LPF chairman rebuts criticism of target returns
Taiwan's Labor Pension Fund has rebutted arguments put forward by fund managers in a story by AsianInvestor.net, subsequently printed in our magazine, that criticised the LPF for "unrealistic" assumptions about returns it wants from third-party managers competing to win absolute-return mandates. Here we reprint a letter from the chairman of the LPF Supervisory Committee, Huang Chao-hsi. This letter has been edited for grammatical style.
The report, Managers say LPF absolute-return mandates “unrealistic”, on page 24 of AsianInvestor, June 2012, indicated that the target return of our mandate is too high to achieve; the management fee is too low; and the structure is too complicated. We want to clarify.
1. About the statement that the target return of 9% is decided by our potential liabilities, and therefore not easy to achieve:
The new pension scheme of Labor Pension Fund in Taiwan is a defined-contribution plan, not a defined-benefit plan, so there is no issue of potential liabilities. Actually the target return is calculated from the average historical return, including dividends, of the Taiwan Stock Exchange Capitalisation Weighted Stock Index (Taiex). So it definitely has nothing to do with the potential liabilities.
For the past 10 and five years, the average annual return of Taiwan’s stock market is about 8.4% and 3.3% [annualised], respectively. Meanwhile, the average annual return of stock dividends is about 4.7% and 5.2%, respectively. The sum of the above is over or equivalent to 9%. Hence it should be reasonable for us to ask our selected professional managers to achieve the target return of 9%.
2. Regarding the management fees:
We don’t think this statement is without fear or favour. Our management-fee structure is based on the achievement of target return, which we set forth in our investment guidelines. That implies the stronger link between the manager’s performance and their income, which means better performance delivers a higher management fee. From our point of view, the fee structure is fair to us and to managers.
3. Regarding the complexity of our fee structure:
We want to pay more to outperforming managers and less to underperforming ones. As a result, managers will get extra fees for excess returns, or be asked to return part of the management fees if their accumulated returns fail to hit the targets upon expiry or termination. This design is in line with the principle of absolute-return type outsourcing, and it only takes place once at the expiration of the contract. So it doesn’t increase the complexity of management-fee calculation during the term of contract.
Chairperson, Labor Pension Fund Supervisory Committee