Interview: the uruguayan leading one of the largest investment firms in Latin America

The referendum promoted by Pit-Cnt to eliminate the AFAPs could have ‘hidden’ or ‘non-explicit’ costs

Said SURA Investments CEO, Gonzalo Falcone, in an interview with El País at an event in Chile organized by the firm to celebrate the first year since the unification of its investment businesses.

Falcone, a Uruguayan, began his career in 1999 at AFAP SURA in Uruguay, where he spent 14 years working in the investment platform, as well as serving as the General Manager of the company. He also led the creation of the Wealth Management business in the country and, since 2013, took on the role of CEO of SURA Asset Management Uruguay.

In 2019, he became part of the SURA Investment Management team as Executive Director of Distribution, responsible for client relationships and the company’s branding. In November 2023, he was appointed CEO of SURA Investments, the Colombian firm’s investment platform with a presence in Chile, Peru, Mexico, Colombia, and Uruguay, in addition to investment vehicles in the United States and Luxembourg, managing over US$ 20 billion in assets, making it one of the largest in Latin America.

Falcone discussed global conditions, opportunities in Latin America, the electoral campaign in Uruguay, and business changes.

What is SURA Investments’ view on the global situation, amidst so many geopolitical and military tensions, and how does this impact investments?

Geopolitical tensions always generate volatility, and that’s where our investment teams—comprising more than 100 people who are primarily technical professionals focused on analyzing these events—come in. The main goal is to develop a vision regarding these situations and reflect that in portfolio strategies.

For instance, I emphasize multi-asset strategies and dynamic funds, which we are already implementing in Luxembourg. From Luxembourg, we can take these strategies and products to any jurisdiction. These are self-managed strategies, meaning the client doesn’t need to be constantly monitoring what one analyst or another is saying. Instead, we incorporate our recommendations into the strategy of these funds, and they are also high-conviction products.

Why do I link this to geopolitical challenges and uncertainty? Because if we identify a factor that could be negatively affecting a particular asset that we don’t recommend, we won’t have exposure to it in that product. In line with the investment policy of these funds, we overweight sectors where we have a positive view. This is part of the day-to-day work of more than 100 people within the organization because we are an asset manager, and that’s why we constantly monitor the situation.

For obvious reasons, we have a significant weight in local assets, but parts of our clients’ portfolios also have global exposure, and international events inevitably affect local assets as well.

This is our work, and I’d say there’s always something new. Last year, it was the banking crisis, with regional banks in the U.S.; before that, it was Ukraine and its inflationary effects. Now, perhaps the most volatile upcoming event is the U.S. election and everything that might follow. But this is all part of our teams’ daily activities.

Does this affect risk aversion or investor profiles?

Not really. What we do, particularly in wealth management, is profile the client, identify their risk appetite or aversion, and generate monthly recommendations based on that risk appetite.

For example, a client with a higher risk appetite may receive a recommendation that includes more volatility or perhaps a longer investment horizon. Client profiling is done once, but it’s maintained over time, and the monthly recommendation adapts to market conditions.

You mentioned in your presentation that there are opportunities in capital markets regarding financial institutions in Latin America. What are the challenges and opportunities in this regard?

At the financial system level, it’s much more advanced than the capital market, and our role focuses on how we contribute to the development of the capital market. If you look at public markets, you have bonds or fixed income, including sovereign and corporate issuers. These are relatively well-developed, with many issuers.

About 75% of Latin American corporate issuers are in sectors like oil and gas, automotive, aviation, and others. This reflects the productive matrix of Latin America. So, there’s a pool of issuers to create a strategy and diversify well. I’d say that fixed income is not a major issue.

In late 2020, we launched a Latam Corporate Debt strategy in dollars, with a vehicle also in Luxembourg. Given the current interest rate environment, where expectations point to lower rates, there’s potential for capital appreciation, along with an additional yield pickup, particularly with relatively short durations.

The longer the duration, the greater the capital appreciation in a falling rate environment. But it’s doable. What caution should one take in Latin American corporate fixed income? If you want to add an ESG (Environmental, Social, and Governance) thematic investment tone, you’d need to create a strategy that isn’t diversified, which wouldn’t be advisable.

We’ve decided to consider ESG factors in our investment process, but we don’t exclusively follow thematic investments that only allow buying such assets. On the equity side, public markets are seeing fewer companies listed or going private. Latin American equity markets are much more concentrated.

In Chile, for example, the last IPO was in 2019, and Chile is one of the more developed capital markets. Brazil and Mexico remain as markets with some depth.

Where do we see the development of capital markets, and where are we focusing? On the development of alternative assets (Infrastructure, Real Estate, and Private Debt), which aligns well with increased productivity, economic growth potential, and broader social benefits.

For example, Private Debt aligns with the conservative profile of our clients, which is replicable across the markets we operate in. This conservative profile means that fixed income is a significant component of their portfolios. Approximately 80% of the assets we manage are fixed income, especially for individual clients or corporates, with insurers having a large fixed income component. Among alternatives, Private Debt is the closest match.

Thus, the first step in incorporating alternatives in a diversification strategy that adds value is to recognize that alternatives have lower volatility and higher returns. This is what they bring to portfolio management. So, Private Debt is emerging as a relevant asset class with its portion of the portfolio, and it’s one of the areas we are developing the most.

We have funds in Colombia, Peru, and Chile, already managed. This is partly due to regulation, such as Basel (international regulation), which leaves room for financing but also complements the financial system. In many cases, medium- and long-term needs are covered by these products rather than banks.

For example, we launched a fund in Colombia, where investors include Colombian AFPs (pension funds), insurance companies, and BID Invest, aimed at financing Colombian SMEs. Small, medium, and some large companies, but primarily SMEs, which represent more than 90% of the business network in our countries and generate 70%-80% of employment.

These figures apply at the individual country level but also regionally. So, we’re creating an instrument to channel resources, in this case, from institutional investors with medium- to long-term horizons, to a business network that, while having access to bank financing, often finds it insufficient due to maturity or financing conditions. These companies, in turn, have a significant impact on capacity and employment generation.

All these conditions are part of the capital market’s role. Even though these funds are not publicly traded, this still falls under the capital market, and what we do as a manager is channel resources into these types of initiatives. Another significant area is infrastructure investment. Countries, with varying degrees of progress, have infrastructure needs, whether for replacement, upgrading, or new projects like roads, ports, or power generation requiring transmission networks.

There are numerous infrastructure needs, and at SURA Investments, we have created infrastructure debt funds, particularly in Colombia. We finance concessions, enabling the financial closure for the concessionaire to carry out the project.

This represents enormous productivity gains. For example, in Colombia, the terrain is such that it takes about 8 hours to travel from Medellín to Bogotá, a 300-kilometer journey along winding mountain roads. Infrastructure projects are underway to address this. It’s about taking the abstract concept of the capital market and making it tangible.

This money allows for the financing of a concession, reducing travel time, associated risks, and costs, leading to faster and cheaper transportation. It’s a direct productivity gain. From a client portfolio perspective, it adds diversification, as it’s a different asset class. Many of these assets are indexed to inflation and reduce volatility since they are not constantly traded in public markets. Thus, they offer better returns, lower volatility, and diversification benefits for the portfolio.

Is there a new trend among investors to focus on SMEs, and are you incorporating them into portfolios?

When incorporating ESG criteria, SMEs become a target for investment due to their role in job creation. Many SMEs, particularly micro-enterprises, are led by women, which adds another layer to the investment case.

Investing in SMEs is not easy. In Colombia, for example, we partnered with a fintech that monitors these companies, as they often lack balance sheets, making traditional credit analysis challenging. Electronic invoicing helps, as in Uruguay, where it allows us to track invoicing and get a proxy of how the business is performing.

Additionally, in Colombia, the National Guarantee Fund provides coverage. Initially, it offered coverage rates of 80%-90%, depending on whether the loan was for working capital. Today, it’s around 50%, acting as a nudge for the economy. Once the market starts rolling, the financial system organizes itself to channel resources more efficiently.

Is there a need to reach these SMEs through alternative means other than the stock market?

It’s unlikely that an SME would issue a bond, for example, which would be a public security.

Unless through crowdfunding, right?

That’s another mechanism, but crowdfunding typically serves retail demand. In this case, we’re talking about institutional investors that we channel into different credits. But all these mechanisms are complementary. It’s challenging for an SME without a balance sheet to issue a bond that the market would monitor, so alternative methods and connections with fintech and technology enable access to such credit.

We’ve discussed capital market opportunities in Latin America, but looking at Uruguay, its stock market is still nascent. What’s your vision, and what needs to change for improvement?

There are several issues. In Uruguay, public debt has a significant presence in the capital market, and from the financial system’s perspective, deposit accounts and savings accounts dominate. SURA re-launched the investment fund industry 12 years ago to channel savings into the capital market, and more managers have joined in recent years. These are mechanisms.

The Central Bank has also been promoting regulations to enable such issuances with varying degrees of success. We’ve mentioned crowdfunding, for example. Another important issue is the role of AFAPs (Uruguayan pension funds) in investing in the real sector and long-term projects, which has been crucial to capital market development. It’s important for institutional investors, though retail investors are often left out, even though a portion of issuances is reserved for them. Institutional investors still claim the most significant share.

Looking from another perspective, Uruguay is a dual-currency economy, as is the case in Peru, where we also operate. Retail and individual clients’ portfolios are highly diversified, with the opposite challenge: encouraging local currency investment when the dollar is so deeply ingrained in the Uruguayan mindset.

When you look at a dollar portfolio in Uruguay, all global solutions are available. We, along with market operators, offer access to all types of investments that satisfy those needs.

 Local currency investment has also grown, especially in inflation-indexed units (UI).

I’m a believer, and the returns have proven it. There’s also an effort by some advisors and analysts to demonstrate the value of investing in your local currency.

From a wealth management perspective, when advising a client, local currency should be a relevant part of the portfolio because they live in the country, are indexed to those issues, and consume locally. There’s a basic logic. However, in Uruguay, there’s also a strong attachment to the dollar due to past crises, and changing that mindset is challenging.

Despite the Central Bank’s plan to de-dollarize.

It has done so, as has the government. Public debt has been restructured, and today, Uruguay has extended its yield curve and moved to nominal currency. This was a necessary step for the government to take, and it’s a positive signal.

What needs improvement?

We should recognize that significant efforts have been made. Companies like Conaprole or UTE (through stock market issuances) have made strides. It would be wrong to claim that there’s a “key” solution. Many capable individuals have worked on this, including those on the Securities Market Promotion Commission, who are highly competent. It’s not an easy issue to resolve, and Uruguay’s scale presents challenges, just as in other countries. This isn’t just a problem for Uruguay; it’s a challenge for many countries. Companies that were once publicly traded have gone private, which is a trend happening everywhere. I don’t have a magic solution—I wish I did.

The capital market is recognized as important for the country’s growth, and Uruguay’s historical growth rate is low. Couldn’t this trend be changed through the stock market?

Yes. There are roles for the state. I recall a report by CAF (the Development Bank of Latin America) that offered insights on how to drive change. In Colombia, the National Guarantee Fund started with 80%-90% guarantees, and as the market began to flow and financing became available, it reduced coverage to around 50%. Whether 50% is still too high is debatable, but in the absence of reliable credit risk indicators, diversification, atomization of credit, and some level of coverage are necessary. These initiatives might be worth exploring.

What about the opening of public agencies?

There’s the example of UTE’s wind farms, both debt and equity. When it happened, many people participated. That’s an example that worked, so the question is why it wasn’t continued. There was no public policy to deepen it. UTE’s examples were concrete successes.

There were also criticisms about whether conditions were tailored to make it happen.

The question is whether there needs to be an initial incentive to get things moving or whether simply opening up a company’s capital would attract investments. When there’s nothing, it’s worth trying different approaches. Those were good examples, at least pointing to a potential path.

What’s SURA Investments’ view on the referendum to eliminate the AFAPs, and what’s their role in the capital market?

Pension reform is an issue we see in all countries. I always clarify that SURA Investments’ business isn’t in pensions, so I’m not involved in the day-to-day discussions. But we’re seeing it in Mexico, Colombia (which must approve it by June 20), and Peru, where it’s under parliamentary debate, and Chile is discussing it too.

What one hopes for are technical discussions leading to consensus. In Uruguay, there was a technical debate over the past two years that reached agreements, and now there’s this referendum. The only thing I can say is that the role of AFAPs is highly relevant and perhaps not fully appreciated, especially regarding the role institutional investors play in the markets. It’s not just about how much they’ve invested in the real sector but also about the importance of accumulated savings in the development of the government’s yield curve.

Having long-term yield curves is possible because long-term investors are willing to buy. The shift we discussed earlier, from dollarization to building a nominal yield curve, is also thanks to their existence. And how do international investors perceive a country when they see this ecosystem of institutional investors?

The relevance goes beyond how much of the portfolio they invested—it’s crucial for the potential development of the market. The market may not be the most developed, but it’s important because these long-term projects have a price and a rate that can be set based on a long-term yield curve and accumulated resources.

I read an Economía y Mercado column in El País about the risks of underfunding and fiscal impacts, which are significant. But beyond that, the absence of these types of investors could lead to major constraints on an already limited development. We see the role of institutional investors, particularly AFAPs, as highly relevant across all markets, not just in Uruguay.

An important point is that the state itself accesses financing at a much lower cost.

The investment-grade rating allows access to cheaper financing.

And avoids turning to international markets.

Exactly. How much of that is due to sound public finances and past structural reforms that are now paying off? These are hidden or non-explicit costs that may not be fully understood.

Regarding ESG indicators, what’s your view of Uruguay in terms of sustainability?

Today I was listening to the discussion on Uruguay’s energy matrix, which was transformed some time ago. Uruguay works on the basis of nudges and incentives, such as setting specific prices to develop wind farms. Then came solar power, and hydro has been in place longer, allowing for energy diversification.

I think Uruguay is on par with where Chile is today, though Chile’s transformation was largely driven by its mining sector, with big consumers creating their own power generation. In Uruguay, the transformation happened through state involvement and UTE, as the distribution company with energy purchase agreements.

These are different approaches, but in the end, they both result in policies that impact and change the energy matrix. What’s more challenging for investors is identifying decarbonization goals and reducing emissions across corporate issuers. Typical information sources like MSCI and Standard & Poor’s don’t have that level of detail or coverage in the region.

That’s why, in our research team, as we practice active ownership (being in constant contact with issuers), we not only gather information but also try to set standards for decarbonization and ESG criteria. This benefits us by expanding our investable universe. However, if we wanted to create a pure ESG strategy for corporate issuers today, we couldn’t diversify enough because too few issuers meet the criteria for a reasonably diversified portfolio.

We’re in an election campaign. What do you expect from it?

Across the markets where we operate, the focus is on growing the business. In Uruguay, we’ve built scale over the past 10-12 years, and political cycles—whether they bring more or less volatility—don’t change our market decisions. It’s more about market scale and depth. These are the opportunities we’re analyzing, not so much whether one political party or another wins the election.

Would there be stability?

Political cycles don’t affect our decisions. In Mexico, we had an election that caused massive market volatility, but Mexico remains a significant growth opportunity for us, and we’re capitalizing on it.

Does Uruguay have those opportunities?

It does, but on a different scale. Over the past 10-12 years, we’ve built approximately US$ 500 million in assets under management. We’d love to have more, and we’ve had a strong year so far, but it’s the size of the market. We’re still a relevant player in Uruguay.

What’s the aspiration?

We’re aiming to double SURA Investments’ business over the next five years, with 20% annual growth. These are the numbers we’re working with, and we’re on track this year. Last year, we experienced 95% growth during an organizational transformation. This year, we’re growing at 20% overall (8.9% in Uruguay), thanks to being in different countries with different business lines. This diversification allows us to take advantage of opportunities in one market or business line if another slows down.