Beginnning to look outside

Paula Garrido
Portuguese asset management industry has become even more concentrated in recent months. What was already a tight market has seen the number of providers shrinking significantly.
Carlos Ravara, consultant at Watson Wyatt in Lisbon says: “The market is over concentrated and this is not positive for our clients, because there is not much choice. Excluding the insurance companies, which do not significant assets for pension funds, we have now four real commercial players,” he says. These are Pensõesgere, part of BCP Atlântico Group, ESAF, the asset management division of Banco Espírito Santo, BPI Pensões owned by Banco Português de Investimento (BPI), and Futuro. There is also Caixa Geral de Depósitos, the 100% state-owned financial institutions ,and Previsão which manages the assets for the Portuguese telecom group companies and the post office pension funds but “these are not real commercial asset management houses but captive companies , although Caixa is doing now some marketing and it’s trying to expand its business”, says Ravara.
However, for some this concentration is not considered as a big threat for the functioning of the market. “Concentration would be a problem if there was a market , but this is not the case in Portugal,” says José Manuel Mendinhos, general manager at asset management company Futuro in Lisbon. “It’s not good for clients not having much choice but the market in Portugal is still very small.”
Although very recently a planned merger between Espírito Santo and BPI failed, the consolidation of the Portuguese market could increase in the next months although some believe that there is not much room left for further mergers. “I can’t see more Portuguese banks merging in the near future,” says Filomena de Oliveira, deputy manager at Caixa Geral de Depósitos in Lisbon. “But I wouldn’t be very surprised is something happened between Portuguese and Spanish banks for instance,” she says.
At present , the whole Portuguese pension fund market amounts to around E12bn and only a few companies are offering additional pension plan arrangements to their employees.
“Around 60%of the pension plans in Portugal are from banks,” says Rui Pedras, president of the Associação das Empresas Gestoras de Fundos de Pensões ( AEGFP), the Portuguese association of pension funds. “The rest of the pension fund assets comes from the electricity and telecom companies and other exstate-owned companies, and only 8% comes from private companies, so the real market is very small,” Pedras says.
The issues stopping the growth of the market have to be found behind the nature of the Portuguese social security system itself. “In terms of size the market is developing slowly because the benefits that social security is giving to the workers are too high,” Pedras explains. “In some cases the promised retirement benefits are 100% of salary and with a figure like this there is not much room for additional private pensions.”
Futuro’s Mendinhos agrees: “The regulation framework and the tax conditions regarding pension funds is good, but when you know you can get a pension of up to 100% of your salary from the state you don’t feel the need for additional coverage.” He adds: “And I don’t think is something to do with culture because in Portugal people have always saved money but they don’t use this kind of instruments to save for retirement.”

In the summer the Portuguese government had the opportunity to improve things when the social security system was discussed in parliament , but disagreement s between political parties didn’t allow this discussions to go much further.
Regardless the size, and in terms of investment , the Portuguese asset management market is becoming more sophisticated. The trend towards investing in euro stocks, present in the Portuguese asset management market for the last two years, has now been confirmed. Portuguese investors have found in Euroland the best way to diversified investment strategies without currency risk.
“Our pension fund investments are now more focused on the equity side and on the euro market than they were a year ago,” says AEGFP’s Pedras. “In general we could say that the market is becoming more sophisticated and pension fund asset managers in Portugal are changing their strategies using standard instruments that they didn’t use a few year ago,” he says.
Ravara, at Watson Wyatt, agrees: “We can see how the exposure to European equities is increasing while the Portuguese equity investment s are shrinking.” Ravara adds: “Once stock exchange joins the Euronext, the switch will become even more significant.”
At William M Mercer in Lisbon, consultant Rui Guerra also highlights this issue: “When we speak to the managers we realise they all have a different approach to investment and don’t consider the Portuguese market as the main target any longer.” A Mercer’s survey on asset allocation for pension funds shows how the exposure to European equities increased from 13.7% in December last year to 16.6 at the end of June. “And this trend is not only affecting equity investing but also bonds,” Guerra says. “The exposure to euro fixed income was around 30.5% in December 1999 to 38.9% six months later. This approach shows that asset managers in Portugal have realised that if they have the possibility to invest in other markets they should do it, because the Portuguese market is so small.”
The trend towards going external is not only limited to European stocks, with more Portuguese investors trying to invest more widely.
“The international diversification is improving and we have now more investments outside Euroland,” says Nuno Botelho, responsible for pension fund investment at AF Investimentos, part of the BCP group. “The proportion of assets invested in US or Japan is still very small but there is a growing interest in this area,” he says. “For this kind of investments, Portuguese asset managers normally make third party agreements with third party international houses.” This is one of the ways for foreign asset managers to enter the Portuguese market , although their presence is still low.
In order to be allowed to manage pension fund assets in Portugal, foreign houses would have to establish a Portugal-based company regulated under Portuguese law, and although theoretically a possibility, there is not much activity in this respect currently “There is a big question mark regarding whether the market is open for international fund managers ,” says Watson Wyatt’s Ravara. “The size and the concentration of the market makes it very difficult for foreign providers to come here to do business. Meanwhile what is happening is that Portuguese fund managers are using international players to expand their global capabilities.
“In general I would say that domestic plan sponsors prefer local providers,” he says. “But if they start to see underperformance, lack of good services or poor administration, they might consider other managers.”

And in fact, fund sponsors in Portugal seem to be more interest in investments than they were a few years ago and are now demanding more individualised services and solutions.
“Five years ago or so there was the idea in market that sponsors would never have significant role in investment strategies,” says Mercer’s Guerra. “But this have changed. Now people want to know more about sophisticated issues like benchmarking or asset/liability studies. Before, the only way plan sponsors had to find out more about the performance of their plans was comparing what the other funds in the market were doing.” Guerra adds: “Now people want to have more specific benchmarks and defined strategies which are more suitable to the liabilities of each fund.” As there are more pension funds with specific benchmarks in the market, the need for more advice regarding these issues is also increasing and the role of the consultants in Portugal is now more significant than before. “I would say that there is more interest for investment related issues and the role of the consultant is becoming more important in this area,” says Guerra.
Manager search is another activity required by pension fund sponsor. “When choosing an asset manager pension fund still use previous relations with the financial institution or strategic partnerships as major criteria,” says Ravara. “Fees are not the main concern, and we certainly never base our advice solely on costs.”
“The presence of consultants in the market is becoming very important,” says AF Investimentos’ Botelho. “They are more and more involved in benchmarking and ALM and are very close to the biggest pension funds in Portugal. I think their work is helping to make the market more professional, and their role will become more significant as the market grows” he says.
The question now is whether the market is going to grow in the near future. “I can’t see any radical changes in the next few months. The market will continue growing at a very slow pace until the social security system is reformed,” Botelho says.
“In the Portuguese market there is still a lot of room for growth,” Caixa’s de Oliveira .“Pension funds are not as developed in Portugal as there are in other European countries and this is an area that we all agree should be developed further,” she says.

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