TaiwanÆs LPF seeks new investment consultant

Taiwan's Labour Pension Fund (LPF) is announcing a new RFP for an investment consultant. The news has come as a surprise to industry execs serving Taiwan's institutional market. That's largely because Mercer, traditionally strong in relations with government-affiliated associations in the region, completed a comprehensive long-term asset-allocation plan for the LPF in March last year.

It took Mercer eight months to labour over that piece of research. However, the unfortunate timing of the recommendation -- put together in the trough of the crisis -- means the assumption of asset class behaviour and asset growth used in the actuarial calculation for assets and liabilities have since changed at the LPF.

Mercer's plan is getting binned before it has even started to be taken seriously by LPF officials, say industry executives. And now the fund is restarting the entire process and looking to obtain a second opinion -- from a new consultant -- on how it should invest its $30.19 billion.

The LPF is now Taiwan's most venerable pension-fund investor. It had a testing time during the financial crisis, along with the country's other pension funds. However, unlike the others, it hasn't experienced a drop in its asset size.

Thanks to continued new contributions, as stipulated by law from Taiwan's pension reforms implemented in July 2005, the asset pool at the LPF's 'New System' (its defined-contribution body) is rising swiftly. It has gone from NT$127.8 billion ($4 billion) in 2006 to NT$234.7 billion in 2007, NT$340.3 billion in 2008 and NT$472.4 billion in 2009. The New System reported an investment return of 11.84% last year.

Its now-closed defined-benefit 'Old System', meanwhile, also recorded gains. Asset size has been rising gradually from NT$420.1 billion in 2006 to NT$459 billion in 2007, NT$471.6 billion in 2008 and NT$496.8 billion as at the end of 2009. Returns were up 13.40% last year.

According to Lee Ruey-ji, vice chairwoman of the LPF's supervisory committee in Taipei, the fund is taking the view that the global economy is already out of recession and that the world is entering a phase where economic expansion will be driven by loose monetary policies. The fund believes the recovery is still at its early stage and that the expansionary trajectory is subject to multiple variables.

The LPF is also taking a more active stance in managing its outsourced investments. In a bid to strengthen performance, Lee says managers that underperform relative to their peers will be banned from entering future mandate bids.

Contrary to the approach of many Asian investors now eyeing the possibility of interest-rate tightening with caution, the LPF is continuing to build on its allocation to fixed income. In particular, instead of doing this by selling risk assets, Lee says the LPF is bolstering its fixed-income allocation by shifting its unused cash position. The LPF also quietly funded four Asia-Pacific equity mandates in November (see table below).

The LPF has yet to publish detailed results for its full-year performance in 2009. According to its last published report, as of the end of November, the Old System had a startlingly large cash position of 42.27%, 5% of which is held in local commercial paper.

The Old System has an 11.29% allocation to domestic fixed income and securitised assets, 0.9% in loans to government and public institutions, 9.55% in domestic equities and 4.14% in overseas investments, which it manages internally. The fund outsources 13.92% of its assets to domestic asset managers and 12.93% to overseas firms.

Under the New System, 31.94% is held in cash, 0.72% in commercial paper, 12.69% in domestic fixed income, 0.55% in domestic equities and 5.77% in overseas investments. 24.15% and 24.18% are outsourced to domestic and overseas institutions respectively.

Performance of outsourced overseas mandates as of November 30, 2009