PSPF seeks to offset volatility with NT$20b mandate

The pension fund intends to split the domestic portfolio between four asset managers. It explained to AsianInvestor why it is employing an absolute-return strategy to do so.
PSPF seeks to offset volatility with NT$20b mandate

Taiwan’s Public Service Pension Fund (PSPF) is inviting bids for a five-year domestic equity investment mandate of up to NT$20 billion ($654.6 million) that pursues strategies that can counter volatility in the local stock market.

The NT$585.68 billion state public pension fund, which serves the retirement needs of civil servants, teachers and military personnel in defined benefit schemes, announced the invitation last Friday (October 18). Fund managers can submit their pitches on or before November 4 while the results will be announced early next year.

The mandate will likely be split among four asset managers, meaning that each is likely to be awarded NT$5 billion. They are required to follow an absolute-return strategy to meet a target return of 200 basis points above the average dividend yields of the stocks listed on the main board of the Taiwan Stock Exchange over the last five years. 

PSPF chose an absolute-return strategy when designing the mandate mainly to diversify the investment strategies in its investment portfolio. The pension fund mostly uses relative-return strategies for its current allocations, a senior official at PSPF told AsianInvestor on condition of anonymity.

In addition, the counter-volatility strategy should be a useful defensive measure in uncertain market conditions, due to its flexibility. While it is an equity mandate, the chosen asset managers can opt to invest in public or over-the-counter equities, or use exchange-traded funds, or buy into stocks from initial public offerings.

Crucially, they can also raise or lower the overall exposure of their allocations to the equity market, depending on market conditions. That means the fund houses could reduce equity investments to minimal levels and put the rest of the entrusted amount into bonds or cash-like instruments, if they felt this would achieve the highest possible return, the executive said.

This means the fund houses can also invest in lower-yielding fixed income assets, including government bonds, financial bonds, corporate bonds, asset securitisation products. Plus they use equity index futures for hedging purposes, while they are required to place idle cash in instruments including treasury bonds, short-term notes or bank deposits.

While flexible, the mandate has some limitations. For example, asset managers cannot accumulate more than 5% of the issued shares of any single listed stock, and they are not allowed to invest more than 5% of the capital they have received from PSPF into a single ETF, among other investment restrictions.

The latest mandate follows PSPF having awarded a NT$30 billion five-year domestic equity mandate using a relative-return strategy early this year. Asset managers for that strategy are expected to meet an annual target return of 50 basis points above Taiwan’s Taiex Total Return Index, while the annualised ex-post tracking error should not be more than 6%.


PSPF's decision to issue a large domestic mandate is something of a reversal of its recent asset allocation decisions.

Donna Chen, the founder and president of Taipei-based market research firm Keystone Intelligence, told AsianInvestor the pension fund allowed nine of its domestic mandates to expire over the past 12 months, while only renewing two during the same period.

As a consequence the assets under management of PSPF’s externally run domestic mandates fell from $2.35 billion in June 2018 to $1.35 billion in June this year. In contrast, the combined AUM of its overseas external mandates rose from $5.8 billion to $6.33 billion over the same period. The new mandate will increase its domestic mandates by $654 million, to a total of $2 billion.  

While PSPF’s investment portfolio as a whole is almost evenly divided between domestic and overseas investments, external fund managers were tasked with investing just 7.1% of its AUM in domestic mandates as of June, while they were assigned 33.5% for foreign market investing, according to Keystone Intelligence.

One reason the pension fund has offered fewer domestic mandates is that fixed income investment opportunities in Taiwan are difficult to come by, courtesy of a small market with low returns. Taiwan’s 10-year government bonds deliver a yield of less than 1%, whereas it’s possible to find yields of 3% to 5% in equivalent overseas government bonds, the unnamed executive said.

Indeed, similar concerns have been voiced by life insurance companies in Taiwan. Cathay Life said in July that the island’s bond issuance is insufficient and the returns too low compared to those available in overseas fixed income, even after currency hedging costs are taken into account.

Until that changes, Taiwan’s asset owners look set to keep raising their overseas investments.

Source: Keystone Intelligence (click for full view)


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