Colombia Pension Giant Protección Sees Bonds Extending Market-Beating Rally

Colombian local-government bonds lost 27% last year, the worst performance after Hungary and Russia in a Bloomberg index of emerging market local debt

In Colombia, workers who don’t contribute to the state system pay into so-called obligatory funds.
By Oscar Medina
March 27, 2023 | 04:40 PM

Bloomberg — Colombian peso bonds are set to extend this year’s market-leading rebound, paring their slump of 2022, on bets the central bank will soon halt a series of interest rate hikes, according to one of the biggest players in local debt markets.

After Colombia’s steepest-ever cycle of monetary tightening, portfolios with a high exposure to peso bonds will “recover in an accelerated manner,” said Felipe Herrera, chief investment officer at Protección SA, Colombia’s second-largest pension manager with $26 billion under management.

Colombian local-government bonds lost 27% last year, the worst performance after Hungary and Russia in a Bloomberg index of emerging market local debt. While much of that was due to interest rate hikes, some investors also blamed the new President Gustavo Petro, who pledged to overhaul the nation’s conservative economic model.

Trading in credit default swaps shows that Colombia is now seen as riskier than Brazil, even though it enjoys a higher credit rating.

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In Colombia, workers who don’t contribute to the state system pay into so-called obligatory funds. The four such funds managed by Proteccion lost an average of 15% last year, similar to the returns of funds managed by the other three providers, Porvenir SA, Skandia SA, and Colfondos SA.

Private Equity Exposure

Petro sent a bill to congress this month seeking to dramatically cut the role of private pension funds and move most of its clients into the state system. He has repeatedly criticized the industry, and recently accused it of making risky bets overseas.

Herrera declined to comment on the bill or on Petro’s remarks, but backed up the large investments the Colombian pension funds have made in private equity — which many regard as risky. Private equity instruments don’t trade publicly and they are difficult to value.

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Colombian pensions’ exposure to overseas private equity has soared in recent years, with the main funds now holding just over 20% of their assets in these instruments, up from 8% in 2018, according to the nation’s financial watchdog.

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Herrera attributes this to the fall in the local stock market, to its reduced share in global indexes, and to the rise of the dollar against the peso. Colombia’s benchmark Colcap index has lost 41% in dollar terms over the last year, the worst performer among more than 90 primary equity indices tracked by Bloomberg.

“Private equity funds are an unequivocal tool for building value for our clients,” Herrera said in a video interview. “There is an interest in diversifying using these private capital funds, and maximizing the value of the individual accounts.”

Billionaire investor Warren Buffett has urged investors to treat such investments with caution, saying that they often charge high fees, use excess amounts of leverage, and are hard to value.

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Herrera added that investments in private equity might be reaching a peak as the dollar rally loses momentum. To maximize the returns, pension fund managers would prefer to keep those assets until they mature, which could take around seven years, he said.

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