Taiwan's BLF set to gain $5bn in January after record 2022 loss

Taiwan’s Bureau of Labor Funds (BLF) expects investment performance in 2023 to stabilise, following a record investment loss of $12.7 billion in 2022, as it foresees unprecedented rate hikes coming to an end.

“Although the global economy is set to slow down, company earnings are depressed, and geopolitical uncertainties remain, the interest rate hikes are coming to an end, and global economic growth is expected to stabilise,” said Liu Li-ju, deputy director general of BLF.

One industry expert that AsianInvestor spoke to said the fund is poised to book gains on its portfolio in January as financial markets improved.

Liu Li-ju, BLF

In 2022, BLF suffered an investment loss of NT$382.1 billion ($12.7 billion), or 6.68%, versus a 9.67% gain in 2021.

The government entity manages eight pension funds in Taiwan, including six labour funds, which account for 92.3% of total AUM. 

It was BLF’s worst annual performance since its inception in 2014. As of the end of 2022, assets under management stood at NT$5.99 trillion ($199.2 billion), up from NT$5.58 trillion in 2021.

Performance in 2022 was pressured by a volatile global market, a global economic downturn, rate hikes, Russia-Ukraine tensions, and China’s Covid lockdown that disrupted the global supply chain, noted Liu when announcing the results on February 1.

“With the recovery of the financial market in the future, investment performance is expected to stabilise,” she said. BLF didn’t respond to an AsianInvestor request to elaborate on its investment outlook for 2023.

That view is echoed by industry experts: research firm Cerulli Associates estimates that based on data from January, BLF is set to book a NT$150 billion (about US$5 billion) gain in the first month of 2023, after suffering a NT$110 billion loss in December 2022.

“I believe it is a good start, and we can take a cautious look at the new year,” the firm’s research analyst Joanne Peng Xuan told AsianInvestor.

The entity’s six labour funds lost NT$352.9 billion, or 6.71% in 2022, with AUM standing at NT$5.54 trillion as of end-2022.

“The labour funds have an average annualised return of 4.05% in the past ten years. The long-term investment performance is still stable,” said Liu.

Compared to 2021, the portion of the six labour funds’ fixed income investment shrank by 2.4% to 42.9%, equity investment grew by 1.5% to 44.4%, and alternative investment increased by 0.9% to 12.7%.

Meanwhile, assets managed by external managers grew by 1.25% to 52.35% in 2022.

BLF doesn’t disclose asset allocation of the other two funds it manages, which are the National Pension Insurance Fund and the Farmers' Pension Fund.

MARKET TIMING CRUCIAL

According to data compiled by Keystone Intelligence, BLF’s Global Enhanced Fixed Income, Global Enhanced Equity, and Global REITs (Real Estate Investment Trust) mandates that started in the first quarter of 2022 were the worst performers among its global mandates, suffering double-digit losses.

“The performances of these Taiwan government pension funds rely heavily on the performance of the delegated managers and the market timing when releasing the funding to these managers,” said Donna Chen, president of Keystone Intelligence, a Taiwan-based financial advisory firm.

Donna Chen, 

Keystone Intelligence

Chen stressed that the timing of issued mandates are very important to performance as the tenor of BLF’s mandates are usually just five years.

“It’s crucial for BLF to have the right market outlook for the next six to 12 months in place to decide when to start a new mandate,” she told AsianInvestor.

As the interest hike is set to continue at least in the first half of 2023, Chen suggested BLF might watch the market closely, and to be prudent and relatively conservative in issuing new mandates.

“Looking forward, the strong US dollar attributed to the US interest hike is likely to put a hold and weaken in the second half of 2023. China equity, emerging market equity and emerging market fixed-income and investment grade bonds are likely to benefit from post-Covid recovery and possible interest rate cut,” Chen added.

STEADY ALLOCATION

Joanne Peng, 

Cerulli Associates

Based on the likely positive returns for BLF in January, Cerulli's Peng said BLF is unlikely to make big changes to its asset allocation in 2023.

For example, the analyst is bullish on Taiwan stocks. Within BLF's domestic equity portfolio, shares in the electronic industry accounted for 65.7%, followed by finance and insurance, accounting for 15.3%, Peng noted.

"I don’t think there will be obvious changes in allocation," she said.

Nevertheless, Peng stressed that the possibility of military conflict in the Taiwan Strait and the deteriorating China-US relations have to be taken into consideration in 2023.