LIIJ: Give us a an overview of your experience as FAPES CIO and now as a pension consultant.

RW: To be the CIO of a big Brazilian pension fund managing around US$ 5 billion is fascinating. A hands-on approach includes proposing and executing the investment strategy and asset allocation with a long term view. In addition macro aspects have to be followed as well fixed income and equity securities and outsourced funds in order to manage the portfolio.

LIIJ: How are the Brazilian pension funds' investments diversified across asset classes and geography? How do you imagine it changing in the coming year?

RW: The great majority of Brazilian pension funds have little more than 10% allocated to equity, less than 5% to real estate and to loans to participants. This leaves more than 80% invested in fixed income, mostly in government bonds. The bigger pension funds have a higher allocation to equities - above 25% - and some allocation to alternative investments, especially private equity funds. Home bias and regulation have inhibited geographical diversification. In the unlikely scenario of real interest rates being reduced in the near future there could be an asset allocation shift to more risky assets.

LIIJ: How have the calculated liabilities of Brazil's pensions influenced their investment decisions? Is further diversification needed? And if so, how can it be achieved?

RW: Historically the maximum allowed liability discount rate was 6% per annum in real terms. Interest rates in Brazil were much above this figure shaping asset concentration in fixed income. Real interest rates in 2011-12 were below 6% and regulation demanded the pension funds to reduce discount rates by 25 basis points per year. Had this interest rate scenario remained, either contributions by sponsors and participants would increase, benefits cut or the asset allocation would seek for higher returns and risk. At present interest rates are back to near 6% though in the mid-term they are expected to fall. Then pension funds will move to riskier asset classes. Defined Contribution plans might increase investments to equity, corporates, hedge funds or real estate traded funds. Defined Contribution plans can add real estate and alternatives to their range under analysis.


LIIJ: Given current economic dynamics, what is your outlook for Brazil and broader Latin America going forward?

RW: Growth and economic indicators in Brazil have disappointed in the last few years and reflected with bad returns in the equity market. Present forecasts for GDP and earnings growth are below historic patterns. The perception of investment trends and government management is also not good. On the other hand, valuations are low, like in other emerging markets. Maybe this was the reason for positive momentum in March.