The 1980 introduction of what was referred to as ‘Decree 3500’ paved the way for a new Chilean pension system managed by competing private firms. This meant that the previous benefit system was replaced by a schedule whereby pensions are financed by contributions during a person’s working life, which in turn are deposited into the individual’s account.
This new law enabled the development of the Chilean pension system, founded the following year. This model is based on four principles:
– The capitalisation of social security savings in individual accounts
– The professional management of the resources by the private pension fund administrators
– Individual ownership of the contributions
– The strict regulation and supervision of the processes of collection, investment and payment
The main attributes of the Chilean pension system have been the strong returns of both individual and collective pension funds over the last 20 years, as well as the reduction of the contribution rate to half its former level, resulting in an increase in the net salary and productivity of the Chilean workforce. The system has had a significant impact on the development of Chilean capital markets and also on the country’s levels of savings, investment and overall growth.
Since its foundation, the Chilean model has been adopted by more than 30 countries worldwide, so that today approximately 120 million workers have their own pension saving account.
AFP Cuprum SA was launched in 1981 for the benefit of the employees of Codelco Chile, who belonged to the National Professional Association of Copper Supervisors (ANSCO). Although the fund has always been closely linked with the copper mining industry, over the years it has expanded its remit to include other sectors, most notably property.
Today it has partnership agreements and alliances with companies and funds operating in a range of sectors. One of the more prominent of these businesses is Empresas Penta SA, which since 1988 has played an important role in the overall growth of AFP Cuprum.
The business today
Today, AFP Cuprum has more than $28.5bn in assets under management, and has recorded a 27.5 percent growth in market share over the last eight years. It operates as a multi-active fund manager, with a diversified portfolio. 55 percent of its investments are in domestic assets, with the remainder invested internationally. In terms of type of instrument, 51 percent is invested in fixed income and 49 percent in equities.
Cuprum believes that a diversified portfolio is important in order to maximise profitability and returns, and as such maintains a policy of diversification across asset class, investment instruments, currency, country, issuers and fund managers.
Cuprum also has different strategies for each type of investment. Its local strategy mainly involves making direct investment, both in terms of equity and fixed income. Cuprum’s local investment team performs both top-down and bottom-up analysis in selecting both issuers and, in the case of fixed income assets, the stage in the curve it wishes to invest.
For foreign assets, Cuprum performs mainly top-down analysis, with decisions leading directly down to region or country allocation in the case of equities; and segment, currency and region in the case of bonds. In order to be consistent with its overall goal of maintaining a diversified portfolio, for foreign assets it uses external fund managers, chosen via a rigorous selection methodology.
Performance
Cuprum has consistently out-performed both the market and its own benchmark. This is demonstrated by the Administrator Pension Funds Service Client Index indicator (ICSA). Created in 2006, the ICSA is a public index that allows pension funds to see the quality of service it provides to its clients. The index is calculated every four months and allocates pension funds an overall ranking in terms of service quality. Since the creation of the index, Cuprum has achieved the top ranking 12 consecutive times.
In spite of the economic crisis Cuprum’s funds have continued to meet their targets. This is largely a result of two counterbalancing factors. On the one hand, Cuprum’s more conservative funds have protected investors from the big downturns; however, the more aggressive funds were well-positioned to reap rewards when the market began to recover. Thanks to this strategy, Cuprum has already managed to recover the losses it suffered when the crisis hit.
Client service
Cuprum is heavily committed to customer services, believing that consumers benefit from a correct decision making process whereby they can choose the right fund based on their own risk profile. As an example of this philosophy, Cuprum was the first pension fund in Chile to propose that individuals use a Fund Guide, which allows consumers to choose the most suitable fund for them based on a set of key requirements such as investment horizon and risk tolerance.
Furthermore, Cuprum’s website contains several support tools, which help clients choose the best option for them. These tools include:
– Tax savings procedures simulation software
– Pension planner simulation software
– Financial environment advisory services
As such, Cuprum’s clients are able to access many services online for which they normally would have to visit a branch.
Cuprum has also developed a three-tier customer service programme that provides clients with solutions to their pension, financial and tax information requests. Specifically, the programme gives professional guidance on tax benefits associated with their investments, portfolio analysis, saving plans and pension projections. Response time is quick, with all customers guaranteed a maximum 48-hour response period, depending on their level. The top-level programme also offers two face-to-face meetings per year in order to help clients with personal financial analysis. Additionally, Cuprum runs a series of seminars at hotels throughout the country, providing a forum in which to discuss different topics such as economic outlook, pension and saving products and tax exposure.
Cuprum’s customer service programme is focused on providing individuals with the necessary information that enables them to take out the best pension possible for them. This includes the selection of the most suitable investment fund according to their own time frame and level of risk, structuring the savings plan required to meet their own personal goal, keeping the client up to date in terms of tax benefits available and constantly helping their pension plan work better for them.
Competitive advantage
Cuprum has a small market share (seven percent), yet personally administrates more than 20 percent of the total pension fund money, giving it a unique position in the pension funds market. This niche allows the fund to offer clients a tailor-made yet cost-effective product. In order to provide a bespoke service, the firm has developed expert sales and advisory teams, which are kept at the top of their game thanks to an ongoing series of unique training programmes.
Another important asset is Cuprum’s policy of ongoing innovation. As a result, it manages the most complete and updated pension fund simulator, allowing clients to review their global investment portfolios as well as to keep track of the specific tax benefit 57bis. In this field, Cuprum is the only company in the whole of the Chilean finance industry that can offer this invaluable tool to their clients in order to help them plan their savings.
Decision-making
Since 2007, Cuprum has been certified as ISO 9001, meaning that its quality management systems have reached the highest international standards, specifically within the trading desk, the compliance office and the treasury department. This ISO 9001 also ensures that Cuprum’s main suppliers – which include many overseas asset managers – are constantly evaluated.
Cuprum’s core aim is to maximise long-term return while at the same time complying with the regulations established by the group’s Investment Policy Statement and the Chilean Regulatory Requirements. In order to achieve these objectives, it follows the investment process systematically and rigorously.
There are several key elements within this process, including the portfolio managers, the research team, trading desk and execution, and risk management. The investment process may operate a top-down approach for asset allocation, and bottom-up for security selection.
Risk Management: As a pension fund manager, Cuprum sees financial risk at the core of its business. The general framework it uses to achieve its strategic goals involves the systematic understanding, identification, measurement and control of the exposure to sources of uncertainty, both within specific functional units and at the top level management. As a group, Cuprum preaches the importance of due diligence and accountability, acknowledging the hard reconciliation needed with proper innovation.
Compliance with local regulations: Analysis of investment ideas and strategy must comply with local regulatory norms stated by the Chilean Pensions Supervisor regulations, based on Decree 3500.
AFP Cuprum Investment Policy Statement: this is where Cuprum sets out the general principles used both for the
analysis and selection of the investment alternatives.
Investment committees: these meet on a regular basis, with the aim of supporting the investment process. There are committees for each of the following divisions: asset allocation, regional equities and fixed income selection, fixed income and currencies, local equities and third-party manager selection. Each committee has the task of analysing all the relevant variables that have influenced the behaviour of the different asset classes and securities, in order to identify the best alternatives for portfolio framework. Each committee looks at both quantitative and qualitative aspects of their individual division, using models developed internally by the company.
Portfolio managers and CIO: These decide and review the best allocation of funds across different asset classes and securities.
AFP Cuprum believes that its success in achieving positive returns against the backdrop of a depressed Chilean market has been the result of implementing innovative systems and following the investment process to the letter.
Furthermore, in the eyes of its clients, this policy has allowed the group to rise to the top of the market, demonstrate superior returns to its competitors, gain recognition by its affiliates as the best Chilean AFP as well as a reputation for profitability and reliability.
