The mutual fund industry in Chile has grown tremendously in the last few years, particularly given the global context of recent times. As was the case with countless others, the industry was hit hard by the financial crisis in 2008, which caused its assets under management (AUM) to shrink by 27 percent. Yet by the following year, Bci Asset Management experienced an impressive turnaround – not only did it recover the losses it incurred from the crisis, but it actually grew by over 40 percent from its 2007 base.

Since 2010, Chile’s mutual fund industry has continued this pattern of growth (see Fig. 1). “In fact over the three years, the growth rate has accelerated, reaching over 11 percent annually in USD”, Roberto De La Carrera, Chief Investment Officer at Bci, tells World Finance. In consideration of the favourable financial environment in Chile, there are strong indications that the increasingly sophisticated industry will continue to grow at this healthy pace. Today, the country’s mutual funds amount to just under $50bn in assets (see Fig. 2), which represents approximately 20 percent of Chile’s GDP. Given that in the US, the mutual fund industry is roughly equal to the country’s GDP, De La Carrera says, “It’s safe to conclude that there is plenty of more room for growth in Chile’s future.”

A number of promising opportunities currently exist within Chile’s local mutual fund industry, the two most notable being structured funds and balanced funds

Reaching maturity
In 2001, the first capital market reform was introduced with a positive impact to Chile’s development as a financial services centre. The mutual fund industry benefitted significantly with much greater flexibility, while asset management entities were also created at the time in order to effectively manage various types of funds. A third set of capital market reforms then came into force in 2010, aimed at increasing the security levels of financial transactions, as well as improving competition and the amount of information available for consumers.

In October 2011, the Chilean Ministry of Finance introduced a bill that drastically restructured the regulations applicable to investment funds and asset managers – providing a clear distinction between the two and their corresponding managers. The industry in Chile has thus gone from strength to strength, overcoming previous obstacles, such as fragmentation and an overtly complex set of regulations.

“In my opinion the industry has matured over the last few years”, says De La Carrera. “If one looks at the composition of the equity mutual funds from just a few years ago, they were heavily overweight in Chile, with nearly 50 percent of the total equity position within the local market. If you stop to think that Chile currently represents around one third of one percent of the world’s market capitalisation, this home bias was pretty extreme.”

Currently, the local market is still showing home bias in its equity exposure, but much less so than was previously the case and it is now down to less than 25 percent of the total equity position. To compare, the principal equity position in the US, which represents about 40 percent of the total, is largely in line with the market capitalisation weight for that market. “Certainly if the local market gets hot again in the future, one could expect an increase in the local exposure, but clearly there is a trend towards diversification.”

On the fixed income side, a recent fundamental change can be seen in the tremendous growth of medium- and long-duration mutual funds. In 2014, these long duration funds totalled more AUM than the local money market funds for the first time in the industry’s history. This current shift towards diversification can be attributed largely to poor returns in Latin America’s equity markets, resulting from the commodities boom coming to an end, which has naturally spurred investors to look outside local markets in order to find attractive returns. “This, compiled together with the recovery of the US economy and the apparent recovery in the European economy, has led Chilean investors to these markets”, says De La Carrera.

Further major regulatory changes in the mutual fund industry were implemented last year, thereby reflecting the ongoing efforts for developing the industry and its growing level of maturity. Under the new guidelines, there has been a significant increase in the level of autonomy with regards to investing, which aims to lead to the creation of new products that are more diverse than what is currently on offer. Another adjustment that has been introduced, which acts as a significant investment incentive, is a reduction in some of the taxes paid by foreign parties while operating in Chile. “All in all, these changes are positive for the industry and we should see the fruit of these developments in the near future”, says De la Carrera.

New opportunities
A number of promising opportunities currently exist within Chile’s local mutual fund industry, the two most notable being structured funds and balanced funds. The combination of low volatility in developed markets and relatively high local interest rates thus create an optimum environment for the offering of local structured funds, which offer downside protection, along with gains from upside movements in the market. The other significant opportunity involves a migration towards balanced funds, thereby catering to investors that are seeking safety, together with income and modest capital appreciation.

“In Chile, the industry is still heavily weighted in fixed-income funds, but with the eminent rise of interest rates in the US, I fear that investors in international fixed income may incur losses”, says De La Carrera. Therefore, the ideal approach in order to mitigate these losses is to move such fixed-income positions into balanced funds. Of course, this leads to an increase in the risk profile, but currently the risk of investing in international fixed income seems more than sufficient to offset it.

Among the array of prospects for the sector, the biggest challenge that has existed since mutual funds first started out in Chile in the 1980s is a lack of industry knowledge. This places a strong need on educating investors: “Clearly there has been a tremendous amount of progress in this area over the years, but there is still much to be done”, says De La Carrera. Additionally, correctly identifying an accurate risk profile for all investors is another challenge in the industry, and one that Bci Asset Management is making sizeable efforts to overcome.

Leader of the pack
The biggest factor that differentiates Bci Asset Management from rivals is its investment process. The firm has developed a robust system that involves seven stages: thorough research, the creation of an investment thesis, asset selection, due diligence, evaluation by a highly skilled investment committee, implementation and a continuous phase of monitoring. Key to this process are the talented experts that skilfully perform at each step, together with having the entire process well-documented – thus ensuring that no individual is irreplaceable and that there is a smooth transition with new hires.

“A second factor that differentiates us from our competitors is the ‘highest rating’ score that we have received from Fitch Ratings as a Mutual Fund Administrator”, says De La Carrera. In giving this rating, Fitch recognises Bci’s commitment to excellence, not only in the investment process but also in accounting, technology, back-office operations, as well as all other processes involved with asset management. Further exemplifying the firm’s prominence and leading market role is the fact that it is the only mutual fund administrator with this rating in the country.

While maintaining this prominent position in Chile, Bci Asset Management is also striving to expand outside of the state and into the international arena. The organisation is offering investors two Luxembourg-based UCITS funds that are managed by the firm – both have a primarily European customer base. There are solid plans also in place to further expand the number of funds offered from Luxembourg. “The idea is to take the advantage of our investment expertise in Latin America to other markets, and create an attractive option for our clients outside of the region.” With a strategy in place to expand its offerings and network, Bci Asset Management appears to be on a clear path to becoming a frontrunner not only in Chile, but for the entire South American region, supporting the country’s ambitions to become Latin America’s financial services centre.

“The goal for the future has been the same for quite some time now: to grow our market share in a sustainable manner, while maintaining profitability for our stakeholders”, says De La Carrera. “I see this growth coming from both local demand as well as from an increase in international demand, which will be accompanied by growing the number of international funds that we offer.”