Seven out of 10 PSPF mandates underperform in 2009

Taiwan's civil-servant pension fund unveils the four winners of its latest overseas mandates, worth an aggregate $900 million, and reports investment results for its latest quarter.

Taiwan's Public Service Pension Fund (PSPF) has unveiled the line-up of managers for its latest offshore mandates. A total of four have been picked from 20 applicants to help manage the civil-servant pension fund's latest outsourcing for investments in global and Asia-Pacific equities. Twelve bid for the global portfolios, eight for the Asia-Pacific mandates.

The global equity managers qualified on the basis that they had outperformed the MSCI World All Country Index on a total-return, net dividends reinvested, unhedged and US dollar basis by a cumulative 150 basis points over three years to June 30.

The Asia-Pacific equity managers were judged on outperforming the MSCI Asia Pacific ex-Japan index -- total return, net dividends reinvested, unhedged and in US dollars -- by a cumulative 200bp over the same period.

Allianz Global Investors (AGI) and Schroder Investment Management won the global equity mandates, and each receives a $250 million portfolio to manage. The two have one target: to outperform the MSCI World by 50bp on an annual basis.

Fidelity International and UBS Asset Management were chosen as the Asia-Pacific equity managers. The PSPF's target return for these two is 75bp over MSCI AC Asia ex-Japan and ex-Taiwan index.

The mandates are good for four years. The PSPF says it will decide on when to fund these mandates at a later date. Taiwan's First Bank, in association with JP Morgan, is appointed as custodian to the current batch of mandates.

Concurrent to the announcement, the PSPF has also made available its investment performance for the latest quarter. As of the end of last year, the fund's asset size stood at NT$454.1 billion ($14.19 billion) and 38.77% of its assets are now outsourced to external managers.

According to the PSPF report, seven of its 10 existing overseas investment mandates underperformed the markets in 2009. Up to the end of last year, except for ING Investment Management, all of the managers the PSPF had chosen underperformed their respective markets of responsibility over the duration of their mandates.

The fund ended last year with a realised investment yield of 1.625% -- barely enough to cover its guaranteed return to its civil-servant members in the pension scheme. The PSPF guarantees a minimum annual return referenced to the local two-year fixed-deposit rate. Last year, the rate was at 0.937%.

Despite its effort to diversify its risk exposure by adding overseas investments, the PSPF's returns have been increasingly volatile. Its annual return results read like a rollercoaster ride, which is deemed inappropriate for a pension fund with large guaranteed liabilities.

The annual yield at PSPF rode from a trough in 2003 of 1.946%, to 2.628% in 2004, 3.661% in 2005, up to 4.446% in 2006 and later to 5.617% in 2007. It plummeted to -2.464% in 2008, the year of the global financial crisis.

Out of the first batch of overseas mandates allotted in 2003, only State Street Global Advisors' global enhanced equity mandate still remains effective. It was renewed in December 2007. Between December 15 that year and the end of 2009, SSgA delivered -25.53% versus the benchmark's -22.57%. The portfolio delivered 27.88% versus the benchmark's 29.99% in 2009. (BGI received a similar mandate of $100 million that year; while AGI, JP Morgan and UBS were appointed as global balanced managers.)

Three global balanced equity mandates were given out in 2006. The appointed managers were AGI, Franklin Templeton and SSgA, with each receiving $200 million. All three mandates have since expired.

Among the mandates distributed in 2007, all three managers responsible for global equity underperformed between July 2007 and the end of last year. These are AGI, Invesco and Templeton. They have delivered -29.26%, -25.63% and -27.74%, respectively, versus the benchmark's -25.37% over the same period. In 2009, the target benchmark return was 29.99%, while Templeton delivered 28.75% and AGI 25.17%. Invesco outperformed with 30.32%.

Also in 2007, two French managers each took charge of a $200 million global fixed-income mandates. As of the end of last year, Credit Agricole Asset Management (CAAM) had delivered 19.39% and BNP Paribas Investment Partners (BNP IP) 19.80%, versus the 21.5% gain of the Barclays Capital Global Aggregate Index. In 2009, CAAM outperformed with 8.47%, and BNP IP underperformed with 6.56% versus the benchmark's 8.2%.

Prior to the announcement of the latest batch of mandates, the PSPF appointed four managers last summer to manage global equity mandates. In the last quarter of 2009, AGI delivered 3.06%, BlackRock 3.34% and Morgan Stanley Investment Management 3.09%, versus the index's 5.66%. Surprisingly, ING Investment Management, using what is believed to be a high-yield strategy, delivered 6.31%, becoming one of the few managers to have actually delivered outperformance for PSPF's portfolio.

Separately, the PSPF has fired three of its domestic managers for poor performance. The three securities investment trusts include Fuh Hwa, Capital and PCA Funds (a subsidiary of UK Prudential).

Industry observers, unsurprisingly, continue to criticise the PSPF's manager-vetting process. The latest mandates may add to concentration risk and expose the PSPF pensioners' retirement saving to managers with unstable management. Industry veterans say the PSPF should start paying more attention to correlation between its 10 managers.

AGI now manages three mandates for the PSPF. Fidelity's appointment comes on the heels of a recent suspension of one of its most respected portfolio managers responsible for institutional Asia-Pacific equity investments.

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