Brazil's Biggest Investors Have Already Given Up on Next Year

  • Rout means pension funds expect to miss target fourth year
  • Four years of falling short would be worst streak in 20 years

For Brazil’s biggest institutional investors, “Wait until next year” offers little hope.

The country’s pension fund association expects its members will miss their return targets for a fourth consecutive year in the next 12 months. Even in a nation known for some bad busts, that would be the longest streak of shortfalls in at least two decades.

The issues dogging the pension funds are the same problems all investors in Brazil face: a shrinking economy, the fastest inflation in 12 years, two credit-rating downgrades to junk and political turmoil including efforts to impeach President Dilma Rousseff. The currency is the second-worst performing in emerging markets this year, the benchmark stock gauge is set for a third annual decline and government bond yields are soaring.

“Brazil has had worse crises, but none so long,” Jose Ribeiro Pena Neto, president of the pension fund association known as Abrapp, said in an interview. “We aren’t in a different market from the other investors. We suffer what everyone is suffering.”

As the economic and political problems erode asset prices, the funds are likely to meet targets only in 2017, and even that is dependent on Brazil making structural changes next year to bring the country out of its longest recession since the Great Depression, according to Pena Neto. The economy will contract 3.5 percent this year and 2.5 percent in 2016, according to analyst estimates compiled by Bloomberg.

Abrapp expects pensions to post returns of 5.4 percent to 11.99 percent this year, trailing the average target of 15.94 percent, according to data from its website. The goal is set by calculating long-term liabilities and adding an additional amount to cover inflation.

In a long run, pension funds are still outperforming their targets. They posted an accumulated average return of 2,335 percent from 1995 through June 2015, compared with a target of 1,315 percent, according to data from Abrapp’s website.

And there’s another bit of relief: Last month, the government changed rules on shortfalls. Under the new regulations, the funds will now have longer to bring their assets in line with goals before they have to cut benefits or demand higher contributions.

With consumer-price increases running at an annual pace of about 10.5 percent, the targets have been impossible to meet, according to Pena Neto.

“The higher inflation is, the worse it is for the pension funds,” he said.

Pension funds are the biggest investors in Brazil’s local debt and had a combined 724 billion reais ($186.4 billion) in assets under management as of August, equivalent to 12.7 percent of Brazil’s gross domestic product, according to Abrapp.

“Brazil needs to solve its political and moral problems to find a solution for the economic situation, otherwise it will be chaos,” he said.

Before it's here, it's on the Bloomberg Terminal.