Vanguard’s investment philosophy and low costs gel well with Mexican clientele

Mexican Afore pension managers have been investing in Vanguard ETFs since 2009, Juan Hernandez, Vanguard’s head for Latin America and country manager for Mexico, told Fund Pro Latin America. “Our expectation is that they will continue to use these and other recently approved products, such as active mutual funds,” says Hernandez.

Regarding the recently approved pension reform, Hernandez believes that “it is a great step in the right direction.” While the cap on management fees charged to Afores is a controversial issue, he does not believe it will affect the use of ETFs and “other efficient investment products.”

According to him, Vanguard’s “long-term investment philosophy, diversification and very low administration costs” positions it well competitively as global managers vie for allocations in both the institutional and retail markets.

“Speaking of fees and costs, it is important to remember that there are factors that investors cannot control. Local and international events have an impact on the markets. The markets adjust every day and that affects the valuation of investors’ portfolios,” the country manager noted. Faced with this situation, Hernandez suggests that investors focus “on the factors that they can control: cost, diversification, and discipline.”

“Afore investment teams have at their disposal Vanguard’s ETFs and mutual funds that allow them to implement the investment path of their portfolio in a disciplined way, giving broad access to the main global equity and fixed income markets and at a very efficient cost. US-domiciled Vanguard ETFs and mutual funds’ fees are, on average, 48 basis points lower than the industry average. This will allow Afores to give workers a better chance of reaching their goals in the retirement stage,” he said.

As of January 2021, five Vanguard active mutual funds and 53 ETFs were on the Amafore‘s list of vehicles approved for Afore investment, per official data.

Vanguard’s Mexican office, which opened three years ago, now comprises 20 people and is constantly growing. “For the same reason that ETFs are global, and transparency is not exact, we cannot give out data at a country level, but I could tell you that we manage more than USD 60 billion in the region (LatAm and Canada) and USD 7.1 trillion globally,” Hernandez added.

Vanguard’s ETFs in Mexico

Vanguard’s local FTSE BIVA Mexico Equity ETF (VMEX) “has been very successful since its launch, adequately achieving its objective of replicating the FTSE BIVA index. Its performance in terms of return has been superior to that of its main competitor, largely thanks to its greater diversification, investing in a greater number of issuers and including FIBRAs in the portfolio. To date, VMEX has close to MXN 1.5 billion (USD 70 million) under management,” said Hernandez.

As of now, Vanguard has decided not to list a Mexican fixed-income product in order to “prioritize the development of international fixed-income products designed for Mexican investors. We have recently listed the Vanguard US ETF Treasury 0-1 Year Bond UCITS ETF (VMST) hedged to Mexican Pesos. VMST will allow local investors to access short-term rates in MXN but with an interesting issuer diversification when investing in US Treasury Bonds. However, we do not rule out resuming the development of these products in the short or medium term,” he said.

The Vanguard Total Stock Market Index Fund, which last year topped USD 1 trillion in AUM worldwide, is available to Mexican investors in its ETF version (VTI) – and since September 2020 has been on the list of approved vehicles in which Mexican pension managers can invest. According to Hernandez, while “ETFs are global products that operate on many exchanges and therefore there is no exact transparency of the shareholders, we estimate that there is close to MXN 2 billion (USD 99 million) in the hands of Mexican investors.”

Subadvisory business

Vanguard also sub-advises two funds in Mexico with over USD 400 million in AUM. USD 200 million from their partnership with Mexico-based Banorte through its NTEDLS+ fund, and USD 200 million from Valmex’s Proviva funds, as well as “other advised portfolios that are not public to the market but available to clients of the institutions we advise. Our advisory agreements have been very successful, not only providing the opportunity for more clients to access our products but also our investment advice,” he said.

NTEDLS+ provides exposure to short- and medium-term fixed income in USD with a moderate and diversified risk, investing in Treasury, corporate, emerging market and mortgage-backed bonds. “So far the results have been very attractive, allowing for Peso-Dollar exchange coverage with an additional yield,” said Hernandez, adding that the alliance between a local administrator like Banorte and an international one like Vanguard has been attractive to Banorte’s clients and third-party distributors.

Valmex’s Proviva funds are target-date funds (TDFs) focused on private pension plans. “Being the largest TDF administrator in the world and working together a local leader in pension plans like Valmex, we were able to bring a solution to the Mexican pension market that combines our global experience with the local experience that Valmex has, and I believe, that we have the best solution on the market. In fewer than two years we have had a very good penetration with this solution,” he said.

“We have had very good acceptance from all segments of the Mexican market, both institutional such as Afores, insurers and mutual funds, as well as the wealth segment, with private banks, independent financial advisors and family offices. We are also working with brokerage houses and online platforms for those who invest directly, a segment that is showing exponential growth both in Mexico and in the world,” he concluded.