iShares' Gamba: Peru ETF Attracting Bigger Audience

| About: iShares MSCI (EPU)
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How broad-based of an audience can an exchange-traded fund focused solely on companies based in Peru attract?

Since launching a little more than a month ago, the seemingly narrow-focused iShares MSCI All Peru Capped Index Fund (NYSEARCA:EPU) has seen its assets top $33 million. That’s actually down a bit from a week ago when that number surpassed $35 million. (See related story here.)

So what’s driving such growth? Performance is one factor. In the past month, EPU’s returns have shot up by nearly 4 percentage points. More significantly to longer-term investors, the country has produced the best gross domestic product growth rate in the region—or near the top, depending on periods studied and data used—for more than a decade now.

And even more assets figure to start flowing EPU’s way. Shortly after coming out on June 22, iShares’ parent Barclays Global Investors announced that Peru’s pension fund manager has decided to invest some $300 million into the ETF over the next several months as a way to create more liquid and diversified portfolios for their investors.

It’s a theme that Daniel Gamba, BGI’s executive director of Latin American operations, says he’s seeing spread throughout the region. Editor Murray Coleman caught up with him at BGI’s headquarters in San Francisco on Thursday for a discussion of the growth of ETFs in Latin America. Below are excerpts from that conversation.

IU: How much growth are you seeing in single-country Latin American ETFs?

Gamba: The asset base for EPU since it launched in June has been growing. It was actually seeded with about $1.2 million in assets. The markets have come down in the past few days a little, but the fact that it has been growing by about $2 million a day make us fairly optimistic. The expectation is that EPU will continue to grow at least at that pace in the future. And Peru is within the top two Latin American markets currently being recommended by U.S. analysts.

IU: In the U.S., a single-country ETF like EPU might seem like a niche product. But last year, Peru’s GDP grew at a 9% rate and it’s still Latin America’s fastest-growing economy, isn’t it?

Gamba: Yes, and we’ve seen strong relative growth in that country for several years. Between 2002 through 2008, its GDP growth averaged 6.8%. That was larger than Brazil or any other country in Latin America. And the inflation rate in Peru continues to be one of the lowest in the region.

IU: Do you see more pension managers in other countries investing in ETFs?

Gamba: In Latin America, pension plans are starting to use ETFs more these days. In Chile, pension plans have about $100 billion in assets, of which around $5 billion are invested through ETFs. Our market share represents roughly 80% of those pension ETF assets. In Mexico, the total pension system is about $100 billion, with ETF pension plan assets of around $7 billion. And Peru’s pension portfolios have close to $25 billion total assets, with about $1 billion in ETFs. As a whole, our ETF market share is about 80-90% throughout Latin America.

IU: How about Brazil?

Gamba: We just listed local ETFs in Brazil at the end of last year. We currently have about $1.5 billion in assets through the local exchange. But across Latin America, there’s a big trend of pension plans moving into ETFs as a more liquid way to diversify their existing portfolios.

IU: Isn’t the Latin American pension plan model being used in other parts of the world?

Gamba: Yes, and as a result, we’re seeing ETFs being embraced in regions such as eastern Europe. Those countries are using a similar type of pension system to the one in Chile. That’s also the case in Latin America, which has also closely followed the model pioneered in Chile.

IU: What similarities do these pension systems share?

Gamba: Basically, we’re talking about a shared view that pension systems should obligate employees to contribute at least a certain percentage of their salaries. Then a group of select pension fund managers handle those assets. It’s similar to the U.S. 401(k) system, except in Latin America and eastern Europe, contributions are mandatory. The ETF structure is being viewed as a favorite with regulators in both of those regions as a means to diversify and add more transparency into the pension systems.

IU: What do you expect for ETF growth rates in pension plans in the future?

Gamba: We expect pension plan assets in Latin America to grow at an average annual rate of around 15% over the next five years. The big majority of that growth will be driven by inflows from employees, who average 28-30 years of age across the region. And again, they’re obligated to contribute.

By contrast, in developed markets around the world, we’re seeing pension plans growing in single digits, less than 10% a year.

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