Taiwan fund houses in search for a competitive niche

Taiwan’s importance as a market for mutual funds has grown, but it is foreigners that have enjoyed the gains. A staid onshore funds market is the problem.

Offshore funds and institutional mandates have increased, in ways that benefit foreign players, but local firms’ bread-and-butter offerings are stagnant.

At the end of 2009, the size of the domestic industry by AUM was the same as that of the foreign firms distributing product onshore: about NT$2 trillion ($65 billion) each. By the end of 2014, the 48 domestic managers enjoyed 14% annualised growth and ran NT$3.2 trillion. Virtually all of the increase came from institutional mandates. Still, the onshore mutual funds business manages just NT$1.97 trillion – the same as it did in 2009.

But the 58 offshore fund companies that distribute global products into Taiwan via local distributors have seen mutual fund assets rise to NT$3.3 trillion, according to the Securities Investment Trust and Consulting Association (Sitca). That doesn’t include whatever institutional business they receive, nor the offshore retail money they manage.

Taiwan’s wealthy invest into funds via Hong Kong and Singapore, and industry executives traditionally say it’s about double the size of the regulated onshore industry. In other words, there’s money to manage, but locals see only a sliver of it.

Taiwan’s industry is trying to adapt. “Taiwanese onshore managers have had a transition in product offerings,” said Henry Lin, Sitca’s chairman.

Many retail investors have lost interest in domestic equities and poured money into global high-yield bond products. In the past five years, offshore high-yield funds have raised NT$796 billion and grown 219% to a total of NT$1.16 trillion by the end of 2014. There’s no way domestic companies can offer anything similar, so they have had to employ global asset managers as investment advisers, or else outsource via a fund of funds.

Offshore managers’ sales-driven model has allowed them to tap money rapidly by launching a lot of funds, while a local manager usually can only launch two-to- three IPO funds every year. Management fees are higher for global products (as much as 2%), so bank salespeople enjoy a fatter commission and push them at the expense of domestic funds.

“To compete with offshore managers, we need to find out our niche,” said Andy Chang, president at Cathay Securities Investment Trust Company (SITC). One such area is exchange-traded funds covering local markets. ETFs require partnerships with local market-makers to ensure liquidity.

A few local firms such as Yuanta Funds and Fubon Asset Management have raised large sums, helping the domestic ETF industry to double in size in five years to NT$161 billion. But only a few players can enjoy the scale required to make ETFs profitable. So the other trend that most firms are following is to link themselves to mainland China products.

Taiwan is part of Greater China, but has found itself sidelined by Hong Kong with its many channels for financial flows. Taiwanese managers are trying to market themselves as relevant and knowledgeable players.

“We’re facing huge competition in offering products with global exposure, but we will not lose advantages in managing A-share products,” said Lin, also president of Fubon Asset Management.

“Both ETFs and China thematic products will be the bright growth spots,” said Cathay’s Chang. The firm introduced a Ucits fund with Greater China exposure in May, as a part of its global expansion plan. Yuanta Funds, Taiwan’s largest EFT provider, also plans to cross-list its products in London and New York.

“Onshore managers can play on strengths such as RMB products or RMB share classes, or invest in China stocks through Stock Connect or QFII quotas,” said Ng Sze Yoon, Singapore-based Asia research head at Cerulli Associates.

To read the full feature on Taiwan, see the current (July) edition of AsianInvestor magazine