Argentina Orders Mutual Funds to Cut Book Value of Dollar Assets

  • Dollar bonds rise in the local market as measure takes effect
  • Some mutual funds are turning down new investments to assess

Argentina enacted a rule ordering mutual funds to change the way dollar securities are valued in their portfolios, making official a resolution that sparked a rout in the local market earlier this week.

The resolution by the securities regulator known as the CNV was published in the official gazette Friday. Mutual funds, like many market participants in Argentina, trade and book securities at the so-called blue-chip swap rate. That market creates an implicit exchange rate of 13.86 pesos per dollar that’s derived from the trading of peso notes with dollar-denominated counterparts. The resolution orders mutual funds to value dollar securities at the official rate of 9.4.

“In order to achieve the right transparency and validity in mutual fund portfolios, it’s necessary to eliminate the discretionary practice used to value the assets,” the securities regulator said in the resolution. “Measures must be adopted to eliminate the possibility of valuing assets at exchange rates different from the currency they were issued in, with the objective of avoiding distortions in the market.”

While Economy Minister Axel Kicillof said the resolution intends to protect small investors in the funds from volatility and that only 5 percent of the investments in mutual funds are affected, the announcement caused some dollar bonds traded locally in pesos to tumble 9 percent on Tuesday and the blue-chip swap exchange rate strengthened from an 11-month low. 

Bonds rallied after the resolution was published with notes due 2024 gaining 5.1 percent at 2:25 p.m. in Buenos Aires. Now that the measure is in effect, some mutual funds are choosing to hold on to the assets ahead of a change of government in December rather than sell at a loss, said Rafael Di Giorno, director at Proficio Investment SA.

"If the two exchange rates converge following the elections and the dollar devalues, the gap will become smaller and it will be a better time to exit the positions," he said. "Mutual funds that sold wide ranges of their dollar-denominated holdings early this week are now advising clients that they’ll probably lose money if they sell and to wait and see."

Argentina’s benchmark Merval stock index also rebounded, rising 4.4 percent after losing 2.5 percent on Thursday on concern over the implications from the securities measure. The blue-chip swap fell 2.8 percent and the black-market peso traded near a record low 16.05.

Mutual funds including those run by Itau BBA and HSBC Argentina said today they’ve temporarily stopped taking new investments in the funds while they analyze the impact of the measure. Santander Rio told clients that any redemptions will be affected by the resolution and the value could be lower.

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