BLF’s stricter rules on external managers may backfire

Taiwan’s state pension fund has pledged to regulate external managers more strictly after the bribery scandal, but the additional red tape could turn away some fund houses.
BLF’s stricter rules on external managers may backfire

The increasingly stringent external investment mandate rules being introduced in response to the corruption scandal embroiling Taiwan's Bureau of Labor Funds (BLF) could crimp the breadth of its choice of domestic fund partners, but potentially to the benefit of their foreign rivals, say several industry executives.  

BLF's strengthened rules on external managers

In the latest move to restore public confidence after the Bureau of Labor Funds' scandal, Minister of Labor Hsu Ming-Chun said external asset managers cannot submit tenders for mandates for five years if they are punished by the Financial Supervisory Commission (FSC), according to local media reports.

Additionally, external managers who are convicted of having committed a criminal offense would have to pay a fine of two times of their guarantee deposits, along with other punishments such as the termination of contracts.

BLF's deputy director Liu Li-ju said the pension manager conducts field checks on the external asset managers’ investment process every year, but the checks are only limited to BLF's accounts.

In order to prevent illegal personal trades, BLF will work with the FSC to conduct comprehensive examinations on the managers' business, among other measures to better scrutinise them, she said.

In the past, only mutual fund managers that demonstrated a strong performance could be selected as mandate managers, particularly for public pension funds. Such mandates were seen as a badge of honour for local fund houses, in effect a recognition of their professionalism and a useful marketing tool for other business.

However, BLF and Taiwan’s regulator are introducing increasingly stringent rules and heavier penalties for violating the rules (see box). These include tougher compliance and auditing requirements. Executives managing institutional money will have to report their own personal transactions and those of family members.

The additional red tape comes at a time when BLF mandates have become less lucrative, with the pension fund overseer having adopted a performance-related approach to fees. This new approach could leave mandated fund houses without any fees at all if the assets they are assigned to invest end up performing below the agreed benchmark.

The lower fees are particularly evident on domestic mandates, where BLF only offers about 0.1% a year in annual fees, on average. Even good fund managers may only receive 0.13%, far lower than the 1.6% average fees that Taiwan’s domestic equity mutual fund managers can command, according to Taipei-based market research house Keystone Intelligence.

The combination of onerous new rules and lower fees are beginning to dampen the interest of domestic managers in securing institutional mandates from BLF, the Taipei-based business development head of a foreign private equity firm told AsianInvestor.

Donna Chen, founder and president of Keystone Intelligence, also said the mixture is disincentivising fund houses for local mandates. 

“BLF is managing public pension money. People easily lose trust in them if something goes wrong...But if the punishments on external managers are heavy and fee incomes are not high, even foreign managers may consider whether to submit tenders for its mandates,” she told AsianInvestor.

“If I were the CEO of an asset manager, I would be afraid of getting too many mandates, because I could not 100% guarantee that my investment managers or researchers did not do something illegal. But if something went wrong, I would have a lot of responsibilities, or may even lost all the money that the company earned in the entire [financial] year,” the unnamed business development head added.

Active managers may decide to focus on managing mutual funds rather than attempting to gain pension mandates. That would ultimately be a bad outcome for BLF because it would reduce its choice of potential partners, he added.


Not everyone agrees that this will inevitably be the case. Some market observers argue the appeal of BLF mandates will linger, because they will continue to help local asset managers build stronger track records and buffer their brands.

Ye Kangting, senior analyst at Cerulli Associates, argued that while asset managers in Taiwan will have to re-evaluate and redesign internal compliance procedures and systems if they want to further develop their institutional business, it’s unlikely the cost of doing so will lead them to give up.

“Say for example, a domestic asset manager shows good performance in managing pension money and has always maintained business relations with BLF, long-term institutional investors in other countries or markets will look at these track records when they look for investment opportunities [in Taiwan],” she told AsianInvestor.

“They may not be as profitable as before, but it is a business that helps to enhance branding.”

The new rules are not bad news for all asset managers, she added; they may well work in favour of those asset managers that already have strict internal rules in place.

The head of wholesale of a foreign asset management firm agreed that domestic asset managers will still pursue the institutional business, but he believes the new rules will be most advantageous for foreign players.

International fund houses will be able to stress their internal control or compliance when bidding for the mandates, he noted.


BLF, which oversees NT$4.45 trillion ($147.16 billion) of public pension assets, has been under fire since a bribery scandal came to light last November.

Yu Nai-wen, director of domestic investment division at BLF, allegedly accepted bribes from PJ Asset Management executives to use BLF accounts to buy shares of Far Eastern Group, so that PJ Asset Management could offload its shares at a premium.

Yu was also suspected of requesting senior executives of Fu Hwa Investment Trust, one of BLF’s external asset managers, to place orders of Far Eastern Group shares after an extravagant dinner in July.  BLF invited bids for a NT$35 billion domestic relative-return mandate announced in July this year, about the same time of the expensive dinner. 

BLF said in a statement in late November that Fu Hwa and Uni-President, which was subsequently found to be involved in the scandal, were among the seven asset managers that were awarded the mandate. But the award of the entire mandate is now on hold. 

Since several domestic managers are implicated in the bribery scandal, BLF may opt to invest the NT$35 billion assigned for the domestic mandate passively or into exchange-traded funds (ETFs). It may also end up awarding the sum to foreign managers, Chen said. 

BLF declined to comment on how it will proceed with the mandate.

Domestic asset managers Uni-President and Capital SITE are also suspected of having violated rules in the incident, according to the latest probe by the Taiwan anti-corruption watchdog,

Fu Hwa is one of the Taiwan’s leading asset managers when it comes to receiving government pension mandates. It helps BLF and Public Service Pension Fund (PSPF) to manage 17 out of 99 mandates. Uni-President and Capital have also received multiple mandates.

According to Keystone Intelligence, Taiwan’s five largest government funds* had 99 outstanding investment mandates as of September 2020 and had assigned them to 13 external fund managers. They include Fuh Hwa, Uni-President, Cathay, Capital, Taishin, Fubon and SinoPac, all of which are domestic fund managers, while Nomura, Allianz, HSBC, Prudential, Schroders and JPMorgan comprised the remaining six.

Uni-President and Capital SITE said they are cooperating with official investigations, declining to elaborate further. Fu Hwa did not reply to AsianInvestor’s queries about the allegations.

* Four of the largest five public funds in Taiwan are overseen by the Bureau of Labor Funds: the Labor pension fund (new), Labor retirement fund (old), Labor insurance fund and the National pension fund. In addition, there is the Public Service Pension Fund (PSPF).

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