Taiwan’s Bureau of Labor Funds (BLF) invited bids on Monday (November 20) for a five-year overseas investment mandate worth a total of $2.8 billion: its first for global absolute-return equity portfolios.
The NT$3.8 trillion ($125 billion) state pension manager is awarding the portfolios on behalf of three of its sub-funds—the Labor Pension Fund (LPF), Labor Retirement Fund (LRF) and National Pension Insurance Fund (NPIF).
The mandate is split, with $2 billion for LPF, $400 million for LFR, and $400 million for NPIF. The mandate for each fund will be spread equally across five managers.
This is the only investment mandate BLF has issued this year, and its issuance follows AsianInvestor's analysis of its likely plans in this investment area last month. Another government pension fund in Taiwan, the Public Service Pension Fund (PSPF), has also issued a total-return global portfolio, but in fixed income, at end October, totaling $800 million. Both BLF and PSPF haven’t issued domestic mandates so far this year.
The rationale behind the new absolute-return mandate is that global equity markets have risen “considerably” during the long post-crisis rally. While there might be some space for further upside, the risk of market volatility is expected to increase, Tsay Feng-Ching, BLF’s new director general who joined in January, told AsianInvestor in October.
Given this outlook, the idea is that the new funds can go off-piste and seek out areas of investment that may outperform market dips experienced by broader stock indexes.
BLF has built up all sorts of core equity portfolios and also passive strategies, so it makes sense for it to issue this new type of equity mandate under the current market environment, a Hong Kong-based senior consultant told AsianInvestor, on condition of anonymity.
BLF's new absolute-return mandates target a return of US dollar 3-month London Inter Bank Offered Rate (Libor) plus 5%, net of all fees and taxes. And while the institutional investor wants to see better overall returns this isn't on an entirely uncorrelated basis, BLF said in its mandate proposal that the standard deviation of products from underlying benchmarks should not be higher than 12% per annum.
Financial groups may only have one asset management firm bidding for the mandates. Applicants must have been around for three years and must be managing at least $5 billion in assets as of September 30.
Also, to bid for the mandate, a manager should propose a product that has a track record of at least three years and provide information on the product's cumulative gross rate of return for the previous three years as of end September. Additionally, BLF said the evaluation and expression of the proposed product’s investment performance should comply with the CFA Institute's Global Investment Performance Standards.
Garry Hawker, director of strategic research for growth markets at Mercer, told AsianInvestor recently that absolute-return equity mandates require asset owners to focus less on returns and more on understanding the manager’s strategy and how they are going to execute it, especially in monitoring their use of derivatives.
In addition, for absolute-return mandates, asset owners need to understand their return expectations and take a longer-term perspective of managers’ performances, Hawker said.
Applicants for BLF’s new mandates must either have an existing operational foothold in Taiwan or be able to appoint domestic financial institutions to act on their behalf.
The deadline for applications is 5pm on December 25. Application forms and further details can be found on BLF’s website.
BLF has been consistently tapping into new types of overseas investments over the past three years.
It invited bids for a total $6 billion global portfolios in December 2016, comprising $2.4 billion allocated to a global ESG (environmental, social and governance) Quality Mix Equity Indexation mandate and $3.6 billion to an absolute-return fixed income portfolio.
It issued $5.3 billion of global portfolios in December 2015, comprising $3.2 billion for its first global multi-asset allocation and $2.1 billion for enhanced Asia-Pacific equities.
BLF’s existing overseas equity strategies also include global enhanced equities, Asia ex Japan active equities, global passive equities, global emerging-market equities, global fundamental index passive equities, global low-volatility passive equities, global high-dividend enhanced equities, and global high-quality enhanced equities.
BLF generated 6.01% or NT$215.7 billion ($7.1 billion) in returns this year, as of September 30.