Taiwan's BLF on drive for greater portfolio efficiency
The Bureau of Labor Funds (BLF) is an umbrella organisation set up in February last year to amalgamate the investment management of various Taiwanese public sector labour pension funds.
Its director general, Chao-Hsi Huang, is a former chairman of the Labor Pension Fund supervisory committee and was also chief secretary of the council for economic planning and development.
The creation of the BLF was in accordance with the government’s wider policy of making public sector organisations more efficient. The Labor Pension Fund supervisory committee was transformed into BLF, and investment management personnel from the Bureau of Labor Insurance were merged into the bureau, to coordinate the investment management affairs of all the funds, which have similar return targets.
The new amalgamated bureau is responsible for overall investment planning for the Labor Pension Fund, the Labor Retirement Fund, the Labor Insurance Fund, the Employment Insurance Fund, the Overdue Wages Payment Fund and the Occupation Incidents Protection Fund.
The BLF is integrating the research, selection and management of its various funds, which had consolidated total assets totalling $92 billion as of the end of March this year. It manages 60% of this in-house. The asset mix is 37% in fixed income, 45% in equities and 18% in cash, while 40% of the assets are invested internationally.
Q: What was the objective behind the merging of these five funds?
A: In view of the tremendous changes in international financial markets in recent years, it was considered necessary to put more resources behind investment personnel and research, providing the labour funds with more professional and effective operation. The BLF promotes the diversified investment allocation of the funds, pursuing long-term and stable returns.
How is the internal investment process coordinated?
Organisation of the BLF is divided into five divisions, including domestic investment, foreign investment and risk management. The finance management division is responsible for the scheduling and delivery of businesses, as well as the custody of the funds business. Internal and external businesses are supervised by the planning and audit division.
The BLF institutes the formal investment policy statement to regulate basic investment principles. We set up mid- to long-term objectives and strategies for the various funds.
The optimal asset allocation of our annual investment plan is decided by estimating the revenue/ expenditure and net cash inflow, contemplating risk tolerance and then adopting a globally diversified strategy.
How many investment professionals does the BLF have in-house?
We have 112 formal employees in all divisions. All the staff have civil service qualifications. Some of them have the certificate of securities analyst, senior securities specialist, investment trust, consulting representative and futures specialist.
With limited manpower, it is important for investment managers and fund allocators to adopt a professional approach and apply teamwork in discussing strategy.
How is the investment strategy formulated?
The BLF drafts its annual investment plan utilising an asset allocation simulation system, and framing optimal allocations balancing between risk and return. The plan is ratified by the investment strategy panel of the BLF and the supervisory committee of the Ministry of Labor.
We review our asset allocation annually in March for next year’s plan. We also revise it in October according to the economic circumstances. Also we review our foreign investment strategies biannually.
The next review of our strategies will be in September. Liability management remains under the control of the Ministry of Labor.
Has the investment committee used asset consultants at any point?
Back in 2007, when the committee started to invest in global markets for LPF and LRF, we considered the broad investment universe and decided to hire investment consultants to assist in the selection and monitoring of all foreign mandate managers. We also worked with them to develop globally-diversified portfolios for the funds.
Going forward, aside from the original monitoring services to all mandate accounts and managers of the funds, the bureau requires consultants to provide professional advice to new mandate design, dynamic asset allocation and rebalancing strategies for all the funds under the bureau’s management. This year, we hired Tower Watson.
What is your approach to risk management?
After the establishment of the BLF risk management division last year, we began constructing a comprehensive risk-control mechanism.
We developed the system in order to calculate VaR [value at risk] daily and to monitor the variation of VaR for each portfolio. The items of risk control include five categories: market, credit, liquidity, operational and legal.
We have also established a risk control and management panel to deal with significant issues that may arise, for example, during extreme market events.
Can you explain how the fund’s investment approach changed to include smart beta?
We had our first smart-beta mandate in 2011 and the first smart-beta index we adopted at that time was Research Affiliates’ Fundamental Index.
The main reason we began to adopt fundamental indexing was the inefficiency of traditional market cap-weighted indexes, which overweight high-valuation companies and underweight low-valuation companies.
The fundamental index invests in stocks which can effectively diversify the risk of our portfolio and earn a better return in the long term. Thereafter we continually seek to diversify our smart-beta strategies to reduce the overall portfolio risk and enhance performance. We are adopting two alternative index strategies: fundamental indexing and minimum volatility.
Do you plan to increase your use of smart beta?
We are using smart beta for 4.56% of the overall portfolio and yes, we plan to increase this. We have gone through a process of selecting managers for enhanced global sovereign credit and global quality equity indexation mandates which both use smart-beta indexes as benchmarks.
We haven’t announced these mandates yet, but our external asset managers for smart-beta mandates are BlackRock, State Street, UBS and Nomura for global equity and BlackRock and State Street for minimum volatility.
What are the fund’s objectives as you evolve under this new structure?
We need to integrate and share investment research resources, make flexible adjustments and gradually rebuild the investment portfolio. We will also continue to promote socially responsible investment and supervise enterprises in fulfilling their social responsibilities.
We plan to increase investment in infrastructure to diversify portfolio risks. We will review our core and satellite asset allocation to improve investment performance. At the same time we will introduce a risk budget into the labour fund asset allocation and strengthen risk control.