Mexico Pension Reforms Boost Flexibility

Mexican pension regulator Consar has approved two changes to the investment regulations governing Mexico’s pension funds (Afores), allowing the funds more flexibility in volatile periods and more flexibility in equity investment, it says. Afores manage over $100bn in local assets. The first change is allowing the value at risk (VAR) limit the regulator places on the funds to adjust with market volatility. This aims to reduce the funds’ pro-cyclicality in crisis periods such as the end of 2008, when many funds had to sell off assets at depressed prices or ask for special permission to exceed the risk limit in order to hold onto them. Regulators will also now allow Afores to buy individual listed Mexican equities, that are part of an approved index and have “medium- to high” liquidity levels. The maximum weight of such an individual stock with these characteristics in the Afores portfolios will be equal to the stock’s weight in the Bolsa index. Previously, pension funds could only get exposure to individual large and medium stocks buy buying the index they were a part of, or by buying small stocks outside the index. “New opportunities to buy individual equities without having to replicate an approved index will present a new challenge for Afores managers to polish their stock-picking abilities, and could lead to increased divergence in investment performance. The downside, however, is that this could also lead to a widening gap in valuation and liquidity between the large- and small-cap names.” Credit Suisse says in a report. The bank also notes that the new VAR calculation appears to be more consistent with a wide open investment regime that remains yet largely unexploited by Afores.