Private credit might be less attractive than it was last year as investors rush into the market, but there are sweet spots to be found.
The supervisory committee office of the fund in Taipei says it is looking for 10 fund houses to help it run NT$30 billion or $1 billion domestically. Instead of pre-selecting a set of benchmarks, fund managers are allowed to let their imaginations run free and design portfolios that will best suit the Labour Pension FundÆs needs.
The fund says it will accept listed, OTC equity shares, IPO stocks, corporate bonds, sovereign debt, anything in fixed income, commercial paper, bank deposits and even past no-nos such as derivatives for the purpose of risk hedging and return enhancements. However, instruments from unlisted entities are still a no-go this time.
It is up to the fund managers to come up with interesting solutions that qualify with one condition: the committee says it is targeting annual returns of no less than 9% from the portfolios.
The Labour Pension Fund is moving into a pure performance-based fee structure. Managers will be paid based on what they bring home. Under achievers will be paid anywhere from 80 basis points to 0.1% a year. Outperformance is rewarded incrementally at a step up of an extra 0.5% depending on the number of times fund managers exceed the Labour Pension FundÆs 9% annual target.
The fund invites all interested managers to participate in its latest round of outsourcing. Just a couple of things: fund houses will first need to obtain a license for handling government outsourced portfolios, and the chosen candidates are expected to hand over NT$200 million ($6.35 million) for guarantee purposes (well, in case the fund managers want to run, which they do sometimes).
The mandates are good for three years. At the end of the term, if managers can show a satisfactory record and a clean history with no violations or offences to the fundÆs rules, the Labour Pension Fund will entrust double the amount of funds to these successful managers.
Further to the outsourced fund management functions, the fund is also inviting bids from custodians to handle the NT$30 billion worth of outsourced portfolios. Interested parties can name their price, but the Labour Pension Fund says, once assets accumulate to over NT$60 billion, they would like to re-negotiate the custodiansÆ compensation. Once again, satisfactory performance will lead to contract renewal beyond the contractÆs three-year term.
Managers and custodians should file their applications by Thursday, September 11 at 5pm, and prepare for an oral examination with the fundÆs supervisory committee should they get selected.
Janet Li, principal investment consultant at Watson Wyatt in Hong Kong lauds the Labour Pension FundÆs pro-activeness in the Taiwan market, and notes the outsourced amount of the fund is still a small percentage of the fundÆs total assets. She says the fund has more room to experiment with new strategies, and perhaps even to dabble in new asset classes.
Li adds, however, the fundÆs promise of providing a retirement income no less than the islandÆs benchmark rate for two-year fixed deposits will greatly restrict the possible model of asset allocation or portfolio structures managers opt to use. As of August 4, 2008, the two-year benchmark fixed deposit rate is at 2.7675%.
Yesterday, Lee Ruey-ji, vice chairperson of the Labour Pension Fund in Taipei, announced the fundÆs intention to move into SRI-compliant portfolio allocations. The fund hopes to use its weight in Taiwan to influence the societyÆs awareness of environmental, social and corporate governance issues, as well as pressing Taiwanese corporates to improve their information disclosure standards.
The Labour Pension Fund is one of the four mega public funds in Taiwan. It has total assets under management of $24 billion. The amount it has outsourced to external managers under the old defined benefit system is now about $2.2 billion. Outsourced investments under its new defined contributory model total $1.66 billion.
Locally, a group of university academics and industry experts have recently been lobbying the Taiwanese government to consider moving into a Singaporean pension model û the Central Provident Fund. The Singapore government, like Taiwan, also centralises the pension assets into one entity, but Singaporean citizens are allowed to choose between different fund providers to handle their retirement investments.
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