Taiwan’s Bureau of Labor Funds is considering investing in new types of foreign smart-beta strategies, a senior executive at the NT$3.6 trillion ($115 billion) state pension manager told AsianInvestor.

BLF has also explained why its global emerging-market debt portfolio has underperformed and said it was set to review its EM mandates at the end of their tenure this year.

The institution has identified smart beta and alternative assets as the two main areas in which it will raise overseas allocations this year. The aim is to further diversify its overseas portfolios, reduce investment costs, diversify risks and improve investment returns.

BLF is one of Asia’s early users of smart-beta strategies, which employ equity weightings other than traditional market capitalisation to boost returns.

Smart-beta initiatives

BLF hasn’t decided which new smart-beta strategies it will make more use of, as it only started seeking managers at the end of last year for $2.4 billion of environment, social and governance (ESG) smart-beta mandates and needs to get that completed first, the executive said. The bureau is assessing managers and hopes to finish its selection in the next one or two months, he added.

“The managers who have submitted their applications are all good and competitive,” said the executive. The key criteria BLF will apply in choosing the winners are the managers’ track record, investment process and service support, he noted, and it will employ both quantitative and qualitative assessments.

The pension fund runs six smart-beta strategies: global fundamental, global low volatility, global high dividend, global high quality, Asia Pacific mixed index and global sovereign credit. They account for about 35% of its NT$1.15 trillion in foreign mandates.  

BLF, which oversees several state funds including the Labor Pension Fund, Labor Retirement Fund and Labor Insurance Fund, will continue to increase its smart-beta exposure but has no set allocation target, the executive said.

Reviewing mandates

Meanwhile, at the latest Labor Funds Supervisory Committee meeting on February 23, a committee member asked about the underperformance of the $1.2 billion global emerging-market debt (EMD) mandates that were awarded in July 2012. These have posted an aggregate -8% loss since inception, while their benchmark lost only -1.62% as of January 31, 2017.

The member asked how BLF would deal with the mandates when the five-year mandates ended in October this year, according to a memo from the meeting.

Leo Lee, director of BLF’s foreign investment division, explained the reason for the loss. The mandates seek to make profits on capital gains in EMD, but capital outflows from emerging markets have caused currency depreciation in the countries in question, and their financial and economic conditions have not been as strong as expected, he added.

That said, EMD has started to outperform developed-market government bonds since last year, Lee noted.

BLF will evaluate the managers when the tenure ends this year and may renew contracts with the firms that have delivered better performance, he said.

Tsay Feng-Ching

When the mandates’ tenure ends, BLF will reconsider its EM debt and equity allocations in its overseas portfolios, said director general Tsay Feng-Ching, who took the helm in January, at the same meeting.

Assessing alternatives

On the alternatives side, the executive said BLF was looking at a broad range of investments and would make decisions based on changes in market conditions and on each sub-fund’s risk management and investment objectives. 

Huang Chao-hsi, the pension fund’s former director general, who retired in January, told AsianInvestor that the pension fund aimed to increase its alternative allocation to 12% by end-2017 from 10% as of December 31.

BLF’s current alternative portfolios mainly comprise global real estate investment trusts, global infrastructure securities and global multi-asset mandates. It also has investments in private equity, hedge funds and commodities. The institution made its first investment in private equity in the first quarter of last year.