Taiwan's BLF plans new absolute-return equity mandate

The $126 billion state pension fund will hand out the new overseas-focused mandate in mid-November, amid rising volatility in global markets.
Taiwan's BLF plans new absolute-return equity mandate

Taiwan’s Bureau of Labor Funds (BLF) will issue a new type of overseas investment mandate—an absolute-return equity portfolio—next month, as the NT$3.8 trillion ($126 billion) state pension fund anticipates greater volatility in global equity markets and seeks to assure returns in this environment, AsianInvestor can reveal.

The rationale behind the new mandate is that global equity markets have risen “considerably” during the long post-crisis rally; though there might be some space for further upside, the risk of volatility is expected to increase, Tsay Feng-Ching, BLF’s new director general who joined in January, told AsianInvestor.

To prepare for this, the new mandate will not set a specific equity benchmark, but will allow managers to make active allocations, based on their preferences and expertise, to help increase investment returns, reduce portfolio volatility, and provide downside protection, Tsay said.

BLF gave no further details of the mandate design as it is still under discussion, but it said it plans to issue a request for proposal (RFP) for the new mandate in mid-November, and will accept submission of tenders until end December. This is one month earlier than the fund's previous two rounds of offshore mandates, issued at end December 2016 and 2015, respectively.

Tighter governance required

Absolute-return equity strategy is not necessarily new to Asian asset owners and has been under consideration for a while, Garry Hawker, director of strategic research for growth markets at Mercer, told AsianInvestor. “Many institutions want absolute returns when the market is going down and relative return when the market is going up.”

From a governance perspective, mandates like this require asset owners to focus less on returns, but more on understanding the manager’s strategy and how they are going to execute it, Hawker said.

As there are restrictions on the derivatives that managers can use under the new mandate, asset owners will need to institute extra monitoring, Hawker noted.

In addition, a key aspect of the absolute-return equity mandate is that asset owners need to understand their return expectations and take a longer-term perspective of managers’ performances. “When the market was rising significantly, you'll see [even] if the managers were doing their job, they might be [still] underperforming,” Hawker pointed out.

Diversifying portfolio

Being the winner of AsianInvestor’s Institutional Excellence Award in the innovation category last year, BLF has been tapping into new types of overseas investments over the past three years.

It invited bids for a total $6 billion global portfolios in December 2016, comprising $2.4 billion allocated to a global ESG (environmental, social and governance) Quality Mix Equity Indexation mandate and $3.6 billion to the absolute-return fixed income portfolio.

It issued $5.3 billion of global portfolios in December 2015, comprising $3.2 billion for its first global multi-asset allocation and $2.1 billion for enhanced Asia-Pacific equities.

BLF’s existing overseas equity strategies also include global enhanced equities, Asia ex Japan active equities, global passive equities, global emerging-market equities, global fundamental index passive equities, global low-volatility passive equities, global high-dividend enhanced equities, and global high-quality enhanced equities.

BLF generated 5.81% or NT$208 billion ($6.9 billion) in returns this year, as of August 31.

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