You are Gabriela Fuentes, chief executive of AFORE Noreste, the Monterrey-based pension fund administrator that manages the retirement savings of 4.83 million workers. Its largest fund ranks ninth of ten in the official league table. On Thursday 16 January 2025, at nine in the morning, you must tell the Investment Committee how much of the risk allowance Noreste leaves unused you will now spend, and on what.
The situation
Noreste manages MXN 420,000 million in five generational funds, the Siefores. The two largest are SB3, with 142,800 million, and SB4, with 141,000. It charges a fee of 0.87% a year on assets, about 3,640 million of revenue and 890 million of profit. Over the last five years SB3 returned 8.2% a year net of fees, against a reference of 9.4%. Each worker may switch administrator once a year, and CONSAR, the regulator, publishes the ranking every quarter: 218,000 net affiliates left in 2024. Finance reckons that if assets fell below 350,000 million the business would stop being viable.
The risk team compared SB3 with the best-performing funds and found three differences: little exposure to the value, quality and momentum factors in equities; a bond duration of 5.8 years, against 4.1 at the best, which hurt when rates rose; and little weight in real-estate trusts (FIBRAs) and development-capital certificates (CKDs). CONSAR caps each fund's risk with a daily value-at-risk (VaR) limit. Noreste uses 61% of that limit; the best-performing administrators use between 82% and 88%.
The board has given you 24 months to bring the funds into the top quartile "without taking excessive risks that expose the workers". You have been in the job for six months. Two memos sit on your desk. Alberto Carrillo, the chief investment officer, writes: "We are leaving return on the table out of fear of a limit we don't even touch." Ernesto Leal, the risk director, asks to wait a quarter: "We don't want surprises with the workers' money."