State funds barred from small-cap stocks

STRICTER OVERSIGHT::The restrictions came after allegations of illegal trading with the Labor Insurance Fund, but the FSC said it may damage small-cap stocks

By Helen Ku  /  Staff reporter

Tue, Nov 20, 2012 - Page 13

The government restricted state fund managers from buying small-cap stocks in the latest attempt to minimize investment risk, government officials said yesterday.

The restriction came after the Financial Supervisory Commission (FSC) discovered earlier this month that four fund managers involved in the handling of four government funds may have engaged in illegal trading activity. The commission said stricter oversight over the management of state funds would be needed.

Former ING Securities Investment and Trust Co (安泰投信) vice president Sam Hsieh (謝青良) and his peers were suspected of using the government’s Labor Insurance Fund and Labor Pension Fund to make huge profits by manipulating the stock price of Ablerex Electronics Co (盈正豫順電子) via dummy accounts.

The Bureau of Labor Insurance sent documents to fund managers who help manage labor funds on Wednesday, barring fund managers from selling small-cap stocks with a market capitalization of less than NT$1 billion (US$34.29 million) and purchasing such stocks from foreign companies under abbreviated codes beginning with the letter “F.”

Labor Pension Fund Supervisory Committee vice chairperson Liu Li-ju (劉麗茹) said the committee has advised the Labor Pension Fund manager to wait until the appropriate time to sell small-cap stocks under NT$500 million or small-cap “F”-prefixed stocks.

Labor Insurance Supervisory Commission (LISC) chairperson Kao Boa-hua (高寶華) also confirmed that the LISC had requested Labor Insurance Fund managers to stop purchasing small-cap stocks under NT$1 billion or stocks that trade fewer than 500 shares a day.

Bureau of Labor Insurance deputy manager Luo Wu-hu (羅五湖) said the measure was aimed at avoiding potential losses caused by stock price manipulation.

Luo added that the policy would not significantly affect the stock market because shares of small-cap companies accounted for only a small proportion of the four largest state funds.

Financial Supervisory Commission administrative vice chairperson Wu Tang-chieh (吳當傑) disagreed with the measures.

“The new criterion may cause a negative perception for investors of small-cap stocks,” Wu said in a question-and-answer session at a meeting of the legislature’s Finance Committee yesterday.

“It would be appropriate for fund managers to take not only market capitalization, but also companies’ liquidity, profitability and management into account when making investment decisions,” he added.

Asked if the Financial Supervisory Commission could stop entrusting state funds to securities investment companies, Wu said it depended on which operating mechanism the FSC selects.

“It would be helpful for the whole operating mechanism if we reviewed securities companies’ investment performance on a relative return basis instead of an absolute basis, so that there would be fewer short-sale situations,” he said.

DPP Legislator Hsueh Ling (薛凌) also requested the FSC to establish a supervisory committee so that the public could monitor the government or securities companies’ investing activities of the four largest government-owned funds.

However, the FSC said that was unnecessary, adding that it will release further reports on a semi-annual basis.