Latin American Capital Markets

INSTITUTIONAL INVESTORS AND CAPITAL MARKET DEVELOPMENT 143aggressive mutual funds.The strong demand for mutual funds has led to an expansionin the types of funds offered.Competition within the sector, particularly for management of pension fundassets, has led to structural innovations, such as the creation of insurance companyseparate accounts. Under the quantitative restrictions of state laws, insurance companiesdo not need to maintain professional staff to engage in investment activities.After separate accounts were established, insurance companies hired and trainedskilled portfolio managers, securities analysts, traders, researchers, and support personnelto support investment operations (Greenough and King 1976).Impediments to Further Growth of Institutional Investorsin Latin America and the CaribbeanIn Latin America and the Caribbean, government efforts to promote the growth ofdomestic institutional investors through pension and market-related reforms have bolsteredthe importance of the sector in the region's capital markets. However, the regionhas certain impediments to further sector growth. Although the United Statesand other OECD countries cannot be generalized to Latin America and the Caribbean,their experience may provide guidance as to what factors are needed to fosterfurther development of domestic institutional investors in the region.Mocroeconom/c PoliciesThroughout Latin America and the Caribbean, volatile macroeconomic conditionsand regulatory uncertainty have impeded long-term capital formation by institutionalinvestors and thus hindered financial innovation (IDB 1998). For example, investors inhedged fixed-income products in Brazil suffered extreme losses when the real wasdevalued in 1999. As a result, Brazilian fixed-income funds tend to remain in shortterm,conservative investments, while continually high interest rates and portfolio restrictionshave deterred greater equity investment (FEFSI 2002).Demographics and Pension ReformsAlthough Latin America and the Caribbean have not faced the same demographicpressures as the OECD countries, pension reform has been necessary to address theregion's mismanaged pay-as-you-go programs. Pension reform has played a strategicrole in governments' overall development policies (Schmidt-Hebbel 1999). Led byCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub