On the Chilean pension funds market

In 1981, the Chilean Social Security System was reformulated from a Defined- Benefit program to a Defined-Contribution one. The new law requires that only private pension fund managing companies called Pension Fund Administrators (PFAs) handle individual saving accounts and return a minimum yield on funds to their affiliates. An examination of the investment behavior of the PFAs reveals a great likeness in portfolio returns. The mechanism used by PFAs to achieve similar performance is to mimic their asset allocations and domestic stocks trading. The benchmark explains more than 95 percent of portfolio performance variability across pension funds. The asset allocation weights are equal across PFAs and there exists a high positive correlation among domestic stock weights. PFAs copy the asset selection in large market capitalization stocks. The legal framework of the reformed system encourages fund managers not to deviate from the average system return by herding in their investment decisions. Regarding the relationship between fund flows and performance and the determinants of investors’ (pensioners’) choice of PFA, evidence is found that (1) a positive and non-linear relationship exists between fund flows and performance, (2) past- 12-months performance and rankings are relevant to consumers, although larger accounts are more sensitive to these variables, (3) the number of customers in a PFA is stable even if it performs poorly, and (4) the marketing strategy commonly carried out by the best performer is advertising, while PFAs in the bottom positions tend to expend less on advertising. These findings suggest that the best performing PFA according to rankings is slightly rewarded with larger flows from elderly or wealthier accounts. However, the instability in the ranking position indicates that customers do not flock toward the top performer. The market share across PFAs has tended to stay constant over time, indicating the short-lived effects of advertising.