Taiwan’s Bureau of Labor Funds (BLF) would like to see a wider range of locally listed smart-beta exchange-traded funds (ETFs), to complement the various products such as leveraged and inverse ETFs that it already uses.

Huang Chao-Hsi, director general of BLF, which oversees the country’s NT$3.49 trillion ($110 billion) in public pension assets, said locally listed smart-beta ETFs were small and limited in choice – offering only high-dividend exposure – and wants to see a wider variety of factor weightings.

BLF has not yet invested in domestic smart-beta ETFs, given the small size and single-diversity of such products in Taiwan, but has made such investments in overseas markets, Huang told AsianInvestor.

As of the end of August, BLF’s overseas smart-beta investments accounted for 32% of its overall foreign mandates, up from 30% at December 31. The fund has NT$1 trillion in foreign mandates.

BLF plans to continue increasing its allocation to smart-beta strategies because they offer sound and stable returns in the long term and diversify portfolio risks, Huang said.

Smart beta funds have been gaining more acceptance among Asian institutional investors as they consider how best to maximise their returns amid continued market uncertainty. For instance, Hong Kong’s $7.2 billion Hospital Authority Provident Fund Scheme issued in June its first smart-beta mandate. Another driver among Asian pension funds to adopt this strategy is to cut costs, as reported.

ETF investment

Broadly, BLF has proprietary ETF investments in both domestic and overseas markets, but the functions are different, Huang noted.

For domestic equities, the Taiwanese pension fund does most of its investments in-house into individual stocks, but it also uses ETFs for tactical purposes to build up or adjust portfolios quickly. It mainly focuses on equity index ETFs, given that they are large and offer substantial liquidity. It has not invested in local mutual funds.

For overseas markets, BLF uses ETFs with a view to accessing market beta and quickly building up positions, diversifying risk and maintaining liquidity, and allocates to mutual funds to obtain alpha from their stock-picking capabilities.

The asset owner has been largely investing in US-listed ETFs with high trading volumes. It buys ETFs focused on global, US, Europe and emerging-market equities; bond ETFs investing in global, corporate, high-yield debt and emerging markets debt; and alternative ETFs mainly focused on raw materials and real estate.

The institution has invested in locally listed leveraged and inverse (L&I) ETFs, but only does so for short trading periods because leveraged ETFs are rebalanced on a daily basis, meaning return of such product might deviate from the performance of the underlying indices over a longer period.

Inverse ETFs can help for portfolio hedging and don’t have the rollover issues posed by index futures, Huang noted. Futures contracts have expiration dates as opposed to stocks that trade in perpetuity. As a result, traders roll over futures contracts that are close to expiration to another contract in a further-out month, which can cause pricing volatility.

He added that BLF hasn't yet invested into foreign-listed L&I ETFs because it takes a long-term, stable approach to overseas investment.

L&I ETFs got the green light to launch in Taiwan in November 2014, as reported. As of end August, there a total of 22 such products have listed in Taiwan, with total AUM of $5 billion ($3.2 billion for inverse ETFs, $1.8 billion for leveraged ETFs). They account for 55% of total local ETF AUM ($9.1 billion), according to Taipei-based consultancy Keystone Intelligence.