Yuanta plans CTAs, sees passive overtake active assets

Yuanta, the largest mutual fund house in Taiwan, plans to enter the alternatives space in light of regulatory changes expected in this area this year. The firm will also launch more exchange-traded funds in 2016, having recently seen its passive assets under management overtake its actively managed funds in terms of size.

Yuanta is developing commodity trading adviser (CTA) strategies, which are typically run by hedge fund managers. CTAs – also known as managed futures – are trend-following long/short strategies that gain exposure through futures and options typically in the commodity, equity and currency markets. 

Taiwan’s Financial Services Commission (FSC) is studying feasibility and best practice around alternative products, as local mutual fund houses want to get into this business. Market sources expect the regulatory change to come this year, but the FSC declined to comment on the time frame.

Another area of focus for Yuanta is that of index funds. Since the firm does not have the same level of research resources for active foreign investments as global asset managers, it is moving to expand its ETF range to provide overseas exposure, said Tony Tan, assistant vice president of the futures trust department.

Yuanta’s index investment AUM in December overtook – and now significantly outweighs – that of its active funds. The firm had a total of NT$290 billion ($9 billion) under management as of the end of February, with active funds accounting for NT$131 billion and passive assets NT$173 billion. 

Tan put this shift towards passive strategies down to investors – both retail and institutional – becoming more aware of the simplicity of using ETFs for hedging, strategic trading, asset allocation and cash management.

However, passive strategies tend to charge lower fees, so this change will presumably have affected Yuanta’s revenues?

Tan said this was not the case, because Yuanta had seen AUM growth in more profitable ETFs such as leveraged/inverse and commodity funds, for which the management fee is about 1%. Revenue has remained stable in recent years, he noted, at $52.38 million last year, $49.57 million in 2014 and $52.19 million in 2013.

As for types of new ETF launches, Yuanta is now  targeting developed-market assets, across equities, fixed-income and commodities, but Tan declined to give more detail. It plans to launch 11 ETFs this year, and they will also include inverse and leveraged products, a relatively new part of the market that got the green light at the end of 2014.

Yuanta managed about NT$40 billion across six such ETFs as of the end of February out of a total market size of NT$102 billion (as of the end of March). Moreover, on March 23 the Taiwan Stock Exchange granted the firm a licence to use  the Taiwan Finance and Insurance sub-index for inverse and leveraged products, making it the first asset manager to receive this approval.

Inverse ETFs are very popular among institutional investors, which account for about half the AUM of such products, as shorting is not easy for them in Taiwan, Tan said. For example, life insurers need to go through an involved process to use derivatives, including submitting investment reports to the Insurance Bureau. This is not necessary to buy inverse ETFs, which are categorised as securities, he noted.