Taiwan – Asia's Mutual Funds Giant

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Introduction For many years, the biggest secret of the Asian mutual fund industry has been the size of Taiwan by comparison to the rest of Asia. While it is relatively easy to get set up in Hong Kong, taking the 83-minute flight north to Taipei was often regarded as being too difficult. The regulatory environment of Taiwan was thought to be cloaked in mystery, getting to talk with the regulators was nearly impossible, and yet there were continuous stories of how much business was being done by the few fund houses that had persevered.

Today, Taiwan is a very different location for global fund houses than it used to be. The Securities Regulations are well defined, the opportunities are vast, and there is an openness that perhaps did not previously exist. On the political front, China and Taiwan are both working hard to reduce their previous tensions. There are many Taiwanese-owned businesses now located in China, which helps to greatly improve the dialogue between both sides.

The aggregate size of the Taiwan asset management market was reported to exceed US$188bn at the end of 2013. This was made up from US$91bn in offshore funds, US$66bn in onshore local funds, and US$32bn in other investment mandates from pension funds and other investors (Source: SITCA). By any standards, this makes Taiwan a location of prime importance to the fund management industry globally.

This paper is designed to provide an outline of the mutual fund industry in Taiwan. It covers the size and scale, the key facts, who the leaders in the market are and what is distributed. It also provides guidance to those that might wish to enter the market.

Chapter 1 Taiwan, the perfect demographics for mutual funds

Chapter 2 The Taiwan Mutual Fund Industry

Chapter 3 Distribution dynamics

Chapter 4 Master Agents

Chapter 5 How to enter the market?

Chapter 6 What are the opportunities in the future?

Chapter 7 Summary

1. Taiwan, the perfect demographics for mutual funds a. Taiwan demographicsBy comparison to virtually all other markets in Asia, Taiwan has near perfect demographics for the mutual fund industry. There is a large middle-aged, middle-class population, with high average earnings, a high savings rate, modest pension provision, and a desire to invest and actively manage money overseas rather than retain it in the home market.

Some key economic statistics (Source: IMF) for Taiwan helps to convey why the location is attractive for the mutual fund industry. GDP per capita is US$20,706 in 2013, having grown at an average rate of 6.11% per annum over the past five years. Unemployment is 4.24% of the 23.4mm population. Inflation is a low 1.2% as of December 2013.

Taiwan Asias Mutual Funds GiantBy: Stewart Aldcroft, Citi Investor Services

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Chart 1.1: Population Pyramid for Taiwan (% of Age of Total Population)

0 1% 2% 3% 4% 5%1%2%3%4%5%0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80-84

90-94 Male Female

Source: National Statistic, R.O.C. (Taiwan)

Population pyramid for Taiwan for end-2012, showing the number of male and female inhabitants per year of age. Currently, Taiwans population aged over 65 accounts for 11%. From around 2015, old-age dependency ratios will climb rapidly to become among the highest in Asia and will be on par with countries like Japan and Korea.

Although marginally higher than Hong Kong, Singapore, Japan and Korea, Taiwan also has one of the lowest birth rates, 9.86 per 1,000, in the world (Source: National Statistic, R.O.C. (Taiwan)), thus leading to a rapidly aging population.

Taiwan is a highly export-oriented country. The economy is vulnerable to fluctuations in world demand. China, including Hong Kong, is the biggest trading partner of Taiwan, representing 39.7% of total exports and 16.4% of total imports in 2013. Taiwan has also been a major investor into the development of Chinas economic growth. Main industries in Taiwan include electronics, communications and information technology products, petroleum refining, chemicals, textiles, iron and steel, machinery, cement, food processing, vehicles, consumer products and pharmaceuticals. It is the OEM/ODM centre for high-tech products. Through both direct investment and people migration, Taiwan has especially supported technology developments, manufacturing and some other growth industries in China.

Source: Companies

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b. Investor habitsTaiwanese investors are well known for their short-termism. Typically, the average hold period of an investment into funds can be around three to six months. Often it might just be until 5% or more gain has been made. Investors have been very willing to take an active role in managing their assets, in part due to the (usual) low level of initial charges applicable for sales of funds (up to 2%) and the desire to take short-term profit, rather than wait long-term for returns which might fluctuate more. This has led to the active use of mutual funds, in a way very similar to equities, to achieve sustained returns.

Even with the recent popularity of high-yield bond funds, the term of holding this type of investment by many Taiwanese investors has averaged just nine months, according to many of the managers offering these products. Even more surprisingly, issuers of regular savings plans into mutual funds also report the average hold periods to be little more than 12 months.

It is an interesting insight into the mind of Taiwanese investors, that there is a commonly held view in the market that because offshore funds, when compared to local funds, have more liberal restrictions on how they may invest their assets, this can deliver better returns, despite offshore funds generally having higher charges and management fees.

c. Household Wealth and AssetsThe current range of household assets and savings rates of Taiwanese is as given in the following charts.

Chart 1.3: Household Asset Breakdown by Category

27%

Securities

9%12%

6%

3%

11%

29%3%

Household Fixtures

Cash & Savings Insurance

Time & FX Deposits Real Estate

Foreign Assents Other Assets

Funds 4%

Stocks& Bonds

23%

Source: Directorate-General of Budget, Accounting & Statistics, R.O.C. (as of 2011)

Chart 1.4: National Savings & Investment (% of GDP)

10%

20%

30%

40%

50%

2012

20

11

2010

200

9

200

8

200

7

200

6

200

5

200

4

200

3

200

2

Gross Natl Savings Gross Dom. Inv.

Source: Directorate-General of Budget, Accounting & Statistics, R.O.C.

Long-term trends are favorable for investment assets as the savings rate has outpaced investments by 12.6% meaning a large idle pool of investment funds. As the population has aged, household savings (and assets) have increased to prepare for retirement. Two-thirds of gross national savings are by households. Household asset growth is irrespective of GDP. As household assets have grown, the top two asset classes of real estate (29%) and securities (27%) have remained the most popular. Of the 27% invested in securities, the split of investments between asset classes is: Stocks and Bonds: 87%, Funds: 13%.

From 2006 to 2010, the growth in securities and fund investments has roughly tracked that of persistent household asset growth. CAGR (2006-2010): securities (4.6%), funds (6.1%), assets (5.2%).

Unlike the other developed mutual fund markets in Asia, Taiwanese have embraced the concept of dollar-cost-averaging through extensive use of regular savings plans (RSP) directly invested into mutual funds. For many, this is seen as their pension top up, albeit with more flexible terms. Most fund managers active in the Taiwan market offer RSPs to access their products, usually with relatively low minimum monthly contributions.

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2. The Taiwan Mutual Fund Industrya. How Taiwan compares to Hong Kong and Singapore In absolute terms, the Taiwan market for offshore funds exceeds that for Hong Kong and Singapore combined.

Over the last five years the volume invested in funds has increased substantially, despite relatively poor market conditions, and forecasts for the next few years are more positive also.

b. Taiwan local funds and managers (SITE)Taiwan has a well-developed local fund management industry that operates alongside offshore funds. Local SITEs offer funds that invest into the Taiwan stock, bond and money markets and also funds that invest internationally. Money market funds have been a particular feature, and very popular with retail investors, as an alternative to deposit accounts with banks. This has been due to the tightly controlled currency and low deposit rates at banks, leading investors to be attracted to higher rates available via the funds.

Table 2.2: Taiwan Local Funds

Number of managers 38

Number of funds 632

Equity 166

Bond, Fixed Income 36

Balanced 25

Money Market 47

ETFs and Index Funds 30

Overseas Equity 190

Overseas Bond & FI 48

Fund of funds 62

Others 16

Assets Under Management US$65.6bn

Source: SITCA as of December 2013

Table 2.3: Local Funds Split of Assets between the Major Market Sectors

Type 2008 2009 2010 2011 2012 2013

Equity 27.6% 37.2% 38.7% 32.7% 31.2% 27.9%

Money Market 60.1% 46.8% 38.0% 43.6% 38.6% 41.8%

Fixed income 0.8% 2.3% 5.7% 6.2% 12.0% 13.8%