Magazine issues » Summer 2012

TAIWAN: Red tape hinders profitability

TaiwanTaiwan offers international asset managers interesting investment opportunities in the retail space, but regulatory challenges may eventually diminish opportunities. Stefanie Eschenbacher reports.

Restrictions on offshore funds have tightened in Taiwan over the past two years, a move that challenges the profitability of international asset managers.

Taiwan used to be the place in Asia where international asset managers made their money, but recent regulatory changes may eventually reduce the opportunities in the country.

Four major pension funds dominate the institutional market: the Public Service Pension Fund, the Labour Pension Fund, the National Pension Insurance Fund and the Labour Insurance Fund.

However, there are interesting opportunities in the retail space, says Patrick Corfe, business development director at Aberdeen Asia.

“The market is fairly retail and distributors tend to be local,” he says, adding that there are “far too many distributors” operating in an unconsolidated market.

“Taiwan is an interesting market because it has a big buyer base and a relatively high risk appetite, though it is still fragmented.”

Ching Yng Choi, head of Asia representative office at the Association of the Luxembourg Fund Industry, says investment restrictions on offshore funds have intensified as Taiwan is trying to favour the development of their domestic industry.

Following further changes to the regulation, the concentration of Taiwanese investors in a foreign fund cannot exceed 70% and the concentration of investment portfolios of an offshore fund in the Taiwan securities market cannot exceed 70% either.

The Financial Supervisory Commission also requires existing funds to disclose all commission fees they pay to bank distributors, an attempt to improve transparency of distribution.

Traditionally, offshore managers have paid higher commission fees for banks than onshore managers.

“Commission fees, which are usually higher for offshore funds, must be disclosed,” Choi says. “And an even tougher, income-based tax treatment is applied to overseas income for Taiwanese residents.”

Profitability
While Taiwan used to be one of the more profitable retail markets in Asia for international asset managers, the recent changes around fee disclosure may make profitability difficult in the long term.

According to the country’s Securities Investment Trust and Consulting Association, the offshore fund holdings by Taiwan investors accounted for about 45% of total assets under management in Taiwan.

The offshore market in Taiwan is dominated by funds domiciled in Luxembourg and Ireland, accounting for 90% of the market.

Samantha Lin, associate at the association, says equity and fixed income funds remain the predominant product offering.

Before the financial crisis, equity funds accounted for 60% of the market and bond funds for 35%.

Bond funds, however, have gained market share and now account for 47%.

Lin says this was driven by the growth of high-yield bond funds and emerging market bond funds.

“The major concerns of the regulator regarding the offshore fund distribution in Taiwan are investor protection and information disclosure,” says Lin.

“Taiwan has its own offshore fund regulations, which are for all mutual funds domiciled in overseas jurisdictions and re-registered in Taiwan instead for Ucits only.”

Beyond ucits
Ucits, however, dominate the offshore funds market and Lin says the regulator becomes more familiar with the scheme.

It has, therefore, also adopted Ucits requirements to Taiwan’s regulation. This includes, for example, the increase in derivatives usage and a simplified prospectus, which is similar to the key investor information document required for Ucits funds in Europe.

Taiwan remains an important market for Ucits, but Lin says regulators and industry associations will also consider whether the Asia Region Funds Passport scheme will be of benefit to the asset management industry and investors in Taiwan.

©2012 funds global

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