Taiwan's LPF issues first emerging-market RFPs

Having chosen Towers Watson as its investment consultant, Taiwan's Labour Pension Fund is opening its first tender for global emerging-market (GEM) equities this week.  

Three $250 million mandates are up for grabs. Managers who can demonstrate no less than three years of track record in GEM equity investing are invited to submit bids by the afternoon of April 28.

The long-anticipated GEM mandates are great news for managers. They come as the LPF works to reduce its cash-heavy positions and tries to increase its assets in order to match its growing liabilities.

Unlike previous requests for proposals set with specific performance-related award schedules, the LPF did not specify its fee schedule in its current RFP. The investment target for this batch of GEM mandates is set at 250 basis points above the MSCI Emerging Markets IMI Index (total return, net dividends reinvested, unhedged and measured in US dollars) net of fees and on a rolling three-year basis.

The LPF can tolerate a cumulative tracking error of 6-12% on an annual basis. Managers submitting bids should be aware that there is a 10% cap on investments in China-listed securities, although the limit does not apply to Hong Kong-listed securities.

Following the great shake-up and poaching wars during the global financial crisis, the LPF has asked that fund houses that suffered portfolio manager turnover must outline the status of the current team and give explanations for any changes.

Furthermore, the fund is paying attention to managers' counterparty risks and capacity issues. These will be more significant issues for managers running GEM equity portfolios than for those pitching for the global or Asian equity mandates favoured by the LPF in the past. That's because EM stocks can be expected to be more volatile and EM market capitalisations are a lot smaller than those in developed markets. 

Interested managers must have no less than $5 billion worth of institutional or segregated assets under management -- any AUM number submitted must exclude funds sourced from retail origins.

Moreover, LPF assets to be managed should not exceed 40% of the AUM of a manager's GEM portfolio. And if a manager already has a large book of investments, the LPF will expect an explanation on how that manager will deal with capacity issues.

Interestingly, quite a number of managers holding top positions in league tables for GEM performance appear to have already stopped accepting new client money to maintain optimal portfolio capacity. It will be worth taking note of the number and mix of manager bids the LPF receives for the current tender.

Separately, from this year, offshore managers that win Taiwanese pension mandates will be able to file requests for refunds of the 20% withholding tax levied on their fees. Click on this article link for background.