To mark its 15th anniversary, AsianInvestor today begins a series of articles looking back on the development – and future – of the regional asset management industry.
As part of our birthday celebrations, AsianInvestor last week held a drinks party in Hong Kong and toasted our anniversary with the leading lights of the investment community. And next week we will be holding AI Week – three days of conferences in Hong Kong featuring senior industry speakers. And then to cap it all off, next Thursday we will present our annual awards to the winners at a black-tie dinner.
But today we start our series of articles with a look back at where many see the origins of the Asia-Pacific asset management industry – Taiwan. To read the full version of this article, along with all the other anniversary stories, see the May 2015 edition of AsianInvestor magazine.
The roots of the modern Asian asset management industry can be traced back to 1980s Taiwan, where unique economic and political circumstances transformed the island into an investment pioneer.
While it was a sleepy island at the start of the decade, within 10 years Taiwan had become one of the largest mutual fund markets in Asia and a model for the industry’s regional development.
From QDII to the now-common distribution of mutual funds by commercial banks, a raft of modern features have their roots in Taiwan.
In 1980, Taiwan had an economy which was still heavily focused on light manufacturing and a GDP per capita of $2,363, one-quarter that of Japan at the time.
At the time, Taiwan had foreign exchange controls, which meant its rapidly growing export proceeds were concentrated in the hands of the island’s central bank. The government of the time had a moratorium on the issuance of new banking, insurance and securities licences and with no fund management licences at all.
The first fund management company in Taiwan was International Investment Trust (IIT), a complex joint venture of 16 leading foreign and Taiwanese financial institutions.
IIT was established to launch a fund overseas to invest in Taiwan equities: the first opportunity that foreign investors had to invest in the Taiwan market. IIT launched its first fund, The Taiwan (ROC) Fund, in October 1983 and raised $41 million from institutions in Europe and Hong Kong. Similar types of products followed.
The domestic funds industry began in 1986, when IIT was allowed to launch a fund investing in local equities, which was limited in size to $56.3 million, initially for institutions but soon opened to retail investors.
In 1987, Taiwan’s central bank decided to lift foreign exchange controls, in part to ease inflationary pressures caused by Taiwan’s mountain of foreign exchange reserves. This meant Taiwanese individuals were suddenly free to remit money abroad.
Jardine Fleming, the Hong Kong-based investment management firm and the first foreign investment firm to establish an office in Taiwan, seized the opportunity, launching Hong Kong-based funds into the Taiwan market.
It was a completely unregulated field. Jardine Fleming hit a nerve, and in the first week, JF received 900 phone calls from Taiwanese interested in investing abroad. So the market for offshore funds in Taiwan officially began.
Jardine Fleming faced challenges in fund distribution. Local brokerage firms were not allowed to sell these new funds; nor did they have any interest given rapid turnover in the local securities market.
As a result, JF felt it had no choice but to set up a direct sales team to promote its funds to the public. Shortly thereafter it convinced a local bank, the state-controlled Farmers Bank of China, to distribute funds to retail bank clients.
These two methods of distribution, via banks and direct sales teams, remain the two main ways that funds are distributed in Taiwan today.
Even more importantly, Taiwanese banks became the first banks in the world to distribute mutual funds. Other banks in Taiwan began to follow the lead of Farmers Bank.
The concept was picked up in Hong Kong in the early 1990s. From that point on the process spread, and today commercial banks are the main distributors of mutual funds in many countries. Few realise that this distribution channel began in Taiwan.
After a period of unregulated trade, the Taiwan government decided to regulate these imported funds, and Jardine Fleming registered the first 12 offshore funds licensed for sale on the island.
The Taiwanese became major investors in offshore mutual funds, and Fidelity and other major international players soon opened offices in Taiwan to promote their range of offshore funds to the local population.
In the early 1990s the initial oligopoly of politically-connected fund managers with licences was broken. A few dozen domestic fund management firms were established, many foreign-owned, but the market quickly became sated with similar products. The breakthrough in the 1990s came when domestic firms were allowed to launch international funds.
Until then, the central bank had been wary of allowing Taiwanese to invest abroad officially, fearful they could never pull the money back to Taiwan in case of a military or political crisis.
Jardine Fleming proposed the concept known today as QDII: local fund management firms would launch funds on the island which could invest abroad; and the central bank could force redemptions if they needed FX to buy tanks and planes.
This gave a new life to the market, and local fund management companies launched wave after wave of local funds which invested abroad, in competition with the offshore funds imported from overseas.
The industry saw other developments in the following decades, such as the development of exchange-traded funds. But to this day the Taiwan industry consists of sizeable onshore and offshore fund industries, an unusual feature in Asia.
Sitca, the Taiwan industry association, reports that total assets under management of the fund management industry (both onshore and offshore) in February 2015 as NT$6.55 trillion ($209 billion).
Blair Pickerell is Asia chairman at Nikko Asset Management. He was Taiwan country head for Jardine Fleming Taiwan from 1985 to 1990.