Taiwan pension fund prepares second outsourcing

Taiwan's NT$140 billion ($4.2 billion) Public Service Pension Fund, a unit of the Ministry of Civil Service, is looking to hire an investment consultant by summer to help it conduct a second round of international investment mandates later this year. The consultant will also advise on the size and asset classes of the second tranche.

Foreign fund managers in Taipei expressed relief at the news. The PSPF chose five managers in December for its inaugural overseas investment, and industry sources say the whole thing came down to the lowest fee level. Although 40 firms put in bids, some houses held back because of the selection criteria, while other executives say they bid in the hope of negotiating a better deal.

Fund managers and the PSPF declined to discuss fees. Michael Chen, auditor at PSPF, acknowledges fees were important in the selection process, but says the most important factor was the ability of fund houses during presentations to clearly elucidate their investment philosophies.

Allianz Dresdner Asset Management, JPMorgan Investment Management and UBS Asset Management won global balanced mandates, while Barclays Global Investors and State Street Global Advisors won global enhanced equity mandates. Each mandate was for $100 million. The PSPF carried out the entire selection process itself.

In addition to seeking a consultant to help the PSPF select fund managers for another round of outsourcing, slated for the end of the year, the pension fund also wants help finding a transition manager.

Chen says the transition manager would be held in reserve, in case the PSPF needs to fire one of its original managers and shift those assets to another's (although no such action is now under consideration). "We need a transition manager who would be familiar with the fund managers in our first international tranche," he says.

Although the PSPF has never used an investment consultant for manager selection or monitoring, it has engaged Watson Wyatt to draw an asset-liability matching study, which recommends that over the long run, the pension fund diversify up to 50% of its assets overseas.

The PSPF has also recently revised its internal guidelines to allow it to invest in derivatives, real estate and venture capital. It has not yet considered such moves, but Chen believes over the next few years some of these may be attractive.