This content is from: Local Insights

Investment grade to attract mutual funds

Carlos Fradique MéndezLuis Gabriel Morcillo

The recent upgrade of Colombia's credit risk rating to investment grade by three Wall Street agencies has opened the door to a broader range of foreign financial institutions, including mutual funds, to offer their products in the Colombian securities market.

This is an opportunity for open/closed-end funds, Ucits and Sicavs, and other pool funds, to target local pension funds, which have been at the forefront of portfolio investment in Colombia, with more than $30 billion of assets under management.

Colombian Pension Funds, in turn, have perceived mutual funds as effective investment vehicles because of their risk-return relation. As of July 2011, mandatory pension funds' assets under management were equivalent to approximately 19% of total GDP and they continue to grow at an approximate rate of 25% each year. Comparing the quantitative allocation limits (5% in mutual funds) with the actual capital commitments of investments, there is room for the expansion of this industry within pension funds and other potential investors, allowing for approximately $2.25 billion to be invested in mutual funds as of today.

Recently enacted regulations (Decree 2555 of 2010, modified by Decree 857 of 2011) have clarified the requirements that international mutual funds must comply with in order to receive commitments from local pension funds:

  • The sovereign credit rating of the country where the fund manager is incorporated, and of the country of domicile of the stock exchange where the participations are traded (if this is the case), must be rated investment grade by an internationally recognised rating agency;
  • The Mutual Fund and the fund manager must be supervised or registered before a supervisory authority in their country of origin;
  • The fund manager must have at least five years' experience and over $10 billion-worth of assets under management on behalf of third-party invertors;
  • At the time of the investment made by Colombian pension funds, the mutual fund is required to have more than 10 unrelated investors, and over $50 million in assets under management, excluding contributions made by such local pension fund or any of its affiliates; and
  • No single Mutual Fund participant may have a participation that exceeds 10% of the total assets under management.

The Colombian government has organised a committee for the analysis of all private equity and mutual funds regulations, whereby these limitations may be reviewed to allow a larger number of mutual funds to raise funds from local pension funds.

Carlos Fradique Méndez and Luis Gabriel Morcillo

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