The ephemeral investment restrictions preventing fund managers of the nation’s major public funds from buying small-cap stocks underline the government’s inept handling of the NT$7 trillion (US$240.4 billion) funds. No professional asset manager will use only one factor, the stock’s capitalization, or even two elements, to evaluate risk and to pick investment targets.
The new rules introduced abruptly last week were devised by the Bureau of Labor Insurance after financial irregularities linked to funds supervised by the bureau were uncovered earlier this month. Sam Hsieh (謝青良), a former fund manager at ING Securities Investment and Trust Co in charge of the Labor Insurance Fund and Labor Pension Fund, which total almost NT$2 trillion, allegedly made massive personal profits by using the funds to manipulate the share price of Ablerex Electronics Co. The alleged manipulation caused losses of NT$170 million for the funds.
The new restrictions, considered damage control measures by government officials, apply to stocks with an “F” prefix on their stock ticker symbol — listed companies with capitalization below NT$500 million. Most companies in the new “F” category are registered overseas and are usually industry start-ups with low capitalization due to smaller share capital.
For instance, F-TPK is the ticker symbol for touch-panel maker TPK Holdings Co (TPK), one of Apple’s major touch screen suppliers for its iPhone and iPad series and registered in the Cayman Islands. Singaporean sovereign wealth company Temasek Holdings is one of the firm’s biggest shareholders.
The labor bureau is going in the wrong direction. The key issue is how to prevent fraud from occurring, rather than stopping investment in small-cap shares like Ablerex, which debuted its shares two years ago and has a share capital of NT$450 million. The bureau ignored the fact that small-cap stocks account for more than half of the 1,450 stocks traded on Taiwan’s stock markets and are characteristic of the local bourses.
The absurd rules, which were also applied to two other public funds — the Postal Savings Fund and the Public Service Pension Fund — were scrapped two days later after intense discussions by the Cabinet on Wednesday.
The Cabinet’s interference came after the investment restrictions dealt a blow to already weak investor confidence and sapped share prices of small-cap stocks. Turnover slumped to NT$54.91 billion on Monday and continued to drop to a six-month low of NT$46.82 billion on Thursday, from NT$68.09 billion on Nov. 16. A healthy trading volume is considered NT$100 billion per trading session. TPK’s shares plummeted 2.28 percent to NT$406.5, their lowest level in two weeks, after the ban on investing in “F” shares took effect.
Government officials finally came to the realization that small could be beautiful, too.
TPK, which has a share capital of NT$3.27 billion, made net profits of NT$8.6 billion, or NT$28.05 per share, in the first three quarters of this year alone, outperforming most local electronics companies such as large-cap LCD panel maker AU Optronics Corp, which is plagued by chronic losses and patent lawsuits. F-IML, the ticker symbol for Integrated Memory Logic (IML), is another example. IML, which has a share capital of NT$809 million, earned NT$552 million, or NT$6.95 a share, in the first nine months of this year.
The government should have realized that a ban on small-cap stocks would make it difficult for small and medium-sized companies to raise funds for expansion. The restrictions also went against its former initiatives of boosting Taiwan’s capital markets by encouraging more companies to list shares on the local markets.
The government is doing the right thing abandoning these new rules. However, it still has no solution to the problem of poor oversight of the nation’s funds. Much more work is required to safeguard the interests of the nation’s workers and retirees.