Late last year, the government ordered a performance evaluation of the external management of the Postal Savings Fund, the Public Service Pension Fund, the Labor Pension Fund and the Labor Insurance Fund. The evaluations found not only that performance lagged behind government-managed funds, but also that it fell short of the performance of other funds managed by investment companies.
The Labor Pension Fund’s supervisory committee said that to improve profits during the contract period, the investment company and the fund manager entrusted with the fund’s management engaged in “a bit more trading [than normal],” which resulted in “a situation with slightly more obvious losses” when the market was performing badly.
“A bit more trading” is rather fuzzy. It means that they were buying high and selling low. A pension fund that is required to be sustainable should choose long-term investments to beat stock market fluctuations and make its profits from the risk premium.
However, to achieve their target rate of return, fund managers engage in short-term trading with even greater passion than retail investors. Short-term thinking is the biggest problem with government funds that have been entrusted to external management.
A second problem is the pursuit of absolute returns. Investors are willing to pay higher management fees simply because they hope that the fund manager will be adept at picking the right stocks and creating higher returns. Unfortunately, many studies have showed that the performance of more than 90 percent of experts is disappointing and that they are unable to beat the market. Exchange traded funds (ETF) and other passive management funds often perform better than actively managed funds.
Most of the externally managed government funds have a set absolute rate of return. While a requirement for a high return is well-intended, a look at the past performance of such funds reveals that they rarely meet that requirement.
The requirement for absolute returns is meaningless, and it would be better to invest in stock market-tracking ETFs.
A third problem is insufficient transparency. Web sites for each of the government’s funds currently provide only limited information about the 10 biggest stocks held at the end of each quarter. Any other information, such as the managing investment company’s portfolio and detailed return rates, is lacking.
The authorities say that this is intended to avoid too-frequent updates, since that could make the fund manager focus on short-term investments.
This is very poorly reasoned. The reason a fund manager would focus on short-term investments would be to meet the stipulated absolute return. It has nothing to do with publicizing investment details. Furthermore, there is a difference between managing funds on behalf of the government and normal investment funds because there will be no redemption by retail investors in a government fund.
The result of insufficient transparency is that unscrupulous fund managers cooperate with other big investors to manipulate stock prices, as happened when the manager of the Labor Insurance Fund allegedly manipulated the stock price of Ablerex Electronics Co via dummy accounts, causing the share price to surge from NT$185 at its initial public offering in September 2010 to NT$565 in five trading sessions.