After some nine months of wait-and-see silence in Taiwan, the country's public sector funds and local insurance companies appear ready to award new mandates after issuing a flurry of request for proposals (RPFs) in recent weeks.
Taiwan Post was the first among the Big Four to announce its plan to issue mandates this year. Earlier, it stated that is was seeking five fund managers and will hand out $100 million to each of these managers to help run a sound global strategy. It is expecting managers to submit their proposals as to how to take advantage of current market situation by Tuesday, May 26.
Now the Public Service Pension Fund (PSPF) says it has a budget of $1 billion to invest in international equity benchmarked to the MSCI World-All country index. The actual timing for the funding of these mandates is still uncertain, but the PSPF says each will be sized at about $250 million and will be good for four years. The tender is open until June 17.
The PSPF says the mandates are only open to fund managers with onshore service points. These can either be a local subsidiary, investment office or a representative office. For those without a local presence, a local service manager must be appointed. This function can be outsourced to a local securities investment consulting enterprise (SICE), a local securities investment trust (SITE) or a bank, for example.
Janet Li, principal investment consultant at Watson Wyatt which is advising the Taiwanese public fund sector, notes the funds are ready to take advantage of current valuations, especially in global equity markets.
There is a clear trend for these funds to become more aggressive and they see the current market situation as a strategic window that will enable them to diversify their holdings.
In reviewing manager performance over 2008, Li notes that more public sector funds have been tempted to terminate their existing active managers and adopt passive strategies by taking up ETFs.
The public fund sector certainly has more money to invest overseas this year. Incoming contributions have been building up on their balance sheets and a lot of them hold large sums of uninvested cash. However, getting corporate governance and risk management right are still nagging concerns for these funds. In particular they are wary of the operational risks and counterparty risks in their dealing with external fund managers.
In order to reduce concentration risk, the Big Four have consistently adopted mandates that seek geographical diversification though global investments. But there is an illusion of safety in this strategy because a lot of the underlying indices of these investments are still heavily weighted towards US equities.
And since there is a limitation as to how far appointed managers can deviate from these benchmarks, Li offers a note of caution. She says the more that funds allocate to global mandates, the more vulnerable their portfolios will become to US market performance.
Meanwhile, alternative investments are attracting more interest from within the public sector. But Li expects that actual allocation to alternative asset classes will remain low due to the internal hierarchy within the funds that makes alternative strategies difficult to implement.
The speculation is that one more insurance company in Taiwan is expected to issue a mega-sized RFP soon. Rumours about which company this will be are circulating wildly.
Taiwan's Big Four is made up of the Labour Pension Fund, Labour Insurance, Taiwan Post and Public Service Pension Fund.