Regulation, diversification and investments abroad – impacts on the efficiency of investment management by Brazilian pension funds in light of portfolio theory

This article investigates, under the prism of portfolio theory, the effects of diversification of assets by Brazilian pension funds under four possible interest rate scenarios as well as identifies the implications for more efficient allocation of assets, including through possible investment abroad, of the limitations imposed by current regulations. The results of the simulations show that the imposition of allocation limits not only restricts the efficient frontier but also shifts it to the right. Therefore, diversification beyond the regulatory limits would improve the efficiency of asset allocation (reducing the risk), an effect that would be accentuated with the inclusion of foreign investments. Finally, the article provides evidence, from a technical standpoint, that Brazilian pension funds can increase their efficiency in allocating resources under any scenario, especially one of stability, and that with a real interest rate of around 4% a year it is essential to allow more investment flexibility, including investment in foreign assets.