Womenonics, consumerism, shareholder activism; taken together they sound like the topics of a lecture delivered by a progressive economics professor. 

But these were some of the terms used by the head of the Bureau of Labor Funds (BLF) to explain the future investment focus of the biggest pension fund in Taiwan. Tsay Feng-ching has overseen a boom period since becoming the director general of the NT$3.8 trillion ($130 billion) state retirement fund early last year. During 2017 the global equity market reaped stellar returns, and BLF was there to benefit from it.   

However, Tsay was at pains to tell AsianInvestor that the pension fund has not been complacent during these good times. Instead, he has focused on using this period of plenty to instil his philosophy for meeting BLF’s long-term goals.

HUNKERING DOWN

Early 2017 was a good time to take over the operations of the BLF. Buoyed by global economic growth, modest inflation and robust corporate earnings, global stock markets soared to high levels last year. The three leading stock indexes in the US all recorded their best years since 2013.

But BLF’s Tsay said he understood this to be the calm before a potential storm. When asked about the biggest problem he has so far encountered since taking over as director general, he pointed to the fact that market volatility is set to rise, which will make it harder to invest.

To prepare for that, BLF invited bids for a $2.8 billion global absolute-return equity mandate late last year. Tsay said that without a benchmark, fund managers can more dynamically adjust their investment exposure, depending on the market situation.

The mandate targets a return of 5% over the US dollar three-month London Inter Bank Offered Rate (Libor). The five external managers given the mandate can use total return swaps (TRS) to hedge volatility risk—the first-time BLF has allowed the use of this derivative tool in its portfolios. The swap lets them raise or lower their exposure to certain stocks or stock indexes without changing asset allocations, which is useful if they have particularly bearish or bullish views of the performance of particular bourses. 

Equity returns are important for BLF because the asset class accounts for the largest part of its portfolio. However, the pension fund has also reined in its performance targets amid concerns of increased uncertainty. The pension fund has a target investment return of 4% this year, much lower than the 7.59% it achieved in 2017. 

Tsay told AsianInvestor BLF’s equity investments were expected to account for 45% of the portfolio, versus the 31% for fixed income. Overseas investments are estimated to be about 52% of the investment book.

FRENCH CONNECTION

More equity mandates are in the offing. Although valuation in many equity markets have reached uncomfortably full valuations, Tsay said the pension fund sees opportunities to raise stock exposures in Europe and Japan on the back of macroeconomic improvements there (as we revealed in an earlier story).

“In this year, we should reconsider several developed countries, and Europe and Japan are two regions that we pay attention to as they will likely expand at a faster rate,” he said. However, the exact size of these mandates is yet to be finalised. 

“We don’t have a specific proportion [for the level of increase] for now. It will depend on the accomplishments of the policies in Europe and Japan in the first half of the year.”

Some European equity markets are seen as offering potential value, particularly given the European Union’s increased political stability. 

The economic prospects in France appear particularly promising after former investment banker Emmanuel Macron took over last year. Tsay noted that the youthful president is very concerned about labour issues, and that France is expected to increase public spending to raise employment opportunities. Other countries may follow suit, offering the Eurozone potential upside in its economic growth this year.

“[Macron’s] approaches are more pragmatic. He represents a new ideology … his [labour] policies will influence other countries in Europe,” said Tsay.

In Japan, Prime Minister Shinzo Abe’s positive economic policies, including efforts to bring more women into the work force and relax rules on immigrants, could finally translate into real improvements in GDP growth this year, Tsay added.

Labour policies like so-called “womenomics” were something not pursued by past prime ministers, despite an aging population being the most serious problem in Japan. “Asia is facing an aging population and Japan is tackling the problem more proactively. The second country that is preferred should be Japan … an overweight on its equity.”

Look out for the second part of this interview, in which the BLF director general discusses his organisation's interest in environmental, social and govenrnance principles.