Colombia’s capital markets are becoming more sophisticated by the day. The government’s decision to exchange external financing for internal financing has driven the development of the fixed-income market. The Colombian Securities Exchange (Bolsa de Valores de Colombia, BVC) has also made significant efforts to increase investment options and expand the capital markets. Programmes developed by the BVC include the creation of the Colombian Global Market ( Mercado Global Colombiano, MGC) and the derivatives market, incorporation into the Integrated Latin American Market (Mercado Integrado Latinoamericano, MILA), and the implementation of Colombia Capital, a programme focused on future issuers.
BVC
The first securities market in Colombia was the Bogotá Stock Exchange (Bolsa de Bogotá), established in 1928 during a period of vast uncertainty surrounding the Great Depression. In 1961 a second market was created, the Medellín Stock Exchange (Bolsa de Medellín), which grew in a favourable economic period driven by demographic expansion and growth in the export sector. Two decades later, in 1983, the Stock Exchange of the West (Bolsa de Occidente) was formed.
To provide more transparency for investors and reduce arbitrage opportunities, the three stock exchanges were merged in 2001, thereby creating the BVC. The move gave depth and dynamism to the Colombian securities market.
The BVC is a listed company within the stock market that manages securities trading platforms, including fixed income, stocks and derivatives. In 2013 the volume traded, including the fixed income and equity market, declined by 1%, totalling COP1.56trn ($760m) in a year marked by uncertainty as a result of external and internal economic factors. At the end of 2013, 22% of its equity was in the hands of brokerage firms. Holders are restricted from owning more than 10% of a company’s equity. Among its achievements, the BVC operates the third-largest derivatives market in Latin America and the sixth-largest fixed income market in the world in terms of traded volume, according to the World Federation of Exchanges. In 2010 changes to foreign investment laws removed investment restrictions for foreigners, allowing them to invest in all kinds of securities. At the end of 2012 a new fiscal regime reduced taxes on foreign investors in fixed income securities from 33% to 14% – except for those investors with residence in tax haven countries, who are taxed at a rate of 25%. These initiatives have helped to boost foreign investment in the country’s capital markets. In the case of equities, Colombian taxes see neither capital gains nor dividends if the investor does not hold more than 10% of the outstanding shares of an issuer.
Fixed Income
Colombia’s fixed-income market is among the most dynamic in the world, representing close to 74% of the total traded volume of the BVC in all markets. It is highly concentrated on public debt, which represents about 90% of the total fixed-income traded volume, with the rest in corporate debt.
In 2013 the government treasury bonds (Tìtulos de Tesorería, TES) market shrank by 7.54% compared to the previous year. According to the Ministry of Finance, the Colombian government had COP174.48trn ($87.24bn) worth of outstanding issues by the end of March 2014 and $20.9bn in active sovereign bonds at the beginning of the year, with different maturities and mostly in US dollars. Thanks to wider macroeconomic stability, the Colombian government has been able to obtain financing from the markets at longer maturities, up to 20 years for certain TES issues and 30 years for sovereign bonds.
As of January 2014, 67% of Colombia’s sovereign bonds were in the hands of funds, with 9% in banking institutions. The majority of the sovereign bonds are held by international entities, 66% by US entities and another 21% by European entities. Corporate debt issuances in 2013 showed a positive dynamism, raising COP9.26trn ($4.63bn) in the market, slightly lower than the COP10.15trn ($5.08bn) issued in 2012. It is particularly noteworthy that the industrial, commercial and public sectors of the economy dominated these issuances, accounting for 54% of the total, a level of activity not seen in recent years.
Equity
The total trade volume in the stock market during 2013 was COP40.88trn ($20.44bn), of which 82.9% was accounted for by cash transactions, 16.9% by repo operations and 0.2% by temporary security transfer operations. During the year, a total of 658,123 trades took place in the stock market, resulting in an average trade value of COP62.1m ($31,050).
The Colombian financial market was affected by changes in the international market, causing an 11.3% drop in traded volume, compared to the COP46.1trn ($23bn) seen during 2012. This drop in traded volume was smaller than those experienced in previous years after reaching a peak in 2010, which suggests that the fall in traded volume is coming to an end, or at least that the levels are levelling off. The COLCAP index declined in value by 12.35%, as did most of the other stock markets in the region.
The total capitalisation of the stock market also decreased from COP484trn ($242bn) in 2012 to COP416trn ($208bn) in 2013. Due to regulatory changes and the increasing attractiveness of the Colombian financial sector, the participation of foreign investors in the stock market has soared in the last two years, growing from 8% in 2011 to 20% in 2013.
The BVC reports 93 listed stocks, of which 41 are considered to have high liquidity, while the others are classified as low-liquidity stocks. Nearly half of the stocks belong to the industrial and financial sectors, while another 25% are divided between public services and other services. Seventy-two listed stocks are domestic, while the rest belong to the Global Colombian Market (Mercado Global Colombiano, MGC).
Colombia oil company Ecopetrol is the largest listed company in terms of market capitalisation, with a value of COP165.7trn ($82.85bn) as of March 2014. The remaining top five are dominated by financial groups, with Grupo Aval coming in second with COP24trn ($12bn), followed by Bancolombia (COP23.1trn, $11.55bn), Grupo Suramericana (COP21trn, $10.5bn), and Banco de Bogotá (COP20trn, $10bn). The MGC was created in 2010 and lists 21 stocks from international exchanges. Among the foreign stocks, leading international companies include Amazon, Apple, AT&T, Bank of America, Chevron, Exxon, GE, Google, JP Morgan Chase and Microsoft. In 2013 Facebook was incorporated into the Global Colombian Market along with three exchange-traded funds (ETFs).
Derivatives
The Colombian derivatives market began operating in 2009 and has been growing ever since. Total trade volume in 2013 was COP83.9trn ($41.95bn) and 885,137 contracts, which was 30% higher than the previous year. There are three types of underlying assets in the local derivatives market: interest rates, stock indexes and exchange rates. TES futures have the largest share in this market, at 72% of all contracts. Trading volumes of TES futures increased by 63% in 2013 over 2012, totalling COP60.9trn ($30.45bn) and 226,216 contracts.
Trading volumes of futures on the US dollar fell by 12%, totalling COP21.7trn ($10.85bn) and 344,513 contracts. Their share in the market registered a considerable drop, falling from 40% in 2012 to 26% in 2013. Futures on equities continued on a positive trend, growing 32% during the year and reaching a traded volume of COP945.71m ($472.86m) and 113,904 contracts. Activity of futures on inflation, however, has not met expectations, and negotiation terms of these contracts will require further adjustment in order to boost overall trading activity.
ETFS
A family of reference indexes on the TES market was created in 2013 under the COLTES name. Additionally, the COLTES indexes will serve as the basis for the development of fixed-income ETFs in 2014.
The BVC has developed nine ETFs in total: four in the equities market (COLEQTY, COLCAP, COLIR, COLSC), four in the fixed income market (COLTES long term, COLTES short term, COLTES fixed rate and COLTES UVR), and one in the money market (COLIBR).
Recent Issues
Traditionally, the financial sector dominates the volume of issuances in the Colombian market. The years 2009 and 2010 were particularly active in the volume of corporate bonds issued, reaching a peak of $7.2bn and 53 operations in 2010. During 2013, $5bn was issued in 25 operations. The largest issuer, raising COP900bn ($450m), was Ecopetrol. It was followed by Celsia at COP800bn ($400m) and Organización Terpel at COP700bn ($350m). Of the amount allocated, the financial sector accounted for 45.6% of total placements, while the primary and secondary sectors represented 33% of the total.
Initial public offerings (IPOs) and secondary offerings in 2013 fell greatly compared to previous years, with just one issue in which Cementos Argos raised COP1.4bn ($700,000) through a secondary offering.
Since 2010 more than $12bn has been placed. There was a peak in 2011 in terms of the amount raised and the number of placements, with a total of $5.13bn in eight operations. However, only one of them was an IPO: AviancaTaca issued shares worth $271m. The following year’s activity was slightly lower, with six issues, four of them being IPOs: Carvajal Empaques, Cemex LatAm, Construcciones el Condor and Tuscany International Drilling. Nevertheless, the total amount raised was only $2.21bn, less than half of that reached during the previous year. Colombian banks have been behind many of the debt and stock placements in recent years due to the merger and acquisition activity taking place in the region.
Colombia Capital
Colombia Capital is a programme developed by the BVC and focused on developing future issuers in the capital markets with the objective of increasing the number of Colombian issuers and the depth of the financial markets. The programme provides training and assessment to companies interested in obtaining financing through the Colombian capital market. In 2013 five companies joined the programme, bringing the total to 76 companies, in a preparation process aimed at eventually issuing securities in the local stock exchange. Also during 2013, Credifamilia, a company that subscribed to the programme after only three years of operation, placed COP18.23bn ($9.12m) to finance low-income housing projects. This placement helped transform the notion that there is a lack of appetite in the market for issues from new and smaller companies.
Non-Banking Financial Istitutions
Pension funds, insurance companies, mutual funds, trusts and stockbrokerage firms encompass the non-banking financial system. As of December 2013 Colombian non-banking financial institutions held investments worth COP344.4trn ($172.2bn), accounting for 48.2% of total investments of the financial system. Pension fund managers held COP147trn ($73.5bn) – the equivalent of 20.6% – of the total investments, with the majority of the investments belonging to the mandatory pension fund system.
Mutual funds and trusts held a slightly higher portion at 21.9% of total investments, or COP156.4trn ($78.2bn). Insurance companies controlled another 4.6%, while stockbrokerage firms held 1.2%. The total value of the investments of non-banking financial institutions grew by 5% in 2012-13.
Pension Funds
Mandatory pension funds are divided into public and private systems, which operate in very different ways. While older generations tend to be concentrated in the former, younger generations dominate the latter. The average customer in the public pension system is close to 50 years old, while in the private system the average age is nearly 33.
The private system began operating in 1994 and later, in 2011, adopted a multi-fund approach similar to the Chilean model. Currently, it 12m customers are classified into three types of portfolios by risk profile: conservative, moderate and aggressive.
The moderate risk portfolio is the “default” portfolio to which affiliates are assigned, and therefore holds the vast majority of consumers (85% as of January 2014), while the conservative and aggressive portfolios hold just 7.1% and 1% of total customers, respectively. The remaining 6.8% is assigned to a special “planned retirement” fund. Five years before a client approaches retirement age, his or her savings are gradually transferred to the moderate fund and later to the planned retirement fund.
Prior to 2012, the private pension system comprises six pension fund managers; however, that number was reduced to four after AFP Protección acquired ING’s pension fund segment in 2012, and Porvenir, which is owned by Grupo Aval, acquired BBVA’s Horizonte in 2013. These acquisitions resulted in a highly concentrated market, where Porvenir and Protección manage 80% of total assets, while the other two pension fund managers, Skandia and Colfondos, manage 5.3% and 14.1%, respectively.
Pension funds have to invest along certain regulatory limits. None of the funds may exceed 50% of their invested assets in public debt securities. When it comes to equity securities, the conservative fund is limited to investment up to 20% of its total assets, while the moderate fund can invest between 20% and 45%. Investment in private equity funds is forbidden for the conservative fund, while the moderate and aggressive funds may invest up to 5% and 7%, respectively.
In the Colombian model, pension funds face a minimum return requirement determined by a benchmark component and the weighted average return of the industry in that type of fund. According to the methodology, the minimum return established by the Financial Superintendence of Colombia (Superintendencia Financiera de Colombia, SFC) for the period from August 2011 to December 2013 was 4.38% for the conservative fund, 2.84% for the moderate fund and 2.29% for the aggressive fund.
The methodology implemented in Colombia is similar to that used in Chile, but, as Luis Felipe Jiménez, chief of economic studies at Asofondos, the association that represents the private pension funds, says, “That works well in Chile, where today there are six pension fund administrators, while Colombia has four. With four, there are certain administrators that start to weigh heavily among that average.”
Besides the reduced number of pension fund managers, the industry is highly concentrated and, therefore, this methodology depends largely on the performance of Porvenir and Protección. That in itself signals an opportunity for revisions of the methodology. Severance funds and voluntary pension funds are much smaller in proportion. Severance funds held assets worth COP6.58trn ($3.29bn) in January 2014, and voluntary pension funds managed COP11.9trn ($5.95bn).
In general, pension funds reduced their participation in equities in the second half of 2013 and increased their exposure to foreign assets. The exposure of all funds is still below the upper regulatory limit. The conservative funds concentrate 51.9% of their portfolios in public debt securities.
Mutual Funds & Trusts
According to the Colombian Fiduciaries Association (Asociación de Fiduciarias de Colombia, Asofiduciarias), the fiduciary sector in Colombia, which includes mutual funds and trusts, reached COP2.1trn ($1.05bn) in assets by December 2013, with a 1.1% annual growth rate. Today, there are 28 fiduciary institutions in Colombia authorised by the SFC, with 27 of them associated with Asofiduciarias.
The largest companies in the sector are Fiduciaria la Previsora and Bancolombia’s fiduciary division, each owning a 14% share of the total assets. They are followed by FiduBogotá (belonging to Banco de Bogotá), Skandia and FiduOccidente (owned by Banco de Occidente) with 11.2%, 8% and 7.7%, respectively.
Their portfolios are concentrated in public debt (33.2%), debt from financial institutions (24.4%) and stocks (20.4%), totalling almost 80% in those types of instruments. The remaining 20% is distributed among corporate debt, foreign bonds and mortgage-backed securities, among others.
Private Equity
Private equity and venture capital funds are relatively new in Colombia. Their growth began in 2007 after the enactment of Decree 2175. Today the sector includes 30 private equity closed funds, four venture capital closed funds and four seed capital closed funds. Together the funds total $3.66m worth of committed capital.
The vast majority have a multi-sector investment focus, as reported by the Colombian Association of Private Equity Funds (Asociación Colombiana de Fondos de Capital Privado, ColCapital). Funds focused on infrastructure represent 22.7% of the committed capital, and funds with a focus on energy and natural resources represent 19.6%. By October 2013, these funds had invested $1.48m in 151 projects.
Infrastructure Bonds
Pension funds, mutual funds and insurance companies are anticipating the issuance of new infrastructure bonds in the near future. The Colombian government has an ambitious infrastructure development programme worth an estimated $47bn to be invested by 2020. The programme entails the development of new transport infrastructure in what is called “Fourth Generation Concessions”, which will concentrate $26bn in 40 different projects to be developed in five years. These investments will require large amounts of financing, with the potential for participation by non-banking financial institutions. Funds, and particularly insurance companies, are interested in investing in long-term assets to balance their portfolios. So far, there is no mechanism defined and the rules of the concessions are still under discussion.
As Nicolás Romero, director of economic studies at pension fund manager Porvenir, told OBG, “We are expecting the implementation of the infrastructure bonds, which is a mechanism that, based on international experience, has been the best approach to enabling pension fund participation in these sectors. The focus on the development of new products must be concentrated in these infrastructure bonds.”
E-Trading
Securities trading in Colombia takes place on two main platforms, the Colombian Electronic Market (Mercado Electrónico Colombiano, MEC) and the Electronic Negotiation System (Sistema Electrónico de Negociación). The former is managed and regulated by the BVC, while the latter is done by Banco de la República and is the platform through which credit institutions, fiduciary companies, brokerage firms and pension funds operate. In 2013 the MEC regained the share of the total TES market that it had lost in 2012, surpassing the 48.54% volume traded to 55.81%.
Electronic trading for individual investors is done through the brokerage firms’ platforms. E-trading accounts are accessible and can be opened with low capital requirements. According to the BVC, by December 2013, 9217 operations were registered through the e-trading channel, which represented 11.69% of the total operations in the stock market.
MILA
In 2009 the stock exchanges of Chile, Colombia and Peru began the process of creating an integrated regional stock market with the objective of fostering the three countries’ capital markets and providing investors a larger supply of securities and sources of funding. After years of development, MILA began operations on May 30, 2011. Since then investors in Chile, Colombia and Peru have been able to buy and sell stocks from the three local markets through a single intermediary. With this integration, MILA became the second-largest stock market in Latin America by market capitalisation, and the third-largest by traded volume. Today MILA has 590 listed stocks, of which 282 are from Peru, 227 from Chile and 81 from Colombia. The market is operated through 34 active intermediaries spread throughout the three countries.
However, MILA has had difficulties attracting foreign capital and enhancing further trade between the markets due to tax and tariff differences that remain within the countries. Since its creation, the cumulative operations conducted through MILA’s infrastructure have reached $236.2m. Chilean stocks have been the most traded securities with $186.1m (78.82%), followed by Colombian securities with $36.5m (15.46%) and Peruvian securities with $13.5m (5.73%).
During 2013, traded volume through the MILA infrastructure reached $140.2m, which represented a 75.1% increase from 2012. Chilean securities were the most traded with $112.3m (80.13%), followed by the Colombian securities with $21.1m (15.1%) and Peruvian securities with $6.68m (4.77%).
The most traded equities since MILA began operations are: Falabella, with a total accumulated volume of $146m, Ecopetrol ($13.5m), Aguas Andinas ($9.4m), Pacific Rubiales Energy Corp ($7.7m) and Empresa Nacional de Telecomunicaciones ($7.7m).
MILA’s market capitalisation experienced an 18.62% drop in the year, falling from $739.6bn in December 2012 to $601.9bn in December 2013. The participation of listed companies in MILA’s market capitalisation was distributed as follows: Chilean companies held 44.19%, Colombian companies managed 35.77% and Peruvian companies had a 20.04% share.
In 2013 the three governments authorised two new types of operations that investors had been awaiting. The promotion of public offerings from foreign issuers listed on the exchanges was authorised and trading of foreign equities in the primary market was also enabled. The integration of the Mexican Stock Exchange is expected to take place in 2014. Mexico entered the final stage of its integration into MILA after the approval of a financial reform that modified the laws of the stock exchange. With Mexico’s participation, MILA would reach a market capitalisation of over $1trn, with more than 700 listed companies. Chile, Colombia and Peru are also analysing the possibility of including fixed-income markets as the next step for the development of MILA. The main challenge for this process lies in standardising regulations, since fixed-income markets tend to be more regulated than equity markets.
To take advantage of investment opportunities in the MILA infrastructure pension funds, insurance companies and brokerage firms face the challenge of increasing their research capabilities, which can be done by growing the in-house capacity or by reaching agreements with brokerage firms in Chile and Peru.
Outlook
The growth of Colombian capital markets is expected to continue with the consolidation of new markets (MILA, MGC) and products (derivatives, ETFs). Colombian pension funds and fiduciary institutions have shown great interest in the development of new products like infrastructure bonds, and will play a major role in the progress of the markets.
Local capital markets have become more attractive abroad, as the increased participation of foreign investors in recent years demonstrates. Positive reviews of the market are likely to bring more capital flows and raise values. As an example, Standard & Poor’s recently announced the creation of a specific stock index in the first half of 2014 for Colombia after raising the country’s long-term rating from BBB- to BBB the previous year. Modifications to the fiscal regime for international investors are still relatively new and are yet to show their full potential.
Local investors still need to become more sophisticated in order to exploit the full range of investment opportunities that the market presents. For example, there are still few ETFs available in the market, and trading on the MILA and MGC platforms remains low.
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