Taiwan’s Bureau of Labor Funds is inviting bids for a five-year, quasi-passive emerging markets equity mandate of $1.5 billion to be split equally between five asset managers.

The NT$3.94 trillion ($127 billion) state pension manager – a keen user of factor-based, or so-called smart beta, investing – announced the invitation on Monday. It did so on behalf of the NT$2.14 trillion Labor Pension Fund, the largest of the six funds that the BLF manages to meet Taiwan’s retirement and labour compensation needs.  

Asset managers have to prove that they can earn an annual return that is 50 basis points more than the annual net return of the iEdge Rayliant EM Dynamic Multi-Factor Index specified by the institution.

The index is customised and its constituent equity securities are ex-Taiwan, unhedged and measured in US dollars. 

It is a total return index, which assumes that any cash distributions from the stocks, such as dividends, are reinvested back into the index. And the securities in the index will be weighted by a series of factors including low volatility, high quality and high dividend.

The asset managers picked will then try to earn a higher return than the index by overweighting, underweighting or maintaining the underlying securities with different factors.

The tracking error shall not be higher than 4% per year, according to the invitation.

AsianInvestor first reported on BLF’s plan to issue the EM market mandate in July. 

Liu Li-ju

Five managers are being selected for the mandate to diversify investment styles and maintain peer competition. As the portfolio will cover global emerging markets and require strong quantitative capabilities to run factor models, it is unlikely to be suitable for boutique fund managers, Liu Li-ju, deputy director general of BLF, previously told AsianInvestor.

BLF is pursuing an enhanced indexing strategy even though it is likely to generate lower alpha than an absolute-return portfolio, partly because it already has a large absolute-return allocation and it wants to diversify its investment strategies.

Some of BLF’s emerging market investments have matured, so its exposure to such assets has fallen, Liu explained.

As the fund has grown, it also needs to add emerging market investments to maintain its allocation level in this area, she said.

Emerging market and Asia-Pacific assets are held in BLF's satellite portfolio, which accounts for 20% to 25% of its assets under management (AUM), Liu said. The core portfolio accounts for the remaining 75% to 80%.

SCOPE AND LIMITATION

The mandate's investment scope includes listed or over-the-counter (OTC) equity securities (common shares, preferred stock, depository receipts, participatory notes), equity beneficiary certificates, exchange-traded funds (ETF) and real estate investment trusts (REITs).

Futures transactions related to stocks are also allowed for hedging purposes or to help increase investment returns.

The total amount of investment in any single listed or OTC stock, ETF, or REIT – whether listed or OTC – shall not exceed 5% of the net asset value of the BLF’s assets managed by the applicable asset manager, among other investment restrictions.

In addition, interested asset managers must not make investments that support the tobacco, alcohol, arms, gambling or pornography industries, in line with the BLF's own environmental, social and governance (ESG) standards.

To be able to bid for the mandate, BLF said asset managers must have a track record of more than three years and at least $5 billion in AUM as of September 30.

Bidders can submit their applications on or before December 24. The pension fund will then examine the proposals, with qualified managers making presentations in March, before potentially going to negotiate fees and sign the contracts.

The overseas mandate will be issued next year. BLF has not issued any overseas mandate in 2018.

In April, seven investment managers shared a $1.4 billion passive equity mandate – the pension fund’s first-ever domestic ESG mandate. The pension fund last month also invited bids for a $1.4 billion broadly-defined domestic mandate and is still evaluating the applicants.