While many developed countries are staring down the barrel of state-funded retirement programs and an aging population, Chile’s privatized pension-plan system has been staggeringly successful in strengthening social security while providing an important source of capital for local companies. Of Chile’s six pension fund administrators, known as AFPs, the biggest is AFP Provida (PVD), which had $46.4 billion in assets under management at the end of April. That’s nearly a third of the total $157 billion in assets held by all of the funds.
Provida, which is owned by the Spanish banking group BBVA (BBVA), increased the value of its assets by 8 percent in April from the same month a year earlier as its investments in foreign markets continued to benefit from the economic recovery.
Currently, Chile’s AFPs have around 45 percent of their assets invested outside the country, though this is expected to continue rising as the Central Bank recently increased the limit for foreign investment to 80 percent from 60 percent.
Provida is still highly exposed to the Chilean market. As a result, the company’s net profits fell 15 percent to $47.9 million in the first quarter of 2011 due to lower income from its Chilean investments, including fixed income and stocks.
Despite an increase in the number of affiliates in the first quarter, local investment bank Celfin expects profits to fall in the second quarter year-on-year, partly as the result of Provida’s purchase of AFP Genesis in Ecuador in early 2010.
But the long-term outlook for real return growth is positive. Real annual returns for Provida’s riskiest fund, Fund A, have averaged 9.2 percent since 2002, which is slightly above average for AFPs.
According to Provida’s president, Joaquin Vial, the high returns in recent years are due to “deep economic changes in Chile and a very high valuation of the assets.”
In the long-term though, Vial expects real returns to settle around 5 percent, “which is still a fantastic rate in a horizon of 30 years,” he told Chilean financial daily Diario Financiero.
A bet on Chile
AFPs charge a commission of 2.4 percent on contributions from Chilean workers, but most of their income comes from their managed assets. With strong returns and no debt, AFP Provida is expected to continue growing in tandem with the Chilean economy.
Over the last 52 weeks, Provida’s ADR has traded at a high of $87.11 and a low of $41.47, having gained 87 percent in that same period.
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