Managers downbeat as Taiwan mulls sovereign fund

The finance ministry has proposed merging four state-run pension funds into a $240 billion sovereign fund, but managers doubt the entity will issue more external mandates.
Managers downbeat as Taiwan mulls sovereign fund

Taiwan’s finance minister has proposed consolidating four state-run pension funds into a new $240 billion sovereign wealth fund, although fund managers appear pessimistic this will lead to more external mandates.

Chang Sheng-Ford submitted the plan last week to the economic planning and development council which advises the Executive Yuan, the government’s highest administrative body, according to reports in the local Economic Daily News.

If approved, it would catapult the fledgling entity into the world’s top 10 sovereign funds by assets, just behind the eighth-placed Government of Singapore Investment Corporation (GIC), which manages around $247 billion.

The four Taiwanese pension plans in question are the labour insurance fund, the public services pension fund, the labour pension fund and the postal savings fund; their combined AUM amounts to NT$7.1 trillion ($244 billion).

A merger between Taiwan’s Labor Pension Fund and Bureau of Labor Insurance has long been discussed and was expected to happen at the start of this year but was pushed back to the second half, as reported. In that instance more frequent and larger mandates were anticipated.

Talks on Taiwan setting up its own sovereign wealth fund date back to 2007, when lawmakers debated using the island’s foreign reserves to establish such a venture, based on the model of Singapore’s Temasek. However, the plan did not win support from Taiwan’s central bank.

What appears different this time is that the central bank is not opposed to the idea, provided the new sovereign fund operates independently of it, media reports.

It is understood that the merger proposal will be examined by the government’s economic planning and development council over the next three months, although Chang was quick to caution that this idea is at an early stage.

He noted that the four funds are controlled by three separate government departments, which would mean a huge amount of upheaval in terms of integrating manpower and resources if such a large-scale merger was to go ahead.

But what is clear is that the four funds have been underperforming, having collectively recorded a loss of NT$89.8 billion last year.

The labour insurance and labour pension funds reported losses of NT$12 billion and NT$45.5 billion, respectively, along with negative investment returns of 2.97% and 3.76%. The public services pension fund racked up NT$28.4 billion in losses.

In terms of portfolio holdings, the labour pension fund (the new fund) has 27% mandated to both foreign investment and to domestic investment, with 21% in bank deposits. Investments performed in-house contributed just 7.85% of AUM, with 0.87% exposure to domestic stocks, according its most recent annual report.

Given the poor performance, some lawmakers have argued against the funds seeking further external money management. Chang noted that if the four funds were combined, the SWF would seek to look beyond short-term equity investment to a more long-term approach.

Fund managers say the pension funds’ trading strategies are too conservative in their favouritism for blue-chip stocks. They also point out that these funds are sometimes required to stabilise the domestic equity market, meaning they are not as focused on profit-making as they should be.

They fear that if the government maintains this conservative strategy for a new sovereign fund, then returns are unlikely to improve.

“The four funds have been established with a mission, and making profits may not be their top priority,” says a fund manager in Hong Kong overseeing the Taiwan market. “If this sovereign wealth fund is set up, it is unlikely it will give more money to external mangers to run.”

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