The Bureau of Labor Funds is inviting bids for a five-year domestic investment mandate of up to NT$42 billion ($1.4 billion), which pursues a strategy that aims to counter volatility in Taiwan’s stock market.
The NT$3.93 trillion ($127 billion) state pension manager announced the invitation on September 28. It did so on behalf of the NT$2.13 trillion Labor Pension Fund, the largest among the six funds BLF manages to meet Taiwan’s retirement and labour compensation needs in Taiwan.
Liu Li-ju, deputy director general of Bureau of Labor Funds (BLF), told AsianInvestor the mandate is designed to give fund houses investment flexibility to reap returns in a volatile market.
“When we see uncertainties in the market – maybe it’s going up and down and still stabilising – we use absolute-return strategies so asset managers can decide by themselves what time to enter the market and what equities to buy,” she said.
According to the mandate, up to seven managers will be given NT$6 billion each to manage. Eligible assets include domestic listed stocks, equity funds of composite indices, and fixed-income assets that include government, corporate and financial bonds.
BLF said applying fund houses should suggest strategies with an investment target that is 200 basis points (bp) above the average year-end returns of the Taiwan Stock Exchange Corp over the last five years.
That will mean about an investment return of 5.94% in today's market situation and active strategies are required, said Liu. That’s a fairly aggressive return level; BLF's overall investment portfolio earned 3.5% for the first eight months of the year.
The perimeters of possible mandates have been drawn fairly broadly. BLF’s invitation said that fund houses could include equity index futures, options, leverage and inverse exchange traded funds, either for hedging purposes or to enhance investment returns.
However the pension fund drew some limitations. In particular, the invitation stipulated that mandates cannot add stocks that lack good daily liquidity and can only include initial public offerings that possess upside and downside trading limitations. In addition, a fund manager can invest no more than 10% of the amount they are entrusted into the stocks of a single company or equity fund. And they can invest no more than 5% of the amount they receive into the bonds or the over-the-counter stocks of any single issuer.
The new mandate specifically targets returns from domestic equities, which account for about 20% of BLF’s overall portfolio. But Liu said there is no restriction on how much equities investment managers should hold and they have the flexibility to invest into bonds and other instruments when the broad market is not doing well.
“When the timing is not good and [managers] hold the assets as cash, it’s idle. They can consider to invest in short-term notes or deposits. The yields will at least be higher than cash,” she noted.
This is the second domestic investment mandate that BLF has offered in 2018. In April, seven investment managers equally shared a NT$42 passive equity mandate, which was the pension fund’s first-ever domestic environmental, social and governance (ESG) mandate.
It is also planning a five-year quasi-passive emerging market equity mandate of about $1.5 billion, which will be split among five sizable managers.
To be eligible for bidding the current domestic mandate, fund managers need to have been in operation for over three years as of August 2018, and they must have assets under management of at least NT$10 billion, among other criteria.
The basic annualised management fee for the mandates will be 0.12%, according to the invitation. Fund managers will be incentivised to outperform; their fee will drop by 7bp if their return is less than zero and the broad market return, but can rise by 33bp if they earn three times above the target return.
Candidates can submit their bids before October 29. The first-stage assessment will end on November 11, while the second-stage evaluation period will last until November 30.