In Taiwan, regulations aimed at fostering a bigger onshore funds industry favour established players at the expense of new entrants. Joshua Bateman reports.
For foreign asset managers, Taiwan’s market is alluring. The country has a GDP per capita of $22,000 and a gross savings rate exceeding 30%, according to research firm CEIC Data.
Foreign funds, which have been eligible for sale in Taiwan since the 1980s, have frequently outsold domestic products. In January 2017, Taiwan had 1,015 offshore mutual funds with $100 billion of assets compared with 735 onshore funds with $68 billion, according to data from the Securities Investment Trust & Consulting Association, a local trade group.
However, a series of moves from the Taiwanese authorities are shaking up the market by requiring asset managers to set up more onshore capacity. As a result, Taiwan is becoming a much harder market for new entrants to penetrate.
Beijing-based Andrew Wang, chief investment officer of Manulife TEDA, joined Manulife in 2008 to establish its Taiwanese asset management business.
He says the popularity of offshore funds came about because “Taiwanese investors, compared to other Asian territories, are relatively sophisticated”.
Alain Le Couédic, head of the Greater China financial services practice at Roland Berger Strategy Consultants, agrees. The wealth of the country’s 24 million people is “quite high by Asian standards”, he says, adding that Taiwan has “a very big fabric of entrepreneurs, who are wealthier and savvy in terms of business”.
Foreign fund managers have been able to build strong brands in Taiwan owing to their “sense of sophistication, performance, and opportunity to diversify”, says Le Couédic. Foreign firms have broad investment coverage and provide diversification opportunities across investment strategies and currencies. They offer solutions such as global high-yield bond, which has seen demand, but which few local firms manage.
In contrast, most local Taiwanese managers have Taiwanese or Greater China investment capabilities, but lack broader international capabilities.
Shrewd business practices have helped offshore fund sales. Foreign asset managers reportedly reward distributing banks with up to 3% commission fees per sale, compared with between 1.5% and 2% for onshore funds.
However, regulation is changing the landscape for foreign fund managers. Ken Yap, managing director at research firm Cerulli Associates, says that in recent years, “new regulations encouraged offshore fund managers and international managers to increase their onshore resources”.
To buttress the onshore market, in 2013, Taiwan’s regulatory body, the Financial Supervisory Commission, cut the number of offshore funds that can be applied for in one registration application from three to one. Onshore firms have shorter fund approval periods and are permitted additional fund authorisations with fewer restrictions. For example, offshore high-yield bond funds and emerging market equity funds face restrictions that don’t apply to onshore funds.
Another directive followed in October 2016. According to the commission, the initiative was designed to: increase investments in Taiwan by offshore fund institutions, including setting up business locations and investing in technology and manpower; increase the scale of the asset management industry in Taiwan; and improve talent development of asset management in Taiwan.
“It’s going to be a long-term process to have a larger share of international capital activity based out of Taiwan,” says Yap.
Some in the industry are hopeful that the development of a larger onshore funds industry will benefit investors. However, fund managers are already feeling the side effects. By limiting the number of new offshore fund registrations, a moat is being dug around those firms that have been in Taiwan and established operations with robust product ranges. It will take new entrants patience and many years to launch investment offerings that can compete with the first movers.
“For the newcomer to enter the market nowadays, there are many more requirements than coming to Taiwan 20 years ago. You need to a have meaningful, sizeable team located in Taiwan,” says Wang, of Manulife TEDA. “It will be very challenging for any newcomers coming to Taiwan.”
NOT SO BAD
Although these new rules are impacting operating models, they are not as stringent as initially proposed. “Foreign firms pushed back and that law was actually watered down,” says Le Couédic of Roland Berger Strategy Consultants. “It’s not as bad as it could have been, but still there are some constraints.”
Yap of Cerulli Associates agrees. “Taiwan is still one of the very important markets in Asia given that offshore funds are not really permitted to be sold across Asia-Pacific.” Taiwan is still one of the largest Ucits markets in the region, he observes.
Additionally, other reforms may create opportunities.
In a 2015 speech, Tsai Ing-wen, Taiwan’s current president, said: “Our various public pension funds have incurred huge implicit deficits that endanger their sustainability. Furthermore, the family-based traditional social safety network no longer suits the needs of the highly urbanised Taiwan. Under these circumstances, one can only imagine the tremendous burdens that are being placed on our younger generation.”
Taiwan’s Labor Pension Fund centrally manages much of the island’s pension assets. Reform proposals have long been considered. These revisions would give workers greater control over their investments as well as provide them with more investment options such as third-party funds.
Pension reform could bring more business opportunities to the asset management industry, which would welcome the inflows because pension money tends to be sticky – something that fund assets in Taiwan are not.
A Citibank report found that the average holding period by Taiwanese fund investors is less than one year. A 2016 survey of Taiwanese mass affluent investors by asset manager Legg Mason found that 57% of respondents viewed long-term investing as five years or less.
To close the pension asset-liability gap, Taiwan may outsource more mandates to foreign managers. “They will have to put more assets on the higher risk level,” says Wang, of Manulife TEDA. “From an asset management company’s point of view, higher risk assets means higher management fees.”
Low interest rates will continue to push the development of sophisticated products. Taiwan’s current benchmark interest rate is 1.375%, providing an incentive for fund managers to create alternative investment products to help their clients realise a greater yield.
Firms are also benefiting from exchange-traded funds (ETFs), which have seen an uptick in launches. As of January 2017, there were 60 ETFs registered in Taiwan with a total of $9 billion of assets. Demand for insurance-linked products is also growing.
Although foreign firms need to affirm their commitment to Taiwan, the market does still present profitable opportunities. Consultants say it will remain a priority market for foreign fund managers in the near to mid-term.
For new entrants, the question is how the market fits within their overall corporate strategy. “Is it Taiwan by itself or is it Taiwan in the context of a broader Greater China strategy?” asks Le Couédic of Roland Berger Strategy Consultants. “And where, ultimately, are your dollars best invested for the long term?”
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