Taiwan’s biggest pension fund, government-controlled Labor Funds, has moved to increase its exposure to alternative investments but has ditched structured products due to their “high risk and complicated structure”.
Leo Lee, head of foreign investment at the Bureau of Labor Funds, told SRP that structured products are not included in the list of preferred investment yet. “Structured products require higher risk tolerance on the part of the investors and their structures are rather complicated,” he said. “Also we’d prefer products with high liquidity and transparency.”
Alternative investments being considered by Labor Fund include stocks, REITS, hedge funds, private equity funds, commodities and energy products. The fund, which has $83.3bn in assets, will put an additional $3.6bn into alternative investments in 2015 from the $1.6bn being invested in alternative investments currently.
“Structured products are not fully welcomed by Taiwan officials in the aftermath of the financial crisis in 2008,” said Samson Tu, fund manager at Uni-President Assets Management. “At the moment structured products are still not allowed to be added to mutual funds' investment list, far less the government-controlled pension fund, but this has nothing to do with the design of structured products.”
According to Tu, as long as the products’ risk assessment and transparency are in line with the standards of the Bureau of Labour Funds, he saw no reason for fund managers not using structured products as part of their alternative investments.
South Korea
Structured products are a popular investment among pension funds in South Korea because they can provide 100% capital protection. The demand for structured products in the pension space is also evident in Japan after the launch of new pension fund regulation which also gave the green light to the largest pension fund, the Government Pension Investment Fund (GPIF), to increase its allocation to alternative investments including structured products.
“I think the problem is about the secondary market liquidity and opaque pricing of structured products in Taiwan,” said Mark Liu, head of global markets at Société Générale, who told SRP that the lack of an efficient secondary market for structured products traps investors into a buy-hold situation, while the underwriting cost of the products are unknown due to the unclear pricing.
He added that even though structured products can be 100% capital-protected and with limited risk, the limited upside revenue still makes it unfavourable. “[These products] are not especially attractive compared with strip bonds which generate a pretty good return as well,” he said. “Also structured products with decent coupons have tenor up to ten years or more in Taiwan, which is too long for fund managers.”