BLI to mandate $1 billion this year

The Taiwanese public pension fund will first seek out an investment consultant to help it select fund managers.
The $15 billion Bureau of Labour Insurance, one of TaiwanÆs big-four public institutional investors, plans to outsource up to $1 billion to global investment managers this year, says Hsu Yenshan, executive vice president, a former academic who has been responsible for asset management since last year.

He joined the BLI just before it made its first foray offshore, when in October it mandated and funded $100 million each to Alliance Capital and Pimco for global fixed-income (benchmarked against the Lehman Global Aggregate Index) and Alliance Bernstein and Wellington International Management for global equities (using MSCI World).

In addition to seeking diversification, the BLI faces pressure to improve investment returns. Because of government-mandated benefits that are generous and low contribution rates, the BLI is under-funded, with liabilities 2.5x greater than its assets. Therefore HsuÆs total portfolio target return is 5-6%, versus the 3.8% the BLI made in 2005 (although this still isnÆt enough to close the gap).

The organisation also faces regulatory restraints on its asset allocation, including a minimum 50% placed in fixed deposits, a maximum of 30% in equities and no more than 10% overseas.

This month, the BLI made internal revisions to these guidelines that it will now put to the government, although it will require the approval of the Legislative Yuan to effect a change. Ideally the BLIÆs management want all restrictions scrapped but will settle for generous easing, and accepts that it will still face a 35% constraint on offshore investing (the same for TaiwanÆs life insurance companies). Hsu says the BLI also wants more flexibility in the use of derivatives, which the government may be able to push through this year so long as it remains limited to hedging purposes.

The immediate priority, however, is to bring aboard an investment consultant to help with the BLIÆs ambition to outsource $1 billion. Hsu says the BLI has never had a proper strategy for international investing, and was pressured by the government to make its first offshore mandates. But since his arrival, the organisation has drawn up an investment policy, selected benchmarks and decided to invest as much overseas as possible.

He intends to send out RFPs to international consultants in the next week or so, and hopes to make the hire by early summer. The consultantÆs job will be to help determine the BLIÆs international asset allocation, as well as assist in selecting and monitoring global fund managers.

One area that the BLI wonÆt touch is absolute-return strategies. It had included this as a separate mandate last year but realised this would require derivatives or aggressive tactical rebalancing. Hsu says this was a learning process and there is no plan to seek mandates in this regard.

Hsu doesnÆt know yet which asset classes the BLI will settle on, but believes it will be tilted toward equities in the United States and in emerging markets, including both active and indexed strategies. He expects the fixed-income mandates to be pretty similar to those from the first round, again tracking the Lehman Global Aggregate.
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