Bringing new value to Mexico’s pension funds

Banking & Finance
| The European | 14 October 2020

An interview with Arantza Guaycochea, Senior Analyst, and Sergio Molina, Head of Asset Allocation at Afore SURA

Mexico’s pensions industry has been in constant evolution since its creation in 1997. Originally starting as pure domestic fixed income funds, the investment regime has become more robust over the last few years. The industry has dramatically increased its international diversification efforts, particularly in equity assets in both public and private markets. Although this process will undoubtedly result in better pensions for Mexican savers, it certainly represents great challenges for the Afore (Retirement Funds Administrators) in charge of managing those savings. 

Afore SURA is the fourth largest pension fund in Mexico and holds a Silver Morningstar Analyst Classification. In 2018, mutual funds became an approved component of Mexico’s pension system, and Afore SURA began actively investing in mutual funds as one of its strategic objectives to deliver differentiating results and better expected returns for its clients. For Afore SURA, the global diversification challenge must be carefully addressed to ensure that it translates into excess returns. Afore SURA is working to build strong partnerships with international managers that best complement its franchise by offering consistent, not replicable alpha, while taking care of its clients’ savings along the way.

Arantza Guaycochea and Sergio Molina oversee this strategic effort for Afore SURA. The European caught up with them to find out more.

Arantza Guaycochea, senior analyst at Afore SURA
Sergio Molina, Head of Asset Location at Afore SURA

In 2018 Mexican pension funds were permitted to invest in mutual funds. What did this mean for the market?

Arantza Guaycochea: The possibility of investing in mutual funds for the Mexican pension system opens a pathway to active management strategies, providing the option to partner with international managers with the highest global standards, leveraging from their experience managing assets proven by their track records and strong investment teams. Before mutual funds were approved, an Afore could only invest actively in global markets through segregate managed accounts, which convey higher maintenance costs and require more operational time. Mutual funds allow SURA to invest strategically and in a more timely manner, with more flexibility in terms of trading, and reducing costs, benefitting from the dilution feature of pooled vehicles. 

How does your mutual funds strategy help clients meet their savings goals? 

Sergio Molina: Afore SURA has been increasing the global diversification of its portfolio over recent years. However, this was done mostly passively, so by incorporating international active managers, we can enhance the risk-return profile of our investments. Passive vehicles provide exposure to a specific beta, while adding active management will ease the possibility to increase the expected returns. Hence, once investing in mutual funds was permitted for Mexican pension funds, it became one of our central objectives and we got down to work in developing a strong manager selection process, with indepth, diligent, qualitative and quantitative analysis of the investment opportunities in the market. 

Today, we are confident that we possess the investment framework and team capacity to capitalise on this new opportunity. Active mutual funds can provide us with significant differentiators versus our competitors, so we are developing an ambitious investment pipeline for the years to come. As of today, Afore SURA already has active mutual fund investments in global and Asian equity strategies. 

Afore SURA has a Silver Morningstar Analyst Classification. What does this mean for you, and how has it been achieved? 

AG: The Silver Morningstar Analyst Classification is proof of the high-quality investment process that Afore SURA undertakes. It means we stand out from our competitors and translates into potential higher performance results in the long term. We have been able to achieve this by increasing the talent within our investment team, through a strong recruiting process and ongoing training. We also have a defined and repeatable investment framework, with academic and empirical support and continuous reevaluations. This framework is shared by the team, from the Chief Investment Officer to each asset class unit, it allows us to collectively construct an optimal portfolio, maximising the use of the investment regime. 

What is the market outlook for this current year, and how has Covid-19 impacted Afore SURA’s plans for 2020? 

SM: The market downturn of the first quarter of the year certainly had a negative impact on our performance. However, we are aware that we manage pension savings, we are long-term investors, so we recognise the need for a broader perspective when analysing cyclical events. This event, therefore, is giving us the opportunity to build portfolios that we expect will obtain results above the historical equilibrium. We continuously ask ourselves: “How does this event affect our clients 10, 20 or even 40 years ahead in time?” 

In a global context of generalised low rates of economic growth, and hence low interest rates, we believe that we can find good opportunities in risky assets. But we need to be mindful of valuations, as some sectors seem to be overpriced. This view invites us to apply a more cautious approach and active management seems to be a good way to incorporate selective bets with appealing return profiles.

Further information 

www.aforesura.com.mx 

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