Taiwan is already one of the big centres for offshore fund distribution, but authorities are keen to ensure the domestic market still thrives. Nicholas Pratt examines the challenge of achieving this balance.
Since 2007, Taiwan has been one of the biggest international centres for offshore fund distribution. By the end of 2013, according to the Securities Investment Trust and Consulting Association, which represents the offshore funds industry in Taiwan, there were 1,016 offshore funds from 77 fund managers registered for sale in Taiwan.
These funds accounted for $91 billion of assets under management, compared to the onshore funds’ $66 billion share of assets under management – a clear contrast with the split in 2008, when onshore funds accounted for $52 billion, substantially more than the $34 billion of assets under management for offshore funds.
The vast majority of offshore funds are Ucits distributed via Dublin or Luxembourg, mainly because of the clearly defined regulations that get them quick approval in Taiwan but also because of the well-established distribution routes between Taiwan and Dublin or Luxembourg.
Distribution has been a key influence in the popularity of offshore funds. The 2004 introduction of the Securities Investment Trust and consulting law, which formalised the registration and distribution of cross-border funds, established a system where asset managers could act as master agents, thereby avoiding the expensive process of having to build local distribution networks.
The savings afforded to offshore fund managers consequently enabled them to reward the dominant distributing banks with higher commission fees, sometimes up to 3% per sale.
This has created a situation whereby these banks account for 80% of offshore funds distribution, but only 50% of onshore funds distribution. It has also led to complaints from onshore managers that distributors were choosing to prioritise offshore funds due to higher commission fees thus restricting the choice of funds for investors and penalising the onshore fund managers.
Caroline Higgins, regional head of transfer agency, Asia, for Brown Brothers Harriman, says the popularity of offshore funds is down to their performance and return rather than the commission fees paid to distributors.
“Foreign fund managers are focused on retaining flows utilising products with the contingent deferred sales charges (CDSC) creating a stickiness and an assets under management retention strategy. Besides considering commission fee, the three key drivers for local Taiwanese investors to determine whether to buy funds are the performance, exposure and income,” she says.
Sébastien Chaker, head of Asia, Calastone, says a key factor in the development of the offshore market was the fact that back in 2006 and 2007 the availability of offshore funds offered Taiwanese investors a way to diversify their investments and also help alleviate potential currency risk. It also played into a lack of confidence in the local economy and the lack of attractiveness of domestic funds.
Nevertheless, in 2010 the Financial Supervisory Commission (FSC), the Taiwanese regulator, attempted to balance the onshore and offshore funds markets by mandating full disclosure of commission fees in a bid to halt the higher fees paid for offshore distribution, a step which did little to halt the growth of offshore funds.
However, the FSC has also taken other steps. There was a cap on the percentage of investment that Taiwanese investors could hold in offshore funds introduced in 2012 and a minimum hiring requirement for local staff for offshore funds in 2013, to name some regulations.
Other measures were designed to make it easier for onshore funds, including an allowance for renminbi-denominated onshore funds, an increased China A-shares weighting and an easier application process.
The rebalancing is largely politically driven, says Chaker. “The FSC has made no secret about its wish to balance the onshore and offshore funds – it wants to build a funds platform that is managed by the Taiwanese. In some ways the offshore funds are a victim of their own success,” says Chaker. “Six years ago the Taiwan market was the most open one, in terms of offshore funds access, but the authorities felt feel it was important that fund managers hire local people and potentially manufacture their funds locally rather than having all the proceeds go straight out of the country.”
As to whether offshore fund managers should be concerned about intervention from the regulator to ensure a balance, Chaker says it depends on their level of commitment to the local market. “If you are an offshore fund manager wanting to distribute in Taiwan but are only investing in the first model where you use a master agent for everything, then there is probably not much growth opportunity,” he adds.
“If, however, you are willing to invest and build on the ground servicing capabilities and set up your own master agent in Taiwan or even set-up local fund manufacturing capabilities by establishing a Securities Investment Trust Enterprise with local staff, then the reward can be very high, as ultimately that is what the regulator is really looking to develop.”
Pioneer Investments’ Taiwanese subsidiary was granted a licence to operate as master agent for its 21 registered funds in Taiwan in October last year, enabling it to deal directly with distributors.
Jack Lin, head of Asia and Middle East, at Pioneer, says the master agent status and a Taiwan-based operation was a “natural step for Pioneer Investments Taiwan given the size and scale of our business in Taiwan”. The asset manager has raked in more than €2 billion in net sales over the last three years.
Meanwhile, there are other European managers pulling out of the region. ING sold its Taiwanese asset management business in January to Japan-based Nomura Asset Management, despite being one of the top ten in Taiwan, with more than €5.2 billion as of October last year, as part of its strategy to divest interests in the insurance and investment markets.
Overall, Taiwan remains an extremely important market for offshore fund managers, says Yoon Ng, Asia research director at research firm Cerulli Associates, and cites the fact that the number of offshore managers has grown from 75 to 78 since 2012.
Yoon Ng also says that the FSC’s future efforts to maintain a balance between onshore and offshore will be aimed at boosting the local market rather than restraining the offshore market.
A typical example of this strategy is the Taiwan Commitment Scorecard, which encourages overseas firms to take on local staff members and demonstrate their investment in the local industry rather than simply extract profit from investors. However the initiative has still to bear fruit, says Ng. “Foreign managers are working to meet some aspect of the commitment scorecard, but so far JP Morgan Asset Management was the only one that fulfilled the scorecard requirement in 2013.”
But rather than imposing more constraints for offshore managers, Ng says the FSC will probably look to complement the commitment scorecard initiative to develop the onshore fund segment by loosening restrictions on products entering the markets, such as allowing the launch of leveraged exchange traded funds (ETFs), inverse ETFs, and allowing onshore balanced funds and bond funds to invest into high yield bonds and other instruments.
“The FSC will also work on enhancing the competitiveness of onshore managers beyond mutual funds, like how they broadened the investment scope of local private funds to invest in gold and other commodities in July this year,” says Ng. Technology and automation are factors in the balance between onshore and offshore funds, with the latter typically having a higher rate of automation, and Taiwan was no different. The few funds that had adopted Swift for automation were offshore. But when the Taiwan Depository and Clearing Corporation (TDCC) developed a platform for automating the order routing of funds it was adopted in the onshore and offshore markets.
There are 30 out of 54 active offshore fund houses in Taiwan available via Calastone on the TDCC service and 20 out of 39 onshore fund houses available directly via the TDCC, says Chaker, adding that one of his Taiwan bank clients achieved fund automation rates of over 80% for both on shore and offshore funds.
“The fact that the rates are so close is very unusual for a market outside of Europe,” says Chaker. “It is probably down to the way that the TDCC has created the platform and the regulatory push it has given. The offshore funds were quick to use the platform and services like ours and the onshore funds probably felt that they had to automate to keep up. That said, it has been impressive how quickly the onshore fund managers have adopted automation.”
This view is supported by Brown Brothers Harriman’s Higgins, who underlines the importance of regulatory action in ensuring that all important balance between the onshore and offshore worlds .
“In 2012, TDCC combined the onshore and offshore fund order automation in the same campaign which means the distributor banks who signed up for the offshore fund order automation would need to adopt automation also for the onshore funds,” he says.
“We have observed that TDCC has been quite successful with the campaign and most of the banks that are live with our offshore fund order automation are also live with the onshore automation.”
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