TAIWAN 2020 ASIA’S MUTUAL FUNDS GIANT Markets and Securities Services Markets and Securities Services | Taiwan Mutual Funds 2020 2 CONTENTS Introduction 3 Chapter 1. Taiwan, the perfect demographics for mutual funds 4 Chapter 2. The Taiwan mutual funds industry 7 Chapter 3. Distribution dynamics 20 Chapter 4. Master Agents 28 Chapter 5. An evolving regulatory environment 32 Chapter 6. What future opportunities are there? 34 Summary 37 Markets and Securities Services | Taiwan Mutual Funds 2020 3 TAIWAN 2020: ASIA’S MUTUAL FUNDS GIANT For many years, the biggest secret of the Asian mutual funds industry was the size of Taiwan compared to the rest of Asia. While it’s relatively easy to get set up in Hong Kong, taking the 83-minute flight north to Taipei has often been regarded as being too difficult (indeed the air route was named the World’s Busiest for three years running from 2014 to 2017).1 2019 was a momentous year for the fund management industry in Taiwan, with many changes and developments occurring. Domestic funds once more exceeded the aggregate AUM of offshore funds, for the first time in many years, as both Exchange Traded Funds (ETF) and Target Date Funds (TDF) successfully captured a significant volume of the net new inflows to the market. Although the number of players in the market didn’t change much, it was the impact of regulatory changes in 2018 that were most felt by the fund managers. They were alert to the need to continue to provide ETFs that matched the liability requirements of insurance companies. They also saw how TDF were able to both meet a perceived market demand for longer term products, but were sufficiently short term for end investors to consider using them. TDF were particularly successful in being used in conjunction with investment linked insurance schemes (ILAS). Taiwan’s regulators made a few changes during the year and expressed increased concerns on the narrow investor base of most of the new ETFs launched. This was because many only had their single insurance company sponsor/client as an investor. These ETF providers will likely need to find ways to broaden the end-clients of their products, perhaps by having other Asian region insurance companies buy. On the political front, China and Taiwan continue to have their differences, but there are few restrictions on business. There are many Taiwanese-owned businesses located in China, which helps to greatly improve the dialogue between both sides. It’s said that more than two million Taiwanese now live and work in Mainland China. The frequency of daily flights across the 160 kilometer-wide Taiwan Straits between Taiwan and more than 10 cities in China has risen from zero 10 years ago to over 20 a day now, and it’s growing every year. Mainland Chinese are second only to Japanese in numbers of visitors to Taiwan, at nearly five million a year.2 For the fund and asset management industry, Taiwan offers opportunities across institutional and retail markets. Taiwan’s institutional investors, pension funds, insurance companies and state institutions have continued to grow and have now become significant holders of offshore investments in global markets across all sectors. The aggregate size of the Taiwan mutual funds market was reported to exceed US$350bn at the end of December 2019.3 This was made up of US$121bn in offshore funds, US$133bn in onshore local funds and US$62bn in other investment mandates from pension funds and other investors. There was a further approximate US$55bn in ETFs.4 By any standards, this makes Taiwan a location of prime importance to the fund management industry globally. The Taiwan institutional market has also grown substantially over the last 10 years. This is split between national pension funds, insurance companies and others. It’s estimated that the current size exceeds US$300bn, of which the five national pension funds exceed US$150bn. A high proportion of the assets are invested globally, and they also use hedge funds and other alternative investments, giving many opportunities to institutional fund managers. Below we provide an outline of the mutual funds industry in Taiwan, covering size and scale, key facts, who the leaders in the market are and what’s distributed, but also providing some brief coverage of the institutional market, which by its nature is less transparent than the regulated retail funds business, and guidance to those who wish to enter the market. 1 “Hong Kong-Taipei, World’s Busiest Airline Route 3 Years In A Row, Why?”, IATA, last accessed at https://english.cw.com.tw on 25 January 2018. 2 “Taiwan Passengers Up 8.8% in 2017: China Airlines Remains Largest Carrier; Japan Is Top International Market”, OAG Schedules Analyzer, last accessed from www.anna.aero on 25 January 2018. 3 SITCA, December 2019. Note US$1 = NT$30.7. 4 TWSE/Yuanta, December 2019. Markets and Securities Services | Taiwan Mutual Funds 2020 4 CHAPTER 1. TAIWAN, THE PERFECT DEMOGRAPHICS FOR MUTUAL FUNDS a. Taiwan demographics Compared to virtually all other markets in Asia, Taiwan has near-perfect demographics for the mutual funds industry. There’s 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 for Taiwan also helps to convey why the location is so attractive.5 GDP per capita is US$24,316, having grown at an average rate of 2.06% a year over the past five years. Unemployment is 3.80% of the 23.5m population. And inflation is a low 1.2%. Although marginally higher than Hong Kong, Singapore, Japan and South Korea, Taiwan also has one of the lowest birth rates in the world at 8.26 per 1,000, which has led to a rapidly aging population.6 Taiwan has a highly export-oriented economy, although it’s vulnerable to fluctuations in world demand. China is its biggest trading partner, representing 42.5% of total exports and 19.2% of total imports.7 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’s the original equipment/design manufacturer (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. Population pyramid and density for Taiwan (% of age of total population) 8 Male Taiwan 2018 Female 100+ 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 1.2 0.8 0.4 0 0 0.4 0.8 1.2 Inhabitants/km2 >40,000 Population (millions) Age Group Population (millions) 20,001 – 40,000 10,001 – 20,000 Population pyramid for Taiwan (end-2018), shows the 5,001 – 10,000 number of male and female inhabitants per year of age. 3,001 – 5,000 1,001 – 3,000 Currently, Taiwan’s population aged over 65 accounts for 501 – 1000 14.4%. From around 2015, old-age dependency ratios began 301 – 500 to climb rapidly to become among the highest in Asia and 101 – 300 0 – 100 will be on par with countries like Japan and South Korea. Markets and Securities Services | Taiwan Mutual Funds 2020 5 b. Investor habits Taiwanese 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 to sales of funds (up to 2%) and to the desire to take short-term profit rather than wait for long-term returns that might fluctuate more. This has led to the active use of mutual funds in a way very similar to equities to achieve sustained returns. Many fund companies have made attempts to slow down the rate of turnover activity in mutual funds by investors, some by introducing a broader selection of funds in their range, others through increased marketing efforts. By late-2019, around 30% of fund sales were made in “B” shares (of UCITS funds), which were reintroduced to the market in the previous couple of years. To date, there’s little evidence this has been successful. Even with the popularity of high-yield bond funds over the last five years, 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. The Financial Supervisory Commission (FSC) has similarly attempted to reduce the extent of turnover activity in mutual funds. In the last couple of years, it introduced a restriction on the extent of sales bonuses paid by banks to their sales staff for individual fund sales, which then extended to become a ban. In future, all such commissions or sales bonuses to staff have become based on retained AUM of client/customer holdings.