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As investment markets become more international and grow deeper, sticking with outdated risk management and restrictive asset allocations translates to low returns, Chu says. Drawing examples from pension managers in the US and Canada, Chu says Taiwan should set its sights on opportunities in offshore investments and expand the set of investment tools available to its pension managers.
The Public Service Pension Fund manages a combined TW$530 billion ($17.49 billion) in assets, made up of TW$400 billion ($13.20 billion) in civil service pensions and TW$130 billion ($4.29billion) in insurance contribution from public school teachers. Close to 40% of the fundÆs assets are currently allocated to international investments.
Chu says his committee wants to increase its foreign exposure and bring the total allocation to 46.8%. Overseas allocation for the teacherÆs fund has been revised to 27% from 17% last year, he says.
ôWe plan to outsource an additional $1 billion this year,ö Chu says. However, an internal committee in the fund is troubled by the developments of the subprime crisis and is yet to decide on the timing of the mandates.
ôWe have had numerous discussions with global banks and asset management houses. Few have been able to tell me whether the crisis is over, and whether they expect to make or lose money this year,ö he adds.
The latest mandates will include a portfolio of equities and a fixed income portfolio. Requirements for fund managers include a minimum three-year track record above the fundÆs designated benchmark, assets under management of at least $25 billion, and a minimum three-person local service team.
The committee has not yet drawn conclusions on the portfolio requirements and the strategy it plans to adopt. Chu says internal discussions include pondering on active versus passive portfolio management under the current investment climate. The use of ETFs, index-tracking funds, and even the setting of benchmark targets are key questions still outstanding.
The committee has plans to empower fund managers with portfolio designs. Previous restrictions on derivatives for risk-hedging purposes have been removed to include return enhancements. Fund managers can freely design the portfolio based on the benchmark requirement without avoiding the regulatorÆs detection anymore.
The sovereign rating requirement for the fundÆs fixed income portfolio has been lowered to a minimum of triple-B, meanwhile.
ôChina, India, Malaysia, Russia, Poland and Latin America are all rising examples of the potential of emerging market debt,ö Chu says. ôIn the past, we have set very high standards for sovereign ratings mainly because of political considerations. Now we are giving more allocation to these markets.ö
To date, the fund has outsourced overseas investments in three batches. The mandates it issued in 2003 have produced successful results, and set an example for the three other public funds in Taiwan to follow û they are, the Labor Insurance Fund, Labour Pension Fund and Taiwan Postal Fund later.
These outsourced mandates have proven to be a rite of passage, as the fund graduates from the basic balanced portfolio to one than invests in global equities and fixed income products.
ôWe are expanding the scope of investment tools in both our direct and outsourced portfolios,ö Chu says. ôWe must diversify our range of asset exposure. In the future, they should include private equity, hedge funds and real estate û all these so-called alternative investments.ö
As the fund turns more global and proactive in outsourcing, Chu hopes that global asset managers will increase their presence on the island and help raise its financial sophistication and build up the local talent pool.
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