huge changes to Colombia. Overall GDP growth last year was near 6%, thanks to open market policies, thriving capital markets and foreign inward investment ($15bn last year). This growth is more modest than that of its neighbours (6-7% for Chile and Peru), but still compares well with the US and Europe (3% and 1.8% respectively). Inflation last year ranged between 3.1% and 3.7%.
Samir Patel, portfolio manager, Latin America, Hermes Emerging Markets, says the past ten years have seen strong GDP growth, resulting in “more formal employment and a middle class expansion leading to a consumer boom.” Growth is structural, as “the country has favourable demographics, which should see a continuation of this growth, albeit at a slower pace.”
The Colombian government has followed Chile’s example in setting up a private pension system, which has already amassed $55bn in assets managed in a multi-fund system. Annual inflows, at 20%, are double that of Chile and so look set to overtake the LatAm pensions pioneer soon. So far, 14% of these assets are managed in cross-border vehicles, with the government setting a flexible 40% limit on international securities, whether mutual funds or ETFs.
By 2014, the industry has been estimated to grow to $121bn, according to Cerulli Associates, with 30% (or $36bn) invested offshore. Over the next five years, exposure to international investments is expected to rise sharply from about 12% to 30%. This would mean an international allocation of $43bn, some $36bn higher than in September 2010.
One of the key drivers of this growth over the past five years is the business-friendly policy of the government. Despite this, says Patel, “we are currently underweight Colombia, mainly on concerns about expensive valuations but also the risk of the economy over-heating in the short term, resulting in higher interest rates.”