PSPFÆs criteria for new mandates raises eyebrows

TaiwanÆs Public Service Pension Fund is to outsource new global and Asia-Pacific equity portfolios, but the manager selection criteria may have an unintentional screening bias that overlooks the best performers.

Taiwan's Public Service Pension Fund (PSPF) is inviting fund managers to bid on its second batch of overseas mandates for this year. The mandates are set to outsource some $900 million worth of investments in global equities and Asia Pacific ex-Japan and ex-Taiwan equities.

Usually, news of a big institutional mandate elicits cheers from fund managers. But many say they aren't going to participate, even though the deadline is not until December 17.

Fund executives who have seen the RFP tell AsianInvestor the bidding process for this second batch of overseas mandates risks becoming a fiasco. Following sharp criticism over the previous batch this year, the PSPF has tried to adjust its process but may have complicated matters instead.

It's been a tough year for the $11.4 billion PSPF, which saw its former chairman, then a handful of officials, investigated for corruption charges. Then it spent the summer labouring over what it deemed a 'short list' of investment managers - all 27 of them.

This time the issue centres on selection criteria. The PSPF has built a new screen for both the Asia-Pacific and global equity mandates that will unintentionally trip up many fund houses.

It wants to select two managers to each run a $200 million portfolio of Asia-Pacific equities, excluding Japanese and Taiwanese stocks. Managers will only be qualified to bid provided that, as of June 30, 2009, they had outperformed the MSCI Asia Pacific ex-Japan index -- total return, net dividends reinvested, unhedged and in US dollars -- by a cumulative 200 basis points over the past three years.

The PSPF will not consider managers who benchmark themselves against the MSCI Asia ex-Japan index. This is considered unusual: most institutional investors would accept proposals from managers using either MSCI Asia-Pacific Ex-Japan index or the MSCI Asia Ex-Japan index as proxy upon submission of proposals. The PSPF's requirement would effectively screen out half the asset management universe.

The PSPF also wants to select two managers for global equities, with each chosen manager running a $250 million portfolio. Again, managers are encouraged to only submit proposals with qualifications. They should have outperformed the MSCI World All Country Index on a total return, net dividends reinvested, unhedged and US dollar basis by a cumulative 150bp over three years to June 30.

By using a short cycle of just three years for measurement, the PSPF's performance qualification is in effect a hidden incorporation of growth bias. Over the designated three-year period, as of June 30, the MSCI All Country Growth index has outperformed the MSCI All Country World by 219 bp and the MSCI All Country Value index by 462bp.

Using data available on the 381 or so known global equity strategies tracked by investment consultants, a quick search based on the PSPF's unsaid style bias actually results in a highly restricted list of mostly mediocre, underperforming managers.

Both sets of criteria for the selection of Asia-Pacific and global equity managers are screening out a surprising number of top performers and steady managers, leaving industry execs wondering whether the PSPF's move was intentional, or just misguided due to a preference for convenience.

The good news for those managers that do bid is that the decision process should be relatively swift. At least there won't be so many houses to mull over. Existing service providers are free to pitch as well, so long as the total investment allocated to them doesn't exceed 10% of the PSPF's total asset size.

Allianz Global Investors, BlackRock, ING and Morgan Stanley were the four managers the PSPF selected for the last batch of global equity mandates. Each received $250 million.

In the meantime, fund executives are wishing the PSPF would pay an investment consultant to handle manager selection and bring some standardisation to the process.

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