Cathay Site developing smart-beta products

Taiwan's biggest investment manager intends to enter the smart-beta arena and widen its range of overseas strategies, amid rising local demand for offshore exposure.
Cathay Site developing smart-beta products

Taiwan fund house Cathay Securities Investment Trust is planning a range of smart-beta products and a US equity exchange-traded fund, amid the growing demand for overseas assets it is seeing from local investors. This reflects a steadily rising focus among investors in Asia on passive and alternatively weighted index strategies.

The low-yield environment has driven domestic institutions to look abroad – mainly at the US – and to alternative investments for higher returns, said Jeff Chang, chairman of Cathay Site, Taiwan’s biggest asset manager.

The planned smart-beta funds will focus on local and foreign low-volatility and high-return-on-equity stocks, but the firm has not set a launch schedule as yet. It is working on these strategies with Conning, the US asset manager bought in 2014 by Cathay Financial Holdings, parent of Cathay Site. 

Cathay intends to apply for a licence to list an ETF linked to a new smart-beta index from Taiwan Index Plus (Tip). Launched on July 23, the Tip Taiex+ Dividend Appreciation 100 Index tracks the top 100 Taiex constituent companies with a history of raising dividends over the past 10 years, as well as other operational metrics, such as cash flow.

Institutional investors will buy smart-beta ETFs if their performance is better than products tracking traditional indices, Chang said, and are likely to hold them for long-term allocation purposes.

Despite some investors’ enthusiasm for smart-beta products, concerns have been raised over the higher fees they charge compared to traditional index funds. That said, some asset owners are considering smart beta as an alternative to certain active strategies, given their lower cost relative to the latter. 

Another issue cited by some – such as the deputy CEO of Malaysia’s Employees Provident Fund – is the fact that the more capital that flows into certain factor-based investments, the less likely they are to outperform the market.

Chang said that as long as the smart-beta products deliver returns that justify their fees, investors would be willing to buy them.

Local rival Yuanta, the biggest Taiwanese manager by mutual fund assets, has also been aggressively building its ETF offering and is working on its first smart-beta products, as reported.

Meanwhile, asked what types of alternative assets institutions were seeking, Chang said Taiwan’s pension funds and insurance companies were keenest on private equity funds, real estate investment trusts and infrastructure.

Another area attracting interest is private credit, he added, but insurers are more cautious on this asset class because of its higher risks, tending to choose asset managers they are more familiar with.

Offshore demand

As for demand from foreign asset owners, he said European investors increased their exposure to Taiwanese stocks after Britain’s June 23 vote to leave the EU or ‘Brexit’, thanks to their high dividend yields of and the stability of the currency.

Taiwan took in foreign net flows across all asset classes of about $4 billion in June, accounting for almost half of the $9.5 billion in foreign net inflows in the first half, according to the Financial Supervisory Commission.

The benchmark Taiwan Stock Exchange Weighted Index gained 4.5% between June 23 and August 2. The currency also held up well after the crisis, with the new Taiwan dollar strengthening 1.4% against the US dollar between June 23 and August 2.

Meanwhile, Brexit has not had much of an impact on Taiwanese investors, said Chang, because they did not have a large allocation to European assets – most of their overseas allocations are in the US.

ETF plans

Indeed, Cathay will launch an ETF investing in US equities by the third quarter of this year, with traditional and inverse versions. It will not list a leveraged US product, given the big difference in time zones, as leveraged ETFs are usually traded intra-day, so it would be risky for Taiwanese investors to hold them beyond that, said Chang.

Cathay is not planning to launch any European products in the near future, given the uncertain environment there following the Brexit vote. Chang said he would prefer to wait for a year or two until the situation is clearer.

The firm is also not considering launching commodity ETFs any time soon, as it already has a commodity trading adviser fund. Moreover, rival Taiwanese manager Yuanta offers oil and gold ETFs, so Cathay would provide little differentiation if it were to do the same, noted Chang.

Cathay Site had entered the passive space last year, launching its first ETF in March 2015, tracking the FTSE China A50 Index. It now has eight ETFs, including six leveraged and inverse products.

The firm is Taiwan’s biggest fund house by assets, with NT$400 ($13 billion) in AUM, of which NT$285 billion is in institutional local equity mandates.

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