Taiwan $1 billion RFP "unrealistic"

The Labour Pension Fund is offering six equal absolute-return mandates, but its return targets and low fees are criticised.
Taiwan $1 billion RFP "unrealistic"

Taiwan’s Labour Pension Fund (LPF) is inviting local asset managers to bid for a NT$30 billion ($1 billion) second batch of domestic absolute-return mandates under its new pension system.

According to the website notice posted by LPF, Taiwan’s largest pension plan, the four-year mandates will be shared equally among six managers, each tasked with managing NT$5 billion and to achieve a return target of 9% annually.

But one CIO at an asset management firm in Taipei tells AsianInvestor: “The target return of 9% is too high to achieve for most managers. It is a required return to cover LPF’s liabilities, but it is not a realistic target.”

In contrast to the targeted return, the management fees on offer are low. “For most companies, running government pension mandates is a way to grow AUM and promote market reputation rather than making profits,” the CIO adds.

According to the notice, selected trustees will receive a base management fee of 0.12%, a performance fee ranging from 0.07% to 0.53% and a fee for excess return of 0.3% to 0.5%. Base and performance fees are paid monthly, while fees for excess return are paid at mandate expiry.

The lowest fees apply to managers whose return is negative and also below the TSEC weighted index, while the highest will go to those who achieve returns four times that of the target rate.

On expiry or termination, managers will be asked to return part of the management fees if their accumulated returns have failed to hit targets and fall below 50% of the TSEC-weighted index.

The CIO notes that the fee structure is also too complicated. “It is an absolute return mandate, but the managers’ performance is assessed against benchmark. This will cause confusion to managers’ investment decisions.”

According to the guidelines, selected managers can invest in domestically listed equities, corporate bonds and government bonds. Each trustee can invest no more than 10% of a mandate’s AUM in a single stock (5% in the over-the-counter market). The cap on a single bond security is 5% of the mandate’s AUM and 0.2% of the total outstanding bond issuance.

Trading in stock index futures is permitted. The long position cannot exceed the net value of the total assets managed by the trustee less the total stock holdings for that day; and short-hedged trades cannot exceed the cash position of total stock holdings for that day and overnight long positions cannot exceed 15% of the trustee’s total net value of AUM.

Eligible applicants must have had an operating history of more than three years and total AUM of more than NT$10 billion by the end of April.

Any equity or balanced fund managed by the applicant needs to have had an AUM consistently above NT$1 billion for the past three years and an accumulated return above the average, according to rankings of the Securities Investment Trust and Consulting Association.

Applicants should also demonstrate accumulated returns on institutional clients’ mandates that have consistently hit return targets or beaten the TSEC-weighted index over the past three years.

The last time LPF issued a similar absolute-return mandate was in February, but for the fund under the old system.

In principle, the new system is a defined contribution plan, while the old system is a defined benefit plan. By the end of March, the utilisation balance of LPF was $45.4 billion, including $19.2 billion under the old fund and $26.2 billion under the new fund.

LPF says that no asset manager had its domestic absolute return mandate terminated between February 21 – when its last domestic absolute-return mandate commenced – and May 17.

LPF set the application deadline for May 31 and says it will finish the review process by July 8.

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