Taiwan’s PSPF invites bids for NT$30bn equity mandate

The domestic portfolio will be split among six managers and issued early next year now that valuations are below their historical averages. Timings will be dictated by global conditions.
Taiwan’s PSPF invites bids for NT$30bn equity mandate

Taiwan's Public Service Pension Fund (PSPF) is inviting fund managers to bid for a five-year domestic equity mandate of up to NT$30 billion ($979 million), while carefully monitoring broader economic developments that might impact the domestic market.

The NT$561.1 billion state pension fund, which serves the retirement needs of civil servants, teachers and military personnel, announced the invitation last Friday. Fund managers can submit their pitches on or before December 17.

The mandate will likely be split among six asset managers, which will be awarded NT$5 billion at most for each. They are required to follow an relative-return strategy and should meet an annual target return of 50 basis points above Taiwan’s Taiex Total Return Index, which has dropped 2% since the beginning of the year.

The annualised ex-post tracking error should not be more than 6%, according to the invitation.

PSPF has not issued a mandate this year, whether domestic or overseas. This is the first one the state pension fund is preparing and will be issued early next year.

As of October-end, 40.18% of its investable assets were managed by external managers, with domestic mandates accounting for 9.45% and overseas mandates the rest.

The investment return for the first 10 months of the year was only 0.26%, presumably because of the slump seen in global equity markets, and was 7.15% in 2017.

PSPF said it reduced its allocation to domestic equities when valuations were high but is planning the new domestic mandate now that these valuations are below their historical averages.

The funds will be granted to investment managers in batches next year once the mandate is issued, an executive at PSPF who declined to be named told AsianInvestor, but the timings will depend on market conditions.

To that end the fund will closely monitor global market conditions, the executive said, citing the nagging uncertainty generated by the China-US trade tensions. Although a 90-day truce in the trade dispute has been announced, what happens after remains unclear, he said.

Another determining factor will be global monetary conditions, with the US Federal Reserve set to continue reducing its balance sheet and raising interest rates – though potentially also pausing – and the Bank of Japan and European Central Bank tipped to follow suit. Such an environment could reduce fund flows globally, the PSPF executive said.


Relative-return, or indexing, strategies require asset managers to track the stocks in a benchmark index.

It likes to target the Taiex Total Return Index, which captures the reinvestment of dividends paid by constituent companies, giving a better representation of the true market return, he added.

The mandate's investment scope includes listed and over-the-counter (OTC) shares, and equity index futures for hedging purposes. Idle cash can be put in treasuries, short-term notes, or bank deposits.

Any investment in a single listed stock cannot account for more than 10% of the entrusted amount or cannot exceed the proportion of the stock’s market value in the TAIEX Total Return Index, among other investment criteria.

In contrast, absolute-return – or total-return – strategies were used for PSPF’s $800 million five-year global fixed-income mandate announced in October 2017. The mandate targeted US dollar three-month T-bill yields plus 2.5%.

The Bureau of Labor Funds (BLF), a bigger state pension fund in Taiwan, has also employed absolute-return strategies. It issued a request for proposals in October for a five-year domestic investment mandate of up to NT$42 billion. 

BLF’s domestic mandate is not limited to just equities. Other eligible assets include fixed-income assets such as government, corporate and financial bonds. The investment target is 200 basis points above the average year-end return of the last five years, as announced by the Taiwan Stock Exchange Corp.

Liu Li-ju, deputy director general of BLF, told AsianInvestor the mandate is designed to give fund houses investment flexibility to reap returns in a volatile market.

To be able to bid for PSPF’s mandate, asset managers must have been in the business for more than three years and have managed more than NT$10 billion in total in domestic mutual funds, according to the invitation.

The pension fund will first check if the applicants are qualified in the first stage, before reviewing their proposals and announcing the result, likely in mid-February.

*This story is updated as PSPF subsequently clarified to AsianInvestor that they were pursing a relative-return strategy.

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