Investment strategy and prospects of the Labor Funds

Huang, Chao-Hsi

Director-General,

Bureau of Labor Funds, Ministry of Labor

Global Association of Risk Professionals

DEC 23, 2014

The views expressed in the following material are the

author’s and do not necessarily represent the views of

the Global Association of Risk Professionals (GARP),

its Membership or its Management.

Outline

國內委託經營之回顧與現況

Ⅰ Preface

Ⅲ

委託經營受託機構之遴選機制Ⅳ

Ⅴ

Organization Structure and Operation

MechanismsⅡ

Ⅵ

Utilization Strategies

Overall Utilization Performance

Future Prospects

Conclusion

3

Ⅰ . Preface

On February 17, 2014, the Council of Labor Affairs was upgraded to become the

Ministry of Labor (MOL), marking a milestone in the history of labor

administration in our country.

Meanwhile, the Bureau of Labor Funds (BLF) was restructured from the former

Labor Pension Fund Supervisory Committee to take charge of the overall

investment management for various labor funds and also commissioned by the

Ministry of Health and Welfare (MOHW) to utilize the National Pension Fund. It

shows not only that the government places high importance on enhancing

economic security for the labor’s retirement, but also it means the BLF shoulders

the great responsibility for wide expectation from the labor.

Since established, the BLF has seamlessly integrated all organizational

mechanisms such as the funds’ takeover, personnel allocation, regulation making

and revising, and office relocation.

Thus far, notwithstanding facing constant fluctuation in the global financial

markets, the investment performance of the funds keeps a relatively stable growth

through BLF’s diversified portfolio arrangement.

4

Ⅰ

Sharing

Resources

Promoting the

Efficiency

of the Organization

Integrating

Information and Risk

Control System

Centralizing

Professional

Talents

Bureau of

Labor Funds

Labor Pension Fund Supervisory Committee

Labor

Pension Fund

Labor

Retirement Fund

Bureau of Labor Insurance

Labor

Insurance FundEmployment

Insurance Fund

Occupation

Incidents

Protection Fund

Arrear Wage

Payment Fund

Ministry of

Health and Welfare

National

Pension Fund

5

Ⅱ Organization Structure and Operation

Mechanisms

6

Department of

Labor Insurance

& Department of

Employment Welfare

and Retirement, MOL(Overseeing the

implementation)

Labor Funds

Supervisory

Committee, MOL(Supervision)

Ministry of Labor(Establishing policies

and regulations)

Ⅱ-1. Tripartite Framework of Collection-

Payment, Utilization and Supervision

Funds' Collection & Payment and Accumulation Status

Annual investment performance

Investment

Management

Collection &

Payment,

Custody 7

Ⅱ-2. Functional Organization Structure

Bu

rea

u o

f L

ab

or

Insu

ran

ce

La

bo

r Pen

sion

Fu

nd

Su

perv

isory

Co

mm

ittee

Planning and

Audit Division

Domestic

Investment

Division

Foreign

Investment

Division

Finance

Management

Division

Risk

Management

Division

Personnel

Office

Accounting

OfficeSecretariat

Civil Service

Ethics Office

Bureau of Labor Funds

Director-general

Deputy Director-

general

Chief Secretary

8

Ⅱ-3.Strenghten Strategy-Making Mechanism

Investment Strategy Committee Meeting

Duties

Draw up or adjust the annual asset allocation and investment plan

Plan or adjust the investment strategy on equity, bond, and beneficiary certificates…

Review plans on mandate projects, annual performance, fund raising or decreasing,

and contract extension or termination

Loans to governments at all levels and state-run enterprises

Review real estate investment, newly added investment items and major issues

Duties

Risk Control （Risk Management

Division）

Audit Control(Planning and

Audit Division)

Investment executionand Reviewing

(Domestic investment Div, Foreign

Investment Div, Finance Management Div)

9

Ⅱ- 4. Execute External and Internal Auditing

Mandated Institutes

Custodian Bank

Bank of Taiwan(For the Labor Retirement Fund)

Domestic Investment Division

Foreign Investment Division

Finance Management Division

Risk Management Division

Accounting Office

Au

dit G

uid

elin

es

for th

e L

ab

or F

un

ds

Execu

te b

y P

rofe

ssio

nal A

ud

itors

Dra

w U

p A

nn

ua

l Au

dit P

lan

1

0

Regular

Project

Documentary

On-Site

External Auditing

Internal Auditing

Ⅲ Utilization Strategies

11

Investment

Research

Resource

International

Supervisory

Consultant

Share

Integrate

&

Information

Systems

Ⅲ-1. Integrate & Share Resources

12

Impact Analysis

and

Countermeasure

Construction

Severe Fluctuation

in Risk ValuesSharp Decrease

On Investment Returns

Data

Collection

Economic and

Financial

Information

Reviewing

Immediate

reaction to

negative

information

against Funds’

management

Ⅲ-2. Strengthen Risk Control

1.Strengthen risk consciousness

13

Risk Budgeting

Risk Tolerance

Risk ValueAnalysis

Risk Surveillance

Surveillance onInvestmentprocedures Monitoring on

Risk Limits

Risk Controland

ManagementTeam

Risk AssessmentMonthly

Stress Test

QuarterlyBacktracking

Test

RegularRiskReport

1. Daily Risk Calculation

2. Monthly Review on Five

Major Risks

1. Weekly Review on

Price Risk and

Liquidity Risk for

Mandate Investments

2. Monthly Review on

Liquidity for Individual

Stocks

Ⅲ-2. Strengthen Risk Control (con’t)

2.Risk Management Mechanism

14

Low down

Fee rate of

the Foreign

Custodian Bank

Low down

commission

rate of the

brokers

Increase

revenue of

the domestic

bonds

Ⅲ-3.Use Advantage of Economies of Scale

15

Assets Under Mangement

1,714

2,641

579

2,369

0

500

1,000

1,500

2,000

2,500

3,000

Date

NT$ 1 billion

Labor Pension Funds

Labor Funds

Jul 2, 2007 Feb 16 ,2014 Nov 30, 2014

Ⅲ-4、Extend Scope of Diversified Investment

2Catch International

management trend

Establish global

Investment strategy3

Allocate Mandate and

In-house investment1

1. Mandate types

2. Selection and supervision

3. Global investment

management data

Select international consultancy to

assist in global diversified investment

16

Ⅳ Overall Utilization Status

17

2,3772,410

2,4232,452

2,482

2,5142,547

2,5722,598

2,641

2,200

2,250

2,300

2,350

2,400

2,450

2,500

2,550

2,600

2,650

2,700

Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Ⅳ-1. Rapid Growth on Assets under Management

The AUM of labor funds grows rapidly up to NT$ 2 trillion and 640

billion at the end of Nov 2014. Though facing constant fluctuation in the

global financial markets, the Labor Funds still earn return steadily and

grow continuously with prudent asset allocation and risk control

mechanism.

18

NT$1 Billion

Ⅳ-2. Moderate Asset Allocation

Assets AllocationAmount

(1 billion)Percentage

Domestic

Bank Deposits 488 18.5%

Bonds 414 15.7%

Equities 642 24.3%

Alternatives 2 0.1%

Others

(included insured

loan、agricultural

insurance fund loan)

35 1.3%

Subtotal 1,581 59.9%

Foreign

Bonds 499 18.9%

Equities 480 18.2%

Alternatives 81 3.0%

Subtotal 1,060 40.1%

Total 2,641 100%

Domestic Investment

59.9%

ForeignInvestment

40.1%

Mandate

43.5％In-house

56.5%

Nov 30,2014

Note：1. Alternatives include real estate, infra-

structure, gold & commodities ETF and

hedge fund.

2. Fixed income includes bank deposits,

domestic & foreign bonds, loans to

insurees and Loan to agricultural

insurance fund.

Equities

42.5%

Alternatives(1)

3.1%

Fixed income(2)

54.4%

19

Equities

42.5%

Ⅳ-3. Steady Assets Allocation (con’t )

Russia 0.79%Europe (29.13%)

Eurozone 14.76%

UK 8.60%

Switzerland 2.08%

Norway 0.56%

Poland 0.80%

Others 2.33%

North America (38.21%)

US 32.91%

Canada 2.89%

Mexico 2.41%

Asia(18.48%)

Japan 6.46%

China 1.93%

South Korea 2.58%

Malaysia 1.51%

Hong Kong 2.05%

Singapore 1.00%

India 0.55%

Others 2.40%

Australia 3.01%

New Zealand 0.35%

South Africa 1.56%

Brazil 2.70%

註： Other Areas(Middle East, North Africa, South America, etc.) 5.77%

By the end of November 2014, the foreign investment of the labor funds amounted to US$ 34.2 billion.

20

Ⅳ-4. Beating target return

Till the end of November this year, the AUM of the labor funds amounted to NT$2.6

trillion with a ROI of 6.05% and return of NT$146.1 billion, which beat the target of

88.6 billion by 57.4 billion. If NT$10.6 billion of National Pension Fund’s gain further

added, the total return reached NT$156.7 billion.

FundReturn

(NT$ 1 billion)Rate of Return

Rate of Expected Annual Return

Labor Pension Fund ( The New Scheme Fund )

71.7 6.12% 4.09%

Labor Retirement Fund (The Old Scheme Fund )

41.3 7.11% 4.05%

Labor Insurance Fund 32.0 5.81% 3.36%

Employment Insurance Fund 0.9 0.97% 1.11%

Occupation Incidents

Protection Fund0.09 0.81% 0.93%

Overdue Wages Payment Fund 0.15 1.53% 1.51%

AUM of Labor Funds 146.14 6.05% -

National Pension Fund 10.58 6.03% 3.39%

Total AUM 156.72 6.05% -21

Ⅴ Future Prospects

22

Ⅴ-1. Strengthen Global Portfolio Strategy

AlternativeAllocation

Nov,2014

Central

Allocation

2014

LPF 4.72% 8%

LRF 2.97% 4%

BLI 0.58% 5%

EM Debt

EM Equity

Alternative

Investment

Regional

Investment

Core InvestmentGlobal Equities and Bonds

Adopt Strategic Index

（Smart β）

Asia ex-

Japan

Equity

AlternativeInvestment

23

Ⅴ-2. Participate in Local Infrastructure Projects

Invest in government bond, state-owned enterprises’ corporate

bond and commercial paper

As of the end of November this year, BLF has invested NT$58.8 billion in

the above asset classes, which helps domestic infrastructure to be

funded. We’ve practically participated in domestic infrastructure projects .

Loan For Economic Constructions

If needed in the future, loans would be granted to governments at all

levels and the state-owned enterprises by our funds.

• Respond to the Economic Power-Up Plan of the Executive Yuan by

allocating investments on domestic infrastructure projects.

BLF would make proper investments on internal public construction

plans by means of providing financial capital under the security,

profitability and liquidity of the funds.

24

Ⅴ-3. Promote Socially Responsible Investment

The principle of Socially Responsible Investment (SRI) has formally been

incorporated in the Investment Policy statement of the Labor Funds which

takes corporate social responsibility under investment consideration in

addition to pursuing profitability.

In the year of 2011, the Labor Pension Fund adopted the “Taiwan RAFI

EMP 99 Index” to launch relative return mandates In order to lead business

entities to increase employment.

This year TWSE launched the Taiwan High Compensation 100 Index and

the BLF has soon completed a selection of investment mandate adopting

such index as the benchmark so as to promote the idea of raising salary for

the labor.

Till the end of November this year, the labor funds has made NT$465 billion

of investment, which is about 95% of our domestic equity position, to the

enterprises which is approved with better CSR performance.

25

Ⅵ.Conclusion

Looking to 2015, the global economy is generally

expected to recover gradually. Nevertheless, lots of

uncertainty remain exiting and need to be responded

carefully.

The Bureau of Labor Funds shall continue to perfect

our investment mechanisms on the ground of current

basis and exert synergistic effects so as to deepen

and widen the Funds’ global portfolio strategies for

the laborers’ long term benefits.

26

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