How Taiwan’s largest pension revamps its bond strategy amid rising rates

Taiwan’s Bureau of Labor Funds (BLF) has made substantial changes to its bond investments over the past year, both in internal operations as well as strategic exposures, amid a rising-rate environment.

In particular, the pension fund consolidated its different bond investment teams into one unit, and turned more aggressive in overseas bond investments, and not just for the short term. It plans to diversify its exposure and enhance performance in the long run.

Before 2022, BLF's fixed income investment tempo was relatively slow in a globally low-rate environment.

Su Yu-ching, BLF

“What we didn’t pay much attention to in the past was that a lot of corporate bonds issued by internationally renowned companies are actually quite good, with decent yields,” Su Yu-ching, BLF’s director general, told AsianInvestor in an exclusive interview.

“Their credit ratings are just as good as financial bonds,” Su said.

Since the US Federal Reserve started its rapid rate hikes from March 2022's 0%-0.25% all the way to 5%-5.25% currently, BLF, like many Asian asset owners have done over the past year, has been increasing its exposure to overseas bonds, given that they have been performing better than the Taiwan fixed income market.

“Of course, it has foreign exchange risks. But from the current perspective, we can be more aggressive for this exposure,” Su said.

BLF has been increasing its held-to-maturity (HTM) positions, while also expanding the range and types of bond components.

Although financial bonds still make up the majority of the portfolio, the pension fund is broadening the investment universe to include more developed-market corporate bonds and using a more diverse trading approach.

“I believe it will help drive our long-term investment performance over time,” said Su.

It is focusing on supranational issuers, highly regulated financials such as Global Systemically Important Banks (G-SIBs), as well as big leading companies with steady fundamentals across different industries.  

Its previous sweet spot was issuers with ratings of A- or higher.  

"Looking forward, with the backdrop that the US labor market is easing, European inflation is still a challenge but seems to be slowing down. The tightening monetary policies within major economies should be easing finally,” Su said.

“BLF is going to closely monitor the market interest rate...to make allocations to fixed income funds and ETFs, and also look into good opportunities to add more exposure in the HTM bond investment."

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BLF is the largest pension body in Taiwan, managing eight pension funds. As of the end of May, BLF managed a total of NT$6.26 trillion ($201.1 billion), according to the latest data released on Monday.

The pension fund returned 5.43% in the first five months of 2023. Its 10-year average annualised return rate was approximately 4.6%.

Fixed income accounted for about 43.85% of BLF’s assets under management (AUM) as of end-May, while equities and alternative assets weighed 43.7% and 12.45% respectively.

The structure has remained stable since March 2022, when fixed income exposure was at 44.38% and private assets accounted for 12.49%.

IN-HOUSE CAPABILITIES

Currently, there are 12 members in BLF's in-house fixed income investment team to look after overseas bond investments, and seven members focus on onshore bonds. 

Besides the overseas exposure, BLF also strengthened its internal capabilities on Taiwan bond investments.

“I think we need to enhance our investment capability, especially in research, for in-house investment management on both domestic equities and bonds,” Su said.

As rates in Taiwan kept going up in the past year, BLF saw the necessity to strengthen its input into investments that were directly related to rate movements.

Hence, it consolidated domestic bond and short-term bill investments into one unit.

“In this way, we can evaluate the trend of short-term and long-term interest rate movements altogether, which can improve the efficiency of our asset allocation and deployment,” Su said.

EXTERNAL EXPERTISE

To ride the opportunities in the bond market, BLF has also been more proactive in deploying assets with external fixed income managers — around 51.6% of BLF’s assets were outsourced.

BLF used to regularly review the performance of external managers and give a top-up to outperforming managers.  

With interest rates skyrocketing, BLF conducted a comprehensive review of its fixed income exposure and made several additional tactical adjustments, especially in core fixed income mandates.

If one fund manager was performing well, the pension fund would gradually increase positions with the manager whenever there was a pullback in the market.

“In the past year, we’ve added substantially to outsourced bond investments,” Su said. This was compared to the period before 2022, when its outsourced fixed income positions were shrinking.