Capital Investment to develop absolute returns

Capital Investment Trust, one of Taiwan's biggest fund management firms, is scrambling to create low-risk, absolute-return equities products in order to continue to attract new assets, says Vincent Lai, its new CEO.

Lai joined the firm in August from HSBC Asset Management, where he had been its Taiwan CIO. He is bringing international investment processes and risk management to one of Taiwan's leading domestic houses. "Local Sites tend to focus on returns, but they should also consider risk," he says.

Capital is not only a fixed-income powerhouse, with NT$110 billion invested in its bond funds, but is a rarity in that it also is strong in equities, with NT$20 billion under management in its equities funds. It manages another NT$15 billion on a discretionary basis, mainly for government pension funds. Lai claims that, with a before-tax EPS of NT$10, Capital is Taiwan's most profitable funds company.

So Lai has inherited a seaworthy ship. His aim will be both to stay on top as well as continue to grow the business, which won't be easy, in part because the flows into fixed income that have propelled the entire industry are threatened by rising interest rates.

Lai argues that bond funds in Taiwan still have mileage left to go. "We can go down the credit curve; corporates are enjoying the benefits of the stock rally," he says. "We can also reduce duration as interest rates fall. We still have something to do."

But the main task he faces over the first six months of his tenure is to diversify Capital's product offering. Capital is fortunate that it has a decent track record in equities and a strong brand name, but this may not be enough to absorb an exodus out of fixed income. Instead, the firm is designing low-volatility, absolute-return products as a receptacle for funds switching out of bonds.

"This will be our target for the next one or two years," Lai says. And this is where experience with a global firm is required. "How can we set up the investment process and succeed at asset allocation? That will determine whether our products are successful or not."

The firm currently has four bond funds, two balanced funds and one equities fund. "We lack that low-risk, steady return product," Lai says. "If we launch that and can demonstrate a 5-10% annual return, the investors will stay with us and our fund size can grow consistently."

This is not just important for the funds business but for the discretionary side as well. Government pension funds are the main clients for discretionary accounts, and Capital has more government money mandates than anyone else - NT$30 billion, half of which is discretionary. These pension funds are shifting their benchmarks to absolute returns, so Capital needs a product to keep attracting these funds.

Lai began his career at Fidelity Investments in 1990, then moved to China Securities Investment Trust in 1994 as a fund manager. He was CEO of Union Securities from 1998-2002, when he left to join HSBC.