Taiwan’s Bureau of Labor Funds (BLF) is planning to invite bids for a five-year quasi-passive emerging market equity mandate of up to $2 billion, AsianInvestor can reveal.  

The $124 billion pension fund – a keen user of factor-based, or ‘smart beta’, investing – is likely to issue the tender towards the end of the year, and expects to split the enhanced equity portfolio between five asset managers.

“It will for sure be at least $1 billion. Whether it will be as much as $2 billion is still not decided,” said Liu Li-ju, deputy director general of BLF. The size will depend on several considerations, such as the fund’s growth and its overall allocation split between domestic and overseas assets later in the year.

Index companies have proposed customised benchmarks for the mandate and the pension fund is evaluating them, she told AsianInvestor. Stocks will be weighted by factors including low volatility, high quality and high dividend.
Liu Li-ju, BLF

BLF expects to pick five managers for the mandate to maintain good diversification in investment style and peer competition, Liu noted. As the portfolio will cover global EMs and require strong quantitative capabilities to run factor models, it is unlikely to be suitable for boutique fund managers, she said.

Enhanced indexing, a hybrid of active and passive management, seeks to amplify the returns of an underlying index. 

INDEX SELECTION

Liu said BLF was pursuing an enhanced indexing strategy even though it is likely to generate lower alpha than an absolute-return portfolio, partly because it already has a large absolute-return allocation and it wants to diversify its investment strategies, Liu said.

BLF awarded a five-year $2.8 billion overseas absolute-return equity mandate in early 2018, split between 15 managers.

The fund has not been using broad market indexes as benchmarks for external mandates in recent years, she noted. Rather, it has been working with index companies to create customised benchmarks with specific features. Index providers are willing to tailor such products for BLF because of the huge allocations it makes, Liu added.

The customised index that BLF started using most recently is the FTSE4Good Tip Taiwan ESG Index for its $1.4 billion domestic environmental, social and governance (ESG) mandate, issued this year and split between seven fund houses.

EMERGING MARKET RATIONALE 

Meanwhile, BLF is looking to increase its exposure to emerging markets at a time when some are questioning the merits of doing so.

Some of BLF’s EM investments made many years ago have matured, so its exposure to such assets has fallen, explained Liu. Moreover, as the fund has grown, it needs to add EM investments to maintain its allocation level in this area, she said.

EM and Asia-Pacific assets are held in BLF's satellite portfolio, which accounts for 20% to 25% of its AUM, Liu said. The core portfolio accounts for the remaining 75% to 80%.