More than half of external investment managers awarded domestic mandates by Taiwan’s Public Service Pension Fund (PSPF) in 2009 have failed to hit return targets.

Last week the fund listed the underperforming managers on its website: Cathay, ING, Fubon, Prudential Financial, Fuh Hwa and SinoPac.

Chang Che-shen, chairman of PSPF’s management board, tells AsianInvestor that the external managers’ performances have been unsatisfactory.

“For more than a decade, we have worked with about 20 to 30 domestic Sites [securities and investment trust enterprises] and foreign asset managers with different investment strategies, but most of them can’t reach the target returns and only a few outperformed benchmarks,” he states.

PSPF notes that three of the managers – Cathay, ING and Fubon – failed to meet a target return rate of 14.567% from June 8, 2009, to March 31, 2011. Instead they posted 10.26%, 8.53% and 7.84%, respectively.

Yet the average return of the other mandated managers during this period was 16.27%, while Taiwan’s stock market rose 26.64% over the same time.

PSPF issued a mandate in May 2009 for each of the six Sites to manage NT$4 billion ($138 million) for three years.

Chang suggests that external managers may not be meeting their targets because the benchmarks are too difficult to beat, although he acknowledges that both parties would have agreed that the targets were realistic when they were awarded the mandates.

Also on the website, Prudential Financial, Fuh Hwa, ING and SinoPac are listed for posting under-par returns of 7.26%, 5.85%, 2.55% and 2.02%, respectively, from October 29, 2009, to March 31, 2011, when the target return of the mandate is 11.472%.

Together with three other Sites – HSBC, Cathay and Uni-President – the seven domestic managers returned an average of 9.40% during a period when Taiwan’s stock market rose 15.26%.

PSPF manages NT$483 billion for 639,000 civil servants, education workers and military personnel and conducts annual performance reviews of external mangers before publishing the results.

Ashwin Mehta, CEO of ING Site, notes, “Given it is such a transparent process, even though mandates are three years, there is no guarantee that it will stay [with the fund manager] for three years. Every year, there is a review and you have to be on your toes.”

“The good thing is that [pension funds in Taiwan] do look at accumulative return rather than return on a monthly basis and don’t get stressed out with high tracking errors in the short term.”

That said, Chang notes that the PSPF is always on the lookout for high-achieving domestic and foreign external managers. “Mandates to third-party fund managers continue to increase and play a more important role,” he says.

“We have limited internal human resources or information about overseas markets, so we need external help from domestic and foreign asset managers. For us, it’s simple: managers need to achieve the target return. We don’t interfere in their investment strategy or process; we only play a monitoring role.”

A detailed Q&A with Chang will be published in the May edition of AsianInvestor magazine.