ALTERNATIVE ASSETS IN TIMES OF CRISIS

The recent news of a global pandemic, with thousands of people working from home, together with other factors, has greatly affected world financial markets, reminding us of how their volatility works in times of crisis.

 By Felipe Díaz Toro

An important characteristic of alternative assets is the low correlation they have with public markets. Another differentiating element of alternative assets is the fact that valuations do not have to be adjusted daily. This makes this asset class generate stability in portfolios in periods of high volatility in other markets. Furthermore, in some cases, such as venture capital, debt is not used and, therefore, returns are less dependent on economic cycles as they are not affected by interest rates.

However, the challenge for the investor, whether professional or not, is that it is not easy to build a portfolio of alternative assets. Among other things, it is necessary to allocate significant financial resources and specialized and experienced analysis teams to access and select the best options. For example, many of the funds with the highest returns are oversubscribed and not easily accessible to an unrelated investor in the industry.

According to figures from the Superintendence of Pensions, the Chilean Pension Funds have not been oblivious to the current volatility of the financial markets, being significantly affected with losses as of March this year, ranging from 16.49% to 2.54% among Funds A through E. This has translated into a significant drop in the total assets under management of the pension funds, since at February 29, 2020 they were at USD 195,175 mm approx. and as of March 31, 2020, USD 170,692 mm approx.

Regulations in this area have evolved in line with the flexibility of investment alternatives for Pension Funds, allowing a greater placement in alternative assets, both in Chile and abroad.

Said opening to this type of assets entered into force on November 1, 2017 and has continued its development until the end of December 2019, the date on which the Superintendence of Pensions published two new general regulations (NCG) that modify the Compendium of Regulations of the Pension Funds and Unemployment Insurance, with the aim of introducing improvements regarding investment in alternative assets, in addition to consolidating the different instructions and circulars issued by the agency between 2018 and 2019 on this matter.

In addition, we must highlight the recent modification of December 2019 to Agreement No. 32 of the Risk Classification Commission (CCR), reducing some of the criteria for foreign managers to distribute alternative asset funds in Chile (under assets under management required of USD 5 billion to USD 2 billion).

In conclusion, historical data shows the different benefits offered by alternative assets in the portfolios of long-term investors, and especially, in times of volatility and market declines. Additionally, being poorly correlated with public markets, alternative assets reduce the volatility of portfolios. However, our current pension regulations, by offering the contributor the possibility of freely changing funds or from one AFP to another, makes it very difficult for AFP investment portfolios to have a significant percentage of their portfolio placement in instruments of little liquidity.

Therefore, we hope to continue seeing regulatory changes that give our Pension Funds the possibility of having a greater exposure in investments with low liquidity and greater stability, in order to attract higher returns with less volatility, especially considering the long-term horizon inherent in this type of investment.