(October 1, 2009) – Brazilian institutional investors are set to unload up to $40 billion in government-backed bonds and move into equities and alternatives following changes in pension fund investment regulations.
The result of falling interest rates in the South American country, regulatory changes likely will cause a move toward hedge funds, corporate bonds, stocks, and private equities, according to SulAmerica Investimentos. The regulations apply to both city and state pension funds.
The country’s National Monetary Council—which creates monetary policy for the National Bank—has made it clear that funds can move out of fixed-income altogether, and has moved the equities limit upward from 50% of holdings to 70%. Such investments, however, would be limited to shares traded on the Novo Mercado, a segment of listed companies that agree to abide by certain corporate governance and transparency practices. Further changes would include allowing investments in international equities (with limits being 10% of total holdings) and direct real estate holdings (an 8% limit). Restrictions on structured-finance funds would be eased, allowing up to 20% of assets to be placed in such funds.
This change in regulation for the Brazilian pension system marks a stark alteration from its relatively conservative history. In past years, Brazilian pension funds have held upward of 50% of their assets in government debt, and another 20% in corporate bonds.
Reaction from Brazilian pension funds has been hesitantly positive. “We’re excited, but it’s an enormous challenge because we have return requirements that are set,” Sylvio Murad of Eletros—the giant utility pension fund—told Bloomberg. “Interest rates are on their way down, whether they inch up in the short term or not.” This also likely will be good news for current holders of Brazilian equities, who will see excess capital flood the market as the pension fund industry sheds its bond holdings in favor of public equity markets.
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