In anticipation of a tough year ahead, TaiwanÆs Labour Pension Fund says it has abandoned its initial plan to become fully invested by April. Instead, the fund is maintaining a large cash position for 2009 and fortifying its position in fixed-income products, which it believes will help to minimise the impact on its AUM from further macroeconomic weakness.

Lee Ruey-ji, vice chairwoman of the fundÆs supervisory committee in Taipei, notes the fund has been studying investment strategies employed by major foreign institutional investors such as Calpers and Yale. She says the fundÆs committee has noticed how buzzwords such as absolute return investments and infrastructure investments have been ushered into the mainstream by investors such as Calpers in recent years. The fund wants to examine the feasibility of how such alternative strategies could fit the 20-year-old pension fundÆs investment portfolio.

According to the latest statistics provided by the committee, the Labour Pension Fund currently manages NT$805.93 billion ($24.5 billion) worth of future Taiwanese retirement income. It has incurred a loss of 10.538% under its old system in 2008. While losses incurred under its new system are at 6.84%. The committee reckons all outsourced investments under both systems have managed to outperform markets at large in 2008.

Lee says domestic fixed income will remain an important source of returns in 2009 as the fund adopts a conservative stance in response to an uncertain economic outlook and expectations of continued lowering of interest rates in Taiwan. Since September 25, the Central Bank of China has already cut rates four times by a total of 0.875%. The benchmark deposit rate for one-year fixed deposit has been lowered from 2.7% to 2.2% currently.

To minimise the impact of rapid rate cuts as monetary authorities attempt to jumpstart the economy, Lee notes the fund is going to reduce its cash position from 32% to 28% and put some of this cash to work in fixed income, which will see an increased allocation from 10% to 15% of the fundÆs assets under its new system.

Meanwhile, the fundÆs allocation to commercial paper will be drastically reduced from its current 12.19% to just 2% of total assets. Allocation to overseas fixed income will be maintained at about 17%.

In equities, Lee says more value investment opportunities have emerged in both overseas and domestic equities markets, as stocks have now been brought down to the lowest valuation level compared to the previous five-year average. However, the fund is intending to stay put with its allocation of 38% until signs of stability return, as most markets are still trading under irregular conditions.

The supervisory committee has decided against changing any allocation numbers for investments under the fundÆs old system due to concerns that any changes may exacerbate losses in the current environment.

A breakdown of the NT$473 billion managed under the old system now includes: a 35% allocation towards cash; 7% in money markets; 16% in domestic lending and fixed income; 33% in overseas equities and 9% in overseas fixed income. Only necessary adjustments will be implemented, depending on how economic conditions unfold this year.