The setback of the pension multi-funds

2021 was a complex year for investors in Chile. Despite a very positive global backdrop for risk assets, the Chilean stock market closed the year with meager gains of around 3%. Meanwhile, the CLP depreciated more than 16% and local bonds fell around 10%.

In this context, last year was very unusual regarding the results of the AFP pension multi-funds. The classic return relationship held: Fund A, which takes the most risk, was also the one that achieved the best performance (over 20% in pesos). At the other extreme, Fund E, which incorporates more defensive vehicles, obtained the worst return, falling more than 7%. However, the risk structure of the funds was completely altered.

Fund E, despite having around 95% in fixed-income instruments, was the riskiest of the year, exceeding 11% volatility. That is 1.5% more volatile than Fund A, which reached 9.8% in 2021. To put this in perspective, that same Fund E recorded risk of 5.9% in 2020 and a 4.3% average in 2016-2020.

If this behavior continues, the Fund E investor who historically “slept soundly” may no longer necessarily be able to do so. Today, more violent movements will be more common.

Let's hope that lower political uncertainty, the end of the withdrawals and a less tense global climate bring calm to Chilean fixed income. It's not easy.

This column was originally published in the newspaper La Segunda on February 3, 2022 [LINK]