Fitch Ratings-Monterrey/New York-26 July 2018: The launch of Mexico’s first electronic trading platform, MEI Fondos, is a positive development for the Mexican funds industry that could also bring new challenges for its participants, says Fitch Ratings. The open architecture should facilitate domestic fund investing and make the market more attractive by providing a broader array of investment options, something often seen in more developed and deeper international funds markets.
As a multilateral trading platform, MEI Fondos should allow for greater communication amongst market participants such as asset managers and third-party distributors. The platform creates a legal framework for the exchange of standardized information of funds and facilitates the flow of fund orders between participants during the allocation and settlement processes, providing greater accessibility and transparency of information. Investors should also benefit from more diverse product offerings from a wider spectrum of institutions, which should allow for better risk-adjusted returns, with the potential for lower fees and transaction costs.
However, the introduction of open architecture may provide additional challenges for fund managers, which could impact their AUM (assets under management) and/or profits. Fund managers may have to further differentiate themselves in terms of investment strategy, fund performance, risk-adjusted returns and fee structures. This may pressure returns to the extent increased client and AUM growth does not offset lower revenues and advisory fees due to increased competition and market commoditization associated with deeper markets that afford broader investor participation.
As of March 31, 2018, the Mexican funds industry’s AUM was USD126.1 billion, equal to 12.8% of Mexican gross domestic product. AUM had a 10-year compound annual growth rate (CAGR) of 4.1% through YE 2017. The number of investment clients – 2.32 million at March 31- had a 10-year CAGR of 3.3% through YE 2017. Investment fund growth has been more variable, with a 3.0% CAGR during the same 10-year period, reaching 641 funds through March 31, 2018. At that date, bond funds were 46% of total funds and 70% of AUM, with equity funds representing 54% and 30%, respectively.
MEI Fondos, which began operations in June 2018, is the first electronic trading platform authorized by the Comision Nacional Bancaria y de Valores (CNBV). The Mexican regulator introduced the concept of open architecture as part of Financial Reform of 2014 to better align the Mexican fund market with international best practices. In November 2016, the CNBV passed regulations to promote the distribution of investment fund shares through open architecture. Importantly, this has afforded investors the ability to analyse various financial institutions and product offerings without being required to open an investment account at a given institution. MEI Fondos is owned by Cencor, a Mexican company with 25 years of industry experience. The company manages a group of subsidiaries dedicated to the development of financial market infrastructure in Mexico, the U.S. and Latin America.