Afore XXI Banorte: we must set the path for the future of Mexico pensions

Transcript

2017 marks 20 years since Mexico reformed its pension system in line with World Bank recommendations. Twenty years ago there were no institutional investors; no asset managers. Today the country’s largest Afore is XXI Banorte, with assets under management worth $35bn. The business has worked hard to ensure its investors are focused on long-term targets, and embedded transparency in its investment process. CEO Juan Manuel Valle Pereña and CIO Sergio Mendez Centeno discuss the ambitions and philosophy of the company, and how Afore XXI Banorte became the first pensions provider to pass the Mexican regulator’s new benchmarking process.

World Finance: You’ve been leading Mexico’s pensions industry since 2014; how have you been maintaining your lead?

Juan Manuel Valle Pereña: It is important to put in context that before the pension system reform, there were no institutional investors in Mexico. There were no asset managers. So in the work we have been doing, it’s not only something that we have to do, because we are the largest – we have to be the ones setting the path towards the future.

One of the first challenges is to be able to put together a team that understands the long-term strategy behind asset management. We have to educate the people saving that the long-term strategy is what they should expect to look after. And that there’s no better alternative for them in the longer term than investing their resources through the pension system.

World Finance: You were the first Afore to gain approval from the pension regulator’s new benchmarking process. Can you talk me through this idea? What was the motivation behind it?

Sergio Mendez Centeno: Having a benchmark, the funds have a guideline. Let me put it that way, you know: a target, from which you cannot be distracted, and you can put your goals in the long-term.

The benchmark comes from an exercise; in the case of Afore XXI Banorte, we hired external advisors in order to create this benchmark, that comes from an optimisation process. Utilising the full investment regime, which allows us to invest from fixed-income locally, to alternatives abroad and locally. And we used capital market assumptions in order to find the right portfolio, the right benchmark, the right guideline.

So right now we have this guideline, that includes also our investment philosophy, and includes the way that we assess risk. And it’s key to be transparent. The benchmark helps you in order to do that, because you don’t have to lose your long-term target because of short-term risk.

So we are always in touch with the people who want to have information, in order to give them transparency. And to explain how the portfolio’s working.

World Finance: On the subject of transparency, as you expanded your alternative investments portfolio, you really embedded transparency into that process. Tell me more.

Sergio Mendez Centeno: Our targets are well known. We explain to everyone in the market, we’re saying: what are we looking for? And what are the strategies that we are trying to build in order to create the alternative portfolios.

So, the manager goes onto the internet, and then they file all the information there. All the things that are required, in order to be accepted.

Then the analyst starts the process. And they start discussions with the manager, doing background checks, how the manager’s doing, how much money, what is the pipeline?

Then, we have legal, we have compliance, we have CEO, CIO. We have analysts discussing if that is the right manager to give money to in order to create the alternative strategies that we are looking for.

So at the end, what we do is, we obtain the authorisation from the investment community to say, yes: this is the right strategy, this is the right manager, this is the right amount of money that we want to give to the manager. So now we can proceed to invest with them.

World Finance: So tell me more about your investment philosophy.

Sergio Mendez Centeno: First we need to fully use the investment regime. That is important. Because it you utilise the investment regime that goes from fixed-income to alternatives, you will have a very good long-term diversification.

After that is to assess which part of the investment cycle we are in. Internationally, because we have a portfolio that allows international investments. Then, finding the right vehicle, in order to better capitalise.

So, the investment philosophy at the end is very macro-oriented. And it’s something that will be exactly the same in an expansionary cycle, as in down cycles.

World Finance: And looking ahead, what challenges do you need to overcome?

Juan Manuel Valle Pereña: The first one is the consolidation of the team. In the structure, in the way we work, and in the people, in the individuals – although they have a lot of experience, they have not been working together for a long time. So, you need to consolidate that team for everything to work perfectly.

Second: we need to take full advantage of what the investment regime allows us. Particularly in our investments abroad, and in alternatives. So we are undertaking now a new mandate on US equities, and also commodities. So during the year we should go out and look for the best managers, in both cases.

I think voluntary savings is a key element. Today we mostly deal with mandatory contributions. And that’s a challenge. People in many countries are not having enough resources for their retirement: we have to make them understand that they need to save. So, voluntary savings is a key element for everyone.

World Finance: Juan Manuel, Sergio: thank you.

Juan Manuel Valle Pereña: Thank you very much, Paul.

Sergio Mendez Centeno: Thank you.