Latin American pension funds have been dropping mutual funds and tapping emerging markets ETFs to gain exposure to non-domestic equities, according to industry figures.
Investec managing director of international distribution Richard Garland says Latin American pension funds are often limited by law in what share of their portfolio they can invest in non-domestic equities.
He says: "This means they often lack the expertise to make direct allocations to foreign equities. Therefore they use mutual funds, but increasingly ETFs, although it varies from country to country."
Peru is the heaviest user of ETFs, while Mexican pension funds, which can invest up to 10% of their portfolios in foreign holdings, use only ETFs as they are not allowed to invest in mutual funds.
Garland adds Latin American pension funds mainly use their foreign investment allowance to gain exposure to emerging markets. This leads the vast majority of them to have portfolios almost completely allocated to emerging markets, since the allocation to the domestic market would also fall under this category.
UniCredit Group market maker Stefano Valenti says the switch to ETFs mirrors a trend that has been occurring over the last four years in Europe, reaching its peak in recent months.
He adds: "Investors have been increasingly realising the benefits of the liquidity ETFs provide them with. As opposed to mutual funds which can be exited only once a day, ETFs can be traded during the day as any other quoted instrument."
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