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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 – Asia’s 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, Taiwan’s 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 China’s 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 Nat’l 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%

Fund of Funds 3.8% 5.6% 9.2% 6.8% 6.9% 5.6%

ETFs 3.0% 3.8% 4.6% 7.6% 7.9% 7.1%

Index Funds 0.2% 0.2% 0.5% 0.6% 0.7% 0.6%

REITS 1.0% 1.0% 0.8% 0.7% 0.9% 1.1%

Other 3.5% 3.1% 2.5% 1.9% 1.6% 2.2%

Onshore 100% 100% 100% 100% 100% 100%

Source: SITCA

While the local funds market is primarily used for domestic investing, it is notable that there are increasing numbers of global fund managers that also offer local fund choices in Taiwan. This can be expected to increase in the next few years, following FSC efforts to encourage the further development of a local fund management industry.

Table 2.1 Mutual Fund Market (US$bn)

Country 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017ECAGR 12-17E

Taiwan 85.0 132.7 140.3 127.4 146.5 158.5 173.0 190.7 212.6 239.6 10.3%

Hong Kong 40.3 57.5 71.0 69.0 92.6 103.9 115.3 127.0 138.7 150.6 10.2%

Singapore 30.4 42.5 46.8 46.9 53.1 56.9 61.7 67.7 74.6 82.5 9.2%

Total 156 233 258 243 292 319 350 385 426 473 10.1%

Source: Cerulli Associates (Figures exclude institutional mandates)

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Table 2.4: Listing of Active Taiwan SITE by Size, Market Share and Number of Funds

Rank NameNo. of Funds

AUM NT$bn

AUM US$bn

Market Share %

1 Yuanta SITE 60 297.9 9.9 15.15%

2 Capital ITC 30 137.5 4.6 6.99%

3 Fuh Hwa SITE 37 121.7 4.1 6.19%

4 Eastspring SITE 24 121.3 4.0 6.17%

5 JP Morgan AM 37 107.5 3.6 5.46%

6 Cathay SITE 25 102.4 3.4 5.20%

7 Allianz Global Inv. 21 87.0 2.9 4.42%

8 Mega IIT 15 85.2 2.8 4.33%

9 Jih Sun SITE 16 82.0 2.7 4.17%

10 First SITE 25 74.2 2.5 3.77%

11 Taishin SITE 19 68.6 2.3 3.49%

12 Franklin Templeton SinoAM

14 67.6 2.3 3.44%

13 Fubon AMC 27 66.8 2.2 3.39%

14 Pinebridge IM 14 64.9 2.2 3.30%

15 Prudential Financial

30 62.6 2.1 3.18%

16 ING SITE 39 59.3 2.0 3.01%

17 Uni-President AMC 18 56.8 1.9 2.89%

18 HSBC Global AMC 23 43.3 1.4 2.20%

19 Hua Nan ITC 15 33.9 1.1 1.72%

20 Union SITE 7 32.6 1.1 1.66%

21 SinoPac SITE 21 29.9 1.0 1.52%

22 Shin Kong ITC 15 29.9 1.0 1.52%

23 Paradigm AMC 9 22.3 0.7 1.13%

24 Manulife AMC 12 22.1 0.7 1.12%

25 AllianceBernstein Inv 4 13.7 0.5 0.70%

26 CTBC Investments 8 11.4 0.4 0.58%

27 Schroder IM 6 11.3 0.4 0.57%

28 Invesco Taiwan 8 9.9 0.3 0.50%

29 KGI SITE 11 9.3 0.3 0.47%

30 Deutsche Far Eastern AMC

7 7.7 0.3 0.39%

31 Reliance SITE 7 6.9 0.2 0.35%

32 MiraeAsset Global 10 5.6 0.2 0.29%

33 UBS Global AMC 3 3.7 0.1 0.19%

34 FIL SITE 3 3.2 0.1 0.16%

35 BNP Paribas TCB AMC

4 3.1 0.1 0.16%

36 BlackRock IM 2 2.0 0.1 0.10%

37 Value Partners Concord AMC

4 1.5 0.0 0.08%

38 Ontario SITE 2 0.5 0.0 0.02%

Total 632 1,967.2 65.6 100%

Source: SITCA as at December 2013 (USD/TWD: 30)

As can be seen from the previous chart, the market is somewhat fragmented. There are many participants that have negligible market share, yet remain active. It can be assumed that they believe there will be growth opportunities for their businesses or that they may be a candidate for acquisition by a foreign player wishing to get into the market.

Table 2.5: Market Share Analysis

Market Share %

Top 10 SITEs 61.85%

Top 15 SITEs 78.65%

Source: SITCA as at December 2013

c. ETF products and providersTo date, Exchange Traded Funds (ETF) have not captured a significant market share of assets. There are just four local providers, following the merger of Yuanta and Polaris in 2012, and the combined firm has a massive 90% market share of ETFs.

There is an agreement between the FSC and the Hong Kong SFC to enable cross-listing and recognition of ETFs between Hong Kong and Taiwan. Apart from Yuanta (Polaris), for whom the agreement was created, few other ETF providers have made use of the agreement to cross-list products in each other’s market.

As with other Asian markets, retail fund sales of ETFs in Taiwan are sub-distributor-led, thus ETFs (which don’t pay commission to sub-distributors), get very little retail shelf space. However, in late-2012, one leading sub-distributor of mutual funds began an initiative to become more pro-active on ETF distribution. This has led to a significant increase in flows, but only to those ETFs listed on international exchanges, such as in New York, London and Sydney. Clearly for ETFs, there is still much more development to occur.

Table 2.6: Taiwan Listed ETFs

SITE Issuer No. of FundsAUM in US$mm Market Share

Yuanta 11 4,190 89.9%

Fubon 6 316 6.8%

Fuh Hwa 1 130 2.8%

SinoPac 1 24 0.5%

Total 19 4,660 100%



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d. Offshore Funds in TaiwanWhile having a well-developed local fund management industry, AUM in offshore funds continues to have an upward trend and offers funds that invest mainly into global stock, bond and money markets as well as other alternative instruments. High-yield bond funds have been a particular feature, and very popular with retail investors. This has been due to the characteristic, which is less seen in the structure of local funds, of expected high return while maintaining a certain level of protection over principal.

For most of the last 25 years or so, since offshore funds began being popular with local Taiwanese investors, there has been the occasional effort made to either restrict or prevent access to the market by offshore funds. Given their level of popularity, it is unlikely this would be able to succeed, nevertheless, the Taiwan Financial Supervisory Commission (FSC), as Regulators of the market, have announced measures in 2013 that slow down the progress of obtaining fund registration, thus the rapid rate of growth of numbers of funds can be expected to slow also.

Table 2.7: Taiwan Offshore Funds

Number of managers 77

Number of funds 1,016

— Equity 711

— Bond, Fixed Income 233

— Balanced 32

— Money Market 29

— Others 11

Asset under management US$90.9bn


As at 31 December 2013, there were 1,016 offshore funds registered for sale in Taiwan, from 77 fund managers. Dominant among these has been the UCITS products from Dublin and Luxembourg, which represent the vast majority of offshore funds approved for sale. The Taiwan FSC has a clearly defined set of regulations applicable to the approval of offshore funds for sale in Taiwan, which has enabled UCITS products in particular to gain quick market access. Since 2012 the FSC has introduced further measures to slow down the influx of funds, especially from the same management group. This has led to better opportunities for those managers that might be new to the Taiwan market, who have had no such restrictions.

Chart 2.8: Asset Split of Offshore Funds (% of Total)

54%

40%

1%5%

Equity Balanced

Fixed Income Other


In the last two years, as elsewhere in the Asian region, Fixed Income and Bond Funds have been very popular with local investors in Taiwan. Particularly successful have been those offering a high yield. Many of the new funds registered with the FSC for launch have also been in the high-yield or income type. This has begun to cause some concerns with the regulators, and as a result, they have taken strong measures to cease to allow any new high-income funds, and to impose greater controls on the existing funds. Chief among their concerns has been whether income is sourced from capital or the dividend income arising within the fund. It has therefore become a requirement for those fund companies offering these products, to clearly state the source of the income in offering and marketing documents.

Prior to this recent rush into bond and income funds, equities had been the most popular sector among Taiwanese investors, as they provided the volatility of investment return that suited the short-term nature of their investing style.

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Table 2.9: Top 30 Offshore Fund Managers in Taiwan (US$mm)

Ranking Fund AUM Ranking Fund AUM Ranking Fund AUM

1 AB 16,498 11 Invesco 2,079 21 HSBC 541

2 JPMorgan 12,371 12 Schroders 1,876 22 PineBridge 462

3 Templeton 10,574 13 UBS 1,855 23 AVIVA 436

4 Fidelity 8,890 14 Aberdeen 1,763 24 Janus 371

5 BlackRock 7,780 15 Neuberger 1,224 25 MFS 340

6 ING 4,081 16 Allianz 868 26 Vontobel 251

7 Pioneer 3,594 17 BNPP 812 27 Manulife 230

8 PIMCO 2,842 18 Investec 702 28 Henderson 216

9 Baring 2,704 19 Old Mutual 594 29 GAM 206

10 Eastspring 2,304 20 Morgan Stanley 580 30 AXA 162

Source: TDCC as at Dec 2013

Table 2.10: Top Offshore Funds by Sales in 2012

Offshore Fund Market Share

AllianceBernstein – Global High Yield 13.17%

AllianceBernstein – American Income 4.93%

BlackRock Global – World Mining 3.26%

Franklin Templeton – Corporate High Yield 2.85%

Pioneer – Global High Yield 2.36%

Fidelity – Emerging Markets 2.28%

Franklin Templeton – Global High Yield 2.22%

Franklin Templeton – Emerging Markets Bond 2.17%

PIMCO – Diversified Income 1.77%

Pioneer – Strategic Income 1.70%

Top 10 Funds 36.71%

Top 15 Funds 43.03%

Source: TDCC

Table 2.11: Top Offshore Funds by Sales in 2013

Offshore FundMarket Share

AllianceBernstein – Global High Yield / 12.94%

ING – Global High Yield ▲ 4.09%

AllianceBernstein – American Income ▼ 3.11%

JPMorgan – Global High Yield ▲ 2.98%

Franklin Templeton – Corporate High-Yield ▼ 2.89%

BlackRock Global – World Mining ▼ 2.11%

Pioneer – Global High Yield ▼ 2.05%

Franklin Templeton – Emerging Markets Bond / 1.98%

JPMorgan – Diversified Income ▲ 1.77%

Fidelity – Emerging Markets ▼ 1.57%

Top 10 Funds 35.48%

Top 15 Funds 41.81%

Source: TDCC as of Dec 2013

Chart 2.12: Local vs. Offshore AUM (US$bn)

201320122011201020092008

52

34

66 6960

81

58

74

62

90

66

91

Local Fund Offshore Fund

Source: SITCA

Chart 2.13: Taiwanese Mutual Fund AUM by Domicile

20122011201020092008

41%

8%

51%

54%

10%

36%

60%

10%

30%

60%

10%

31%

63%

9%

28%

Local Fund-Inv. Locally Offshore Fund

Local Fund-Inv. Overseas

Source: Cerulli Associates (Figures exclude institutional mandates)

As can be seen from the chart above, over the last five years, the market has seen a substantial swing in favour of the use of offshore funds by local investors.


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e. Most popular market sectorsAs can be seen, the local funds in Taiwan have a very different profile to Offshore Funds. Thus, among local funds, Money Market-type has consistently proven to be the most popular with retail investors followed by Equity and Fixed Income. There has been a widely held perception among Taiwanese investors that local funds have a more restrictive set of investment criteria thus local fund managers have failed to raise significant assets from investing internationally.

For Offshore Funds in 2012/13, by far the most popular sector for investors has been Fixed Income, and especially High-Yield Funds. Prior to the relatively recent rush into Fixed Income and Bond Funds, Equity Funds had consistently proven to be the most attractive sector for both retail and institutional investors, with many chasing short-term gains before switching.

3. Distribution dynamics.a. How is distribution of funds in Taiwan achieved?Fund distributors in Taiwan include local and global banks, SITE, SICE, securities companies, insurance companies, and other financial advisers. Given the broad reach of branch networks across the island of Taiwan, banks represent a significant majority of the volume of funds sold at 64%. Most banks maintain restricted lists of managers and funds they are willing to distribute, often after undertaking due diligence and compliance checking, and ensuring the fund fits within their platform. Some of the local banks in Taiwan also have their proprietary range of funds, which may get priority when seeking shelf space. With one notable exception, it is the local banking and financial institutions that have been most successful in achieving volume assets under management. Most global banks operating in Taiwan have yet to achieve significant volume.

Chart 3.1: Taiwan Mutual Fund Sales Percentage by Distribution Channel

201220112010

14.4%3.3%

63.4%

18.8% 17.3%

63.5%

3.4%15.7% 16.3%

3.9%

64.1%

15.8%

Direct Banks

Securities Companies Insurance

Source: Cerulli Associates

Insurance companies represent around 16% of fund sales. They are taking an increasing market share, as their sales forces increase in size and gain more confidence on using mutual fund products. Of course many sales may also be made in conjunction with Investment Linked Assurance Schemes (ILAS).

A number of fund companies, mainly those regarded as SITE, also make direct sales of funds to both retail and institutional investors. This has become a less important area for development in recent years as the other two major distribution groupings increase their volume.

Typically, most bank sub-distributors engage with their fund company partners to hold “in-branch” road-shows and other promotional activities, to introduce their funds and the portfolio manager to prospective customers. This can often prove to be very time consuming in the early stages, however after regular, usually quarterly or half-yearly road-show presentations, ample reward can be gained by successful fund managers.

To enable adequate coverage Island-wide, the major fund managers have had to gear-up their numbers of “wholesalers,” i.e. sales staff, to service the multiple bank branches and distributors in the market. Typically, the larger companies will have around 13 such staff on average, whereas the same companies in their Hong Kong or Singapore offices have significantly lower numbers of wholesalers, as market coverage is geographically easier.

Table 3.2: “Wholesalers” of Major Fund Houses

Country Number (Average)

Taiwan 13

Hong Kong 7

Singapore 3

Source: Citi and market sources.

b. Distribution DynamicUnlike onshore funds, the most common way for offshore fund managers to tap into Taiwan market is to appoint a Master Agent to distribute offshore funds to retail clients. The following table summarizes the fund distribution mechanisms in Taiwan.

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Table 3.3: Fund Distribution Summary

Type Participants Role Description Eligibility Status

Offshore Fund

Master Agent • A Master Agent is required if funds are sold to general public

• One Master Agent may represent one or more Offshore Fund Managers

• Master Agent is responsible for filing applications with Securities Investment Trust & Consulting Association (SITCA), which shall review and forward it to Financial Supervisory Commission (FSC) for approval

SITE, SICE, and Securities Broker

There are 20 SITEs, 19 SICEs, and 3 brokers serving as Offshore Fund Managers’ Master Agent

Sub-Distributor

• The Master Agent may mandate sub-distributors for fund distribution

• A sub-distributor may be mandated to sell multiple funds

SITEs, SICEs, Securities Brokers, Banks, and Trust Enterprises

Up to 64% funds were distributed by banks

Private Placement Agent

• A private placement agent is required when an Offshore Fund Manager wants to sell funds to sophisticated investors, institutions, and funds via private placement

• A private placement agent is optional when an Offshore Fund Manager wants to sell funds to Banks, bills finance enterprises, trust enterprises, insurance companies, securities enterprises, financial holding companies via private placement

• Private placement agent is required to conduct Know Your Client (KYC) checks and suitability evaluations of the sophisticated investors

SITEs, SICEs, Securities Brokers, Banks, or Trust Enterprises

Onshore Fund

Sales Distributor

A SITE may mandate sales distributors for fund distribution to investors

SITEs, SICEs, Securities Brokers, Banks, Trust Enterprises, and Insurance Companies

Private Placement Agent

N/A N/A

Source: Citi Integration

c. Types of products allowed.A significant majority of the offshore funds sold in Taiwan are either Luxembourg or Dublin UCITS products. The FSC has accepted the UCITS regulations as being equivalent to their own, and thus does not try to “reinvent the wheel” when reviewing these products for the Taiwan market. However, in the last couple of years, the FSC has become increasingly concerned that there is a proliferation of offshore fund products, and thus has sought to impose additional restrictions on those seeking to enter the market, both in terms of the individual funds and the investments it makes.

Further, it has slowed down the approval processes considerably, by restricting each Master Agent to a “one fund at a time” policy, thus Master Agents cannot apply for multiple fund approvals, whether for a single fund house or for multiple fund houses, if they represent more than one. This has led to many offshore fund managers choosing to set up their own Master Agent businesses, rather than rely

on a third-party firm. Reports from the market indicate that the time-frame over which approval is given for new funds, has also been greatly extended, to exceed 6 – 9 months in many instances, even where the new product might be an additional sub-fund of an existing umbrella vehicle.

Clearly, fund managers wanting to add to their existing product range on offer in Taiwan need to consider very carefully which will be the most suitable, given the possible time delay to market, and inability to add multiple funds at the same time.

Local funds are generally dealt with very promptly by the FSC. This is designed to help develop the local fund companies. To date, few of the global fund managers with a local SITE license have made much of an attempt to build their local range. Where they have however, the FSC has rewarded them with a faster track processing of offshore fund registrations.


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d. Restrictions on Offshore Funds.1. Holding of Derivatives

• Non-offset “long” position should be less than 40% of offshore fund nav

• Non-offset “short” position should be less than correspondent securities current holding values

• Investment in other assets, e.g. gold, commodities, real estate, etc., is prohibited

2. China market securities

• Investment value should be limited to listed securities

• Investment value should be less than 10% of the fund NAV

3. Taiwan market investment NAV

• Securities investment value should be less than 70% of the fund NAV

• Taiwan investors holdings should be less than 70% of the fund NAV

4. Fund self-related constraints

• Fund should not be denominated in NT Dollars or RMB

• Maintain one year minimum prior track record for the fund

• Evidence of public offering in “home” market

• Custodian bank rating should be higher than BBB-(S&P)

• Investment of all investors in Taiwan in single offshore fund should be less than 90% of fund NAV

4. Master AgentsTaiwan’s Regulations Governing Offshore Funds (as amended 3 September 2010) require offshore fund managers to appoint a single onshore Master Agent. The Regulations require Master Agents and Sub-Distributors to provide prospective investors into offshore funds with copies of a Prospectus and investor information fact sheets. SICE, as well as SITE and other organizations are able to act as Master Agents for offshore fund management companies. Authorizing a qualified domestic Master Agent, which is responsible for all business plans and executions within Taiwan, is essential for all offshore fund managers.

a. Description of Master Agents.Master Agents, in Taiwan, provide the function of being the local onshore representative for a fund manager that is unwilling or unable to set up their own business in Taiwan. A number of both local and global organizations have created Master Agent businesses, usually offering a range of funds and manager choices. As at 31 December 2013 there were 42 Master Agents registered, representing 1016 offshore funds on behalf of 77 offshore fund management companies. The list includes both local and global firms, fund managers offering their own products only and securities companies offering a choice of managers and funds.

b. The Role of Master Agents.Typically, the Master Agent acts as the offshore fund company’s representative in Taiwan, and undertakes to handle most aspects of the local listing and distribution on behalf of the fund(s), including:

i. Production of a Chinese translation and delivery to sub-distributors and investors of the Prospectus for each fund.

ii. Acting as local agent for all servicing aspects, documents and correspondence.

iii. Communicate with the offshore fund manager and handle all Taiwan transactions.

c. Becoming a Master Agent.Master Agents can be one of the following registered and approved business types:

i. Securities Investment Consulting Enterprise (SICE)

ii. Securities Investment Trust Enterprise (SITE)

iii. Securities broker

iv. Fund management institution

The qualifications necessary to become a Master Agent include having a paid-up capital of NT$70m (US$2.33mm), no legal or securities industry violations, and having sufficient staffing requirements to meet the FSC requirements.

Where a Master Agent represents a single offshore fund manager, an additional operating bond of NT$30m (US$1mm) is required to be set up. If representing two offshore managers the bond required is NT$50m (US$1.67mm), and for three or more managers the bond required is NT$70m (US$2.33mm).

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Table 4.1: Listing of Master Agents and Fund Managers Represented

Name of Master Agent Offshore Funds Represented No. of Funds

HSBC Global Asset Management HSBC, Hang Seng 24

Yuanta SITE BNY Mellon 3

Invesco Taiwan Invesco 46

Eastspring SITE Eastspring 33

Prudential Financial SITE Prudential (US) 4

Fubon Asset Management Natixis, GAM 19

Shin Kong SITE Robeco 6

UBS Global Asset Management UBS 51

Alliance Bernstein Alliance Bernstein 26

Pinebridge Investments Pinebridge, MFS 35

SinoPac SITE Amundi Luxemburg 2

Manulife Asset Management Manulife, Henderson, Edmond de Rothschild 34

BlackRock Investments BlackRock 48

ING SITE ING, Pioneer, Janus 33

Mirae Global Investments RBS 3

Allianz Global Investments Allianz, PIMCO 38

Deutsche Far Eastern Asset Management DWS 13

KGI SITE BOCI-Prudential 1

Schroder Investment Management Schroders 59

Paradigm Asset Management Threadneedle, Capital International 19

Concord Capital Management Swiss & Global, Kleinwort Benson 6

Taishin SICE Jupiter 11

Franklin Templeton SICE Franklin Templeton 53

First Capital Management Eurizon Capital, AVIVA 24

Marbo SICE T. Rowe Price 8

SinoPac SICE Russell Investments 8

BNP Paribas Investment Partners BNP Paribas 44

Legg Mason Investment Legg Mason 23

UOB Investment Advisor UOB 19

Baring SICE Baring, Northern Trust 19

UBP TransGlobe SICE Union Bancaire 3

Galaxy SICE Lion Global Investors, Vontobel 27

Cathay SICE AXA, Morgan Stanley, First State 41

Investec Asset Management Investec 23

Aberdeen SICE Aberdeen 21

Capital Gateway SICE Old Mutual Global Investors 23

Pictet SICE Pictet 13

Neuberger Berman SICE Neuberger Berman 11

JP Morgan Funds JP Morgan, JF India 57

FIL Investment Fidelity 75

Masterlink SICE Bluebay 3

Source: TDCC as of December 2013

Note: The above listing is supplied, based on the date of inception of the Master Agent, as per the SITCA listing.


12

d. The Taiwan Master Agents’ “Catch 22”As described, the role of a Master Agent, on behalf of an offshore manager, is to effect sales and the administration of them in Taiwan, through all distributors. For a few Master Agents, they have been willing to represent multiple fund houses, and use their well-developed networks effectively to build assets.

For the offshore fund manager, while there does need to be a high degree of transfer of trust to the Taiwan Master Agent, this can prove to be a relatively efficient means with which to establish a presence, grow a business and learn more about the market, without also having to create the usual infrastructure a local presence would demand.

There are a number of instances where, as a result of successful asset raising by a Master Agent, the offshore fund manager has subsequently chosen to open its own office, thus becoming its own Master Agent, and inevitably replacing the incumbent.

Hence, Taiwan’s Master Agents’ “Catch-22”!

This has not been universally successful though. There are also examples where an offshore fund manager, having become its own Master Agent, has seen significant outflows of assets shortly thereafter. This can be for a variety of reasons, most often the lack of availability of suitable alternative products to suit the short-term investor habit during changing market cycles.

5. How to enter the market?a. Setting up a local presence. How? Who? Where?Once the decision has been made, the next question will be how and in what format? Should the company establish a new company and start from scratch, or should it be through the acquisition of an existing player? It is possible to acquire, in the market, a local SITE business. There are only a few available, which will likely mean a premium pricing. This will enable a greater involvement in the market, with the full range of opportunities available. Making the acquisition a “good fit” might prove a challenge for some that are new to the market, so acquisitions should be seen as an “Entry Ticket” rather than an “Investment.”

SITE or SICE?Currently there are 37 SITEs and 100 SICEs. SITEs can launch funds via IPO or private placement, and offer full fiduciary discretionary investment to specified persons. SICEs can provide analysis, opinions or recommendations on matters relating to investment in return for compensation obtained directly or indirectly from a principal or third party.

Global fund managers can consider to establish a SICE onshore to act as the Master Agent, which role will be further discussed in the Master Agent section, for offshore fund distribution in Taiwan. The benefit of establishing a SICE is the ease of entrance with minimal capital requirement. Most major global fund managers have set up SICE to act as their representative in Taiwan.

Table 4.2: Top 30 Master Agents in Taiwan by AUM (US$mm)

Ranking Master Agent AUM Ranking Master Agent AUM Ranking Master Agent AUM

1 AB SITE 16,498 11 Invesco SITE 2,079 21 HSBC SITE 549

2 JPMorgan Securities 12,371 12 Schroders SITE 1,876 22 Manulife SITE 506

3 Templeton SICE 11,950 13 UBS SITE 1,855 23 First SICE 472

4 Fidelity Securities 8,890 14 Aberdeen SICE 1,763 24 Fubon SITE 349

5 BlackRock SITE 7,780 15 Neuberger SICE 1,224 25 Galaxy SICE 315

6 ING SITE 4,452 16 Cathay SICE 910 26 Paradigm SITE 163

7 Allianz SITE 3,996 17 BNPP SICE 812 27 UOB SICE 153

8 Pioneer SICE 3,594 18 PineBridge SITE 802 28 DWS SITE 143

9 Baring SICE 2,743 19 Investec SICE 702 29 Legg Mason SICE 122

10 Eastspring SITE 2,304 20 Capital Gateway SICE 594 30 Taishin SICE 116

Source: TDCC as at December 2013

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On the other hand, many global fund managers have also considered the proposition of buying a local Taiwan SITE. The appeal of doing this is that only SITEs can do IPO launches in Taiwan. Getting a new SITE License can be problematic. It is understood the FSC doesn’t want to issue any more, thus putting a premium value of those already issued. As seen from the sales numbers and rankings, there is a long tail of small firms with little AUM, but often these are tied to insurance, banking or securities company owners. Looking to the future however, as the FSC is clearly embarking on a policy of favouring local fund management development, this should prove to be one of the best opportunities in the longer term.

It is possible to acquire in the market, a local SITE business. There are only a few available, which will likely mean a premium pricing. This will enable a greater involvement in the market, with the full range of opportunities available.

Without doubt understanding the Taiwan mutual funds market is not as straight forward as for those in Hong Kong and Singapore. The Regulators desire to favour locals over global firms can confuse as well as frustrate many.

The best advice given by those with the most experience in the market is to develop an initial presence over a few years, to not just transact business but to also build local knowledge that can be fed back regularly to the Head Office, wherever that may be, ensure Senior Management visit regularly as well, meet and learn from the peer group in the market. Clearly business volume can be enormously influential in making positive decisions, but the most successful SITEs are unlikely to want to change ownership. This leaves the smaller players of the market, many of which have low single-digit market share, and not much scope, as they may currently be established, to become more significant.

As to the location of the office, Taipei, the island’s capital, is the obvious location to set up. Within Taipei there are many types of office suites available, to suit all possible needs. Starting from serviced offices to taking a whole floor of a building, there is no shortage of choice.

Hsin Yi District, the new financial business district centred around Tower 101, Taiwan’s tallest building, is where many banks and global fund managers have their offices located, making for greater convenience in an otherwise sprawling city.

Typically, most new entrants to the Taiwan market do so from a Hong Kong office base, and usually after having built up prior Asian markets experience in Hong Kong. The Hong Kong office can supply the key ingredients such as literature, support, dealing access, and very often the initial staff with which to open an office. With the relative maturity of the mutual fund industry in Taiwan, there is no shortage of potential Taiwanese staff to recruit (usually from competitors), who can provide considerable local knowledge and experience to access the major distributors, and point a new entrant in the right direction.

b. Starting from the retail marketThe Taiwan mutual funds market, like those in Hong Kong and Singapore, remains “open” for offshore funds and their managers to set up and distribute products. To be offered and sold in Taiwan, an offshore fund must appoint a Master Agent to file an application with SITCA, which shall review the application and forward it to the FSC for approval. An offshore fund manager may mandate an approved SICE, SITE or securities broker to act as Master Agent to offer and sell offshore funds.

This is clearly the easiest entry point to the market. While the FSC is trying to slow down the numbers of products registered, it is perhaps slightly easier for a new market entrant than for one that is already active. There are Master Agents willing to take on new offshore fund partners, in the hope of finding the next big “winner” in market popularity.

In 2013 the FSC began to put a brake on the number of new funds allowed to be registered for sale and imposed a cap limit on AUM for new funds. This has been done by slowing down the processing time for the Master Agent to register a new fund to up to 12 months per fund, with no more than one new fund allowed per Master Agent in the queue at any time. Cap limitation on AUM has been imposed on new funds receiving registration approval from the FSC this year. The effect of this is to encourage further development of local fund managers (SITE), to increase their business at the expense of offshore funds. Local managers (SITE) owned by offshore fund managers are being encouraged to add more local funds to their ranges, which, if they do so, can be rewarded by faster processing of offshore funds from the same organization.


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c. Starting from the institutional market mandatesLabor Pension Funds, Labor Insurance, Public Service Pension Fund and Chunghwa Post all have released public tenders to select external fund managers. It is projected that the total pension market size will grow to over US$130bn in 2016 according to Cerulli Associates. As the pension AUM increases, there will also be more opportunities for mandates as well, giving the offshore fund managers another channel to enter the Taiwan market. The Taiwan pension funds have clearly reached a size whereby they need to not only outsource management of their assets, they also need to invest internationally. They can no longer only invest in the Taiwan equity and bond markets, which offer limited scope for their ambitions. All the major pension funds have allocated mandates to international fund managers, whether they are located in Taiwan or not. Clearly it can help greatly to have an office in Taiwan or in the Asian region, but the funds are very professional, and will select the managers they believe will provide them with best returns also.

d. Provide sub-advisory services to SITEs (White Labeling)The idea behind “White Labeling” is that the mutual fund is “made” by offshore fund managers while it is packaged and sold by local SITEs. Therefore, the fund appears as though it is being made by the SITE, when in reality it is being created by the offshore fund managers.

In this case, the offshore fund managers may focus on managing their fund while achieving a low cost target due to fewer concerns about marketing, which is handled by the local SITEs that will sell the fund. Other markets would regard this route as a “feeder” fund.

e. Legal issues, getting legal advice?Getting good legal advice when entering the Taiwan market is an absolute priority for offshore fund management companies. While there are a number of firms of lawyers that can provide this, it is often wise to check out the names through seeking references from others that have made the move.

The key firms in this area do have English-speaking, internationally experienced Partners, which helps in the international environment, who also have provided similar advice for a number of global firms, as well as those from within the Asian region.

6. What are the opportunities in the future?a. Greater China Opportunities – QFII/RQFIITaiwan is anxious to be seen as a major business partner for China. It already has one of the largest inward investments to that market for manufacturing. It is said there are more than 2 million Taiwanese people now living in China, involved in many different businesses. The past political differences are gone, and both sides are being seen to want to work together. This bodes well for all businesses and future opportunities.

China and Taiwan signed a new cross-strait service trade agreement, a follow-up to 2010’s momentous Economic Cooperation Framework Agreement, in June 2010. Under this service trade agreement, Taiwan will be included in China’s RQFII schemes, although the actual implementation is still pending. It is said that the China Securities Regulatory Commission (CSRC) is actively considering giving Taiwan an RQFII quota of Rmb100 billion (US$16.10bn).

Industry participants believe the RQFII scheme in Taiwan could provide huge opportunities for fund companies in the market due to local investors’ large demand for exposure to China.

It is understood also that the FSC is adopting a “China is for Taiwan” policy as far as the asset management industry is concerned. This in effect means that only Taiwan fund managers can offer China-invested funds to Taiwanese investors, and they will need to do so via domestic funds.

Taiwan’s Aging Society Fuels Savings• Increased longevity and declining birth rates have led

to an increase in the median age of Taiwan

• As the general population has aged, savings (the gross national savings rate LESS the sum of government, business and household savings) has increased to prepare to meet retirement costs

• Household savings regularly make up nearly two-thirds of gross national savings

• While savings have increased, the rate of domestic capital investment has not kept pace, with the savings rate in excess over investments reaching 10.2% in 2012, resulting in a growing pool of idle funds

• These funds represent a potential source of growth for financial markets as the funds require return

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b. Pension reform will fuel the growth of local SITEsThe retirement system in Taiwan is still at an early stage of development. Despite it being one of the first in Asia to achieve nearly 100% coverage for all citizens, the terms were relatively modest. Many plans remain underfunded. Due to widespread concerns about inadequate retirement savings, many Taiwanese have been active in creating their own pool of accumulated savings, usually via mutual funds.

There are a few major “national” pension schemes, including Labor Pension Fund (Old) (US$20bn), Labor Pension Fund (New – 2005) (US$36bn), Public Service Pension Fund (US$18bn), Labor Insurance Fund (US$17bn) and National Pension Insurance Fund (US$5bn), each of which outsources part of their assets to international fund managers.1

In the next few years there are expected to be further developments to encourage a greater number of individual pension plans, which could include greater use of defined contribution schemes, “member choice” (of investment) pension schemes with multiple fund options, offering a wide choice of stock markets into which they may be allowed to invest. In the absence of the final terms of such a scheme, many Taiwanese remain active in maintaining their own accumulated savings via mutual funds. This too has driven strong growth in the overseas funds market.

Chart 6.1: Growing Pension Market in TaiwanLarge Room for Growth in Terms of Low DTI (“Discretionary Investment Mandate”) Ratio

2013E2012E20112010200920082007

DTI-Pension

21%

5045

58

6977

8696

22% 19% 22% 23% 18% 15%

Total Pension Mkt (US$bn)

Source: Cerulli Associates, SITCA

SummaryThe Taiwan mutual funds market provides a wide range of opportunities for fund managers willing and able to enter the market. As it is significantly larger than either Hong Kong or Singapore, yet continues to provide an “open door” policy for the entry of offshore funds (just), global fund managers seeking to expand into the Asian region should carefully consider how best they can participate. As stated earlier, Taiwan has in the past adopted a cloak of mystery about its mutual funds business, but this is changing. Further, Taiwan has a prime position in the line-up for participation in the (Mainland) China fund management business, due not only to the geographic proximity, but also the common language and familiarity with many of the cultural and attitudinal issues that are prevalent.

Stewart AldcroftSenior Advisor, Asia PacificInvestor Services, Citi

1 Source: Official Websites, as at December 2013.


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Glossary of Terms

CSRC China Securities Regulatory Commission

ETF Exchange Trade Fund

FSC Taiwan Financial Supervisory Commission

Hong Kong SFC Securities & Futures Commission of Hong Kong

ILAS Investment Linked Assurance Schemes

ODM Original Design Manufacturer

OEM Original Equipment Manufacturer

RSP Regular Savings Plans

SICE Securities Investment Consulting Enterprise

SITCA Securities Investment Trust and Consulting Association of the R.O.C.

SITE Securities Investment Trust Enterprise

TDCC Taiwan Deposit and Clearing Corporation

UCITS Undertakings for Collective Investment in Transferable Securities

References

SITCA http: www.sitca.org.tw

TDCC http: www.tdcc.com.tw

IMF http: www.imf.org/external/index.htm

Regulations http: www.selaw.com.tw

Directorate-General of Budget, Accounting & Statistics, R.O.C. http: www.dgbas.gov.tw

17

Citi in TaiwanCiti established its first branch in Taiwan in 1965. Citibank is the largest foreign name bank in Taiwan providing a full suite of banking services including: corporate banking, consumer banking and private banking. Citi Taiwan is the leading provider of securities services in Taiwan with the largest volume of assets under custody. We are top-rated in various industry surveys and are a leading player in market advocacy with active communication with regulators and infrastructures for market developments.

Highlights of Citi in Taiwan

Why Citi Taiwan?

1No. 1 service provider with

US$107bn assets under custody

1No. 1 in Wealth Management

Business

1The only foreign-owned bank with government bond clearing license

6363 branches covering 17 major cities

620More than 620 offshore funds distributed by

Citibank Taiwan Ltd.

652,000More than 652,000

settlements per year

Citibank Taiwan Limited Snapshot

• Largest foreign bank with 50 years presence in Taiwan

• US$ 2.2BN capital with US$27BN balance sheet size

• More than 5,000 employees in 17 Cities

• Most Admired Bank by Common Wealth Magazine for 18 years

• Best Foreign Commercial Bank by FinanceAsia for 13 years

Diversified Client Pool

40%

40%20%

Local Issuers

FINI

Local Investors

Securities Services Snapshot

• Largest asset under custody – US$107bn of AUC

• The only foreign bank with government bond clearing license since 2001

• No. 1 in Depository Receipt Custody (52% market share in terms of # of program)

• Leading service provider to facilitate securities borrowing and lending for Taiwan stocks

• Leading player in market advocacy with active communication with regulators and infrastructures for market developments

Complete Suite of Services

√ Global Custody

√ Direct Custody

√ Agency and Trust

√ Depositary Receipts

√ Collateral Management

√ Securities Finance

Most Well-Capitalized Bank with Strong Credit Rating in Taiwan Awards and Recognition for SFS Taiwan

5 consecutive years

Top Rated for Cross Border (non-affiliate)

and the Domestic Client Category 2013

Top Rated for All Client Category

2013

Best Bank in Taiwan

11th consecutive year

Citibank Taiwan Limited

Credit Rating (Fitch) Long term : AA+ (twn) Short term : F1+ (twn)

Capital Adequacy Ratio 18.09%

Data as of Dec. 2013

18

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