BLF to invite bids for $2b global ESG bond mandate

Taiwan’s Bureau of Labor Funds (BLF) plans to appoint five managers for a new global fixed income mandate that focuses on environmental, social and governance (ESG) factors this year.

The size of the mandate will be for at least $2 billion, and it will employ enhanced indexing, or smart-beta, strategies, deputy director general Liu Li-ju told AsianInvestor this week.

An index company appointed by BLF has already compiled a bespoke benchmark index for the purpose of this mandate. Managers should be able to prove that they can earn a return that is 50 basis points higher than the benchmark return, she said.

Enhanced indexing, a hybrid of active and passive management, seeks to beat the return of a benchmark index by overweighting, underweighting or maintaining the underlying securities according to different style factors – which can include such things as momentum or value in the bond space.

BLF had considered issuing such a mandate last year. Enhanced indexing strategies are more popular with equities, but Liu said then that BLF would like to do something “innovative” for the new fixed income mandate.

Ultimately that multi-factor bond plan was put on hold because BLF struggled to find an appropriate factor-based benchmark.

PLAN DELAYED

The NT$4.3 trillion ($145.5 billion) state pension fund originally planned to finish issuing this latest fixed income ESG mandate in the third quarter. However, the impact of the coronavirus outbreak means that BLF now intends to send out request for proposals in summer.

"We have still been making investments. But big allocations that ... require suitable fund managers have indeed been postponed due to the pandemic," said Liu.

She added that it is difficult to comprehend fund managers’ investments ideas thoroughly through online channels. When understanding some new strategies, there is not just one fund manager from a particular asset management company who is involved in the discussion. It involves several other people from the research team as well.

In the past, team members based in different parts of the world would all came to Taiwan to have a face-to-face discussion with BLF and meet its selection committee too. But the lockdowns have made these impossible, so the fixed income ESG mandate plan was delayed, she explained. It remains to be seen whether a prolonging of the impact of Covid-19 would force further delays. 

BLF is also planning to issue request for proposals for two global investment mandates on infrastructure and multi-asset before the end of this year, provided there is not another wave of the pandemic.

ESG FOCUS

The state pension fund intends to issue the ESG fixed income mandate to raise exposure to global bonds. The asset class now accounts for 17.5% of BLF’s NT2.4 trillion labor pension fund, the biggest of the six funds under its management. However, the target asset allocation should be 21%, said Liu.

“Our [global] fixed income allocation is now under the targeted level. We hope to raise our exposure on fixed income. And in the process, we think…we can take ESG factors into consideration, just like equities,” she said.

The custom-made index for the new mandate will exclude bonds issued by companies in such industries like tobacco and gambling, she added.

BLF issued a $2.4 billion global ESG quality mix equity indexation mandate in 2017 and was the first time it applied socially responsible investing principles to overseas equities.

In the following year, it issued a $1.4 billion domestic equity ESG mandate in order to promote the development of these principles among the local society and investment community. The passive mandate tracks the FTSE4Good TIP Taiwan ESG Index, which was the first sustainability index on the island.