Quantitative analysis of AFAP portfolio management in Uruguay: Regulatory alternatives for strategic asset allocation

The investment regulation of pension funds has become an increasingly important topic in Uruguay, as successive regulatory reforms and recent institutional discussions have emphasized the need to improve long term portfolio management while preserving the prudential nature of the pension system. This paper quantitatively evaluates two regulatory alternatives that have emerged consistently in this debate: expanding the investment opportunity set available to pension fund administrators and introducing a more differentiated life-cycle fund structure through the creation of an additional Growth Subfund for younger contributors. We employ the Black-Litterman framework, which combines historical market information with forward-looking views derived from publicly available assessments of major financial institutions, providing a coherent Bayesian framework for strategic asset allocation under alternative regulatory scenarios. The results suggest that broader international diversification improves the risk return trade-off of AFAP portfolios, although it also increases exposure to market risk. Overall, the analysis provides a quantitative framework for evaluating how alternative regulatory scenarios may affect the strategic asset allocation of pension funds in emerging markets.