Afores En México

March 9 2010

AFOREs: MEXICAN RETIREMENT ACCOUNT MANAGERS
• AFOREs will continue to gain importance in Mexico’s financial markets and will become the key local player in the MSE. • Very recent regulatory changes allow them to invest in more names than the 35 included in the IPC and with more leeway. We believe the system is underweight equities with current debt/equity allocation of 87%/13%. •Based on the limits to stock investment, AFOREs could theoretically put to work up to US$ 5.5 billion in equities today, most of which would be allocated to the MSE. • As of January, AFOREs manage almost 40 million accounts with total AUM of MXN 1.16 trillion (~ US$ 91 B) or about 10% of Mexico’s GDP. We forecast new inflows to the AFORE system of US$ 11.2 billion in 2010. CONTENTS
EXECUTIVESUMMARY............................................ ..................... .............................................................1 1. What are the AFOREs?............................................................................................................................... 2 2. Who owns and manages theAFOREs?.................................................................................................... 2 3. Current Investment Regime...................................................................................................................... 3
3.1 Recent Changes: Local agreements and Laxer Regime...................................................................... 3

4. Total assets under management and asset allocation in January2010.............................................. 5
4.1 Inflows to the Mexican Private Pension Funds System ....................................................................... 6

5. Stock Investments of SIEFOREs............................ ................................................................................. 6
5.1 Potential Firepower in Equities and Anecdotal Evidence of AFOREs’ Importance in theBOLSA........................................................................................ ............. 6 5.2 AFORES' returns in the last 36 months.............................................................................. ................... 7 5.3 Estimated trading of AFOREs in local stocks ................................................................................ ....... 8

6. The largerpicture: Institutional Investors in Mexico............................................................... ............ 8

EXECUTIVE SUMMARY
There are 15 MIRAs (Mexican individual retirement accounts) managers or AFOREs. As of January 2010 they manage 39.9 million accounts for total AUM of 1,160 billion pesos (~US$91 billion) or about 10% of Mexico’s GDP. Since the system was created in 1997,higher risk instruments have been permitted. Debt/Equity allocation is currently 87%/ 13%. Compulsory contributions from workers, employers and the government fund the system. Last year US$ 9.6 billion were added to it. Due to asset appreciation a total of US$16.5 billion was the actual expansion of total AUM in 2009. As formal employment recovers, new money should improve substantially. Prognosisforecast for 2010 is an inflow of US$ 11.2 billion. We also estimate that if GDP growth can manage to average 4% in the next decade, total AUM could jump to represent 15% of GDP. There are 5 types of mutual funds specialized in retirement accounts or SIEFOREs (S1 to S5) are distributed according to the age bracket of each worker and each SIEFORE has its own investment regime. The limit forrisktaking is higher for 26 year olds’ and younger workers and virtually no risk for 56 year olds’ and older workers. The top limit for equity investment goes from none in S1 to 15%, 20%, 25% and 30% in S2, S3, S4, and S5, respectively. Recent changes to regulation allow more flexibility to the SIEFOREs, including allowing them to have a higher VaR in high volatility conditions. More importantly for...