Major asset allocation review for $15b Thai fund

The $15 billion Thai Government Pension Fund is looking at a major asset allocation shift, having ridden out the financial crisis with a massive and fortuitous overweighting to bonds.

There aren’t too many pension funds in the world where the members are so engaged that they actually hold demonstrations to voice their opinions. In Thailand, however, that’s exactly what happened last year.

The $15 billion Thai Government Pension Fund, which still has an allocation of about 80 per cent in bonds, had produced a modest negative return of 5 per cent for 2008, when most other pension funds around the world had negative of numbers of 20 per cent or more.

According to Dr Chewakrengkai Arporn (pictured), the senior director, investment strategy department, of the fund, the members did not understand what had transpired in the world and were very angry when the negative return was reported. They demanded a government inquiry. This shows the importance of, and difficulty with, communications that funds have with members, she says.

The governors of the fund have embarked on a major review of the asset allocation subsequent to the crisis, which is likely to lead to a big shift towards growth assets.

The Thai fund is relatively young – having been launched, as a defined contribution fund, with $2 billion in 1997. It has had an average annual return of 7.4 per cent since inception.

Most of the active investment management is outsourced, with 15 per cent invested offshore. The asset allocation as at June last year, which Dr Arporn says is “pretty much” what it is at the moment, was:

. Thai fixed income – 74 per cent

. Foreign fixed income – 5 per cent

. Thai equities – 8 per cent

. Foeign equities – 6 per cent

. Real estate – 4 per cent

. Alternatives – 3 per cent.

Of the fund’s total staff of about 250, the investment department has 55. About two-thirds of the total assets – mainly the local bonds – are managed internally, including indexed strategies.

Dr Arporn says the asset allocation review is looking at all the traditional assumptions with respect to expected returns and the correlations between asset classes.

The fund offered investment choice to members for the first time this year, after it had returned to positive performance with a 9 per cent earnings rate for 2009. Consequently only about 5 per cent of members took up the offer to make their own asset allocations for their accounts.

“The people who did make a choice tended to go for the higher risk options,” Dr Arporn says. “If we had offered it last year (after the 2008 negative return), they may have all gone for money market funds.”

The fund covers a bit more than one million government workers. Employees contribute 3 per cent a year, which is matched by the employer. Contributions are partially tax exempt, while benefits are completely tax exempt.