Chile's pension funds to be measured against a reference portfolio, researcher says
Chile's pension funds are about to be measured against something other than each other. Under the country's new investment regime for the AFPs, each administrator must build a reference portfolio, and the quantitative researcher who helps run Bloomberg's index production line expects them to hug it.
"Esperaría que las AFP se mantengan cerca de su benchmark, con diferencias moderadas a favor o en contra según el período," Francisco Ibáñez of Bloomberg Indices said. His reasoning rests on a simple asymmetry: active funds may earn the same returns as passive ones before costs, but fall behind once fees are deducted, and rising competition between managers makes it harder to turn skill into outperformance.
Measurement matters too. In a study by his team, almost six in ten active US bond funds beat their stated benchmark over a decade, Ibáñez said. Adjust the comparison for the credit risk those funds took on, and the share falls to a little over one in five, with median alpha turning negative. "Un benchmark no evita una pérdida, pero ayuda a explicarla, porque básicamente muestra cuánto vino del mercado y cuánto de las decisiones del gestor," he said.
How much a pension fund can beat its reference depends on the market. Ibáñez cited evidence that where manager competition is fierce, as in the US, beating the benchmark is hard for anyone, while in less crowded emerging markets pension funds returned 1,80% more than their reference. Chile's regulator has set tracking bands of 2,4% to 2,9% a year over a 36-month window, which he said means small differences are neither rewarded nor punished.
The change ends a system in which funds "básicamente se miden entre sí, sin una cartera de referencia, y eso puede llevarlas a mirar al competidor por sobre una visión estratégica de largo plazo", Ibáñez said. With a known reference portfolio and a 36-month horizon, the AFPs can put more energy into the medium and long term. On the controversy over derivatives in the AFPs' E fund, he noted that analysts have pointed to similar positions across administrators: when several managers share the same duration, risk concentrates in the system, and a common reference makes that concentration visible and can temper it.
