With a new, stricter regime for foreign asset managers about to take hold in Taiwan, access to the market will be tougher, particularly for smaller fund houses lacking an onshore business. In addition, most overseas managers will face longer fund approvals and limits on how much capital they can raise locally.
Yet fears that the Financial Services Commission's so-called “deep-cultivation” scheme would force overseas firms to exit the market appear unfounded. They are not leaving – though some are having to switch to bigger master agents (firms through which offshore managers distribute products in Taiwan).
The scheme is being introduced to encourage greater commitment by foreign fund houses to the local market, but it is set to be a particularly major obstacle for smaller players.
“It’s now harder for foreign funds to enter Taiwan,” said Donna Chen, founder and president of Taipei-based consultancy Keystone Intelligence. Even small funds could register to sell in Taiwan in the past, but with the new regime in place they typically face a five-month registration process to get registered and must reach $100 million before they can get on large distributors’ shelves, she noted.
Fewer new small foreign houses are coming into the market now, confirmed Juan Li, senior vice president of the wealth management product division at CTBC Bank, the country’s biggest fund distributor by sales.
And those that do may find it their products a harder sell than in the past. Louis Chang, Taipei-based E.Sun Bank’s head of wealth management, told AsianInvestor that the bank had been cautious about adding new foreign fund houses, given that they must show solid commitment to the local market.
The environment has also become tougher for small fund houses that already have an onshore business.
Unless a foreign firm passes the annual “deep cultivation” assessment – these include the likes of Allianz Global Investors and JP Morgan Asset Management – it can only submit one fund for approval a time, Chen said. This is a major obstacle for smaller players in Taiwan, where the fund churn rate is high.
The slower pace of approval makes it difficult for those lacking a complete product range, as they might not have a suitable fund to offer as a substitute if a client sells out of one of their products, said Olisa Chang, head of product and marketing at Capital Gateway Investments. Capital Gateway is the master agent for UK fund house Old Mutual Global Investors in Taiwan.
As of July, only 16* out of 55 international fund houses operating in Taiwan had met the regulator's stricter criteria for the sale of foreign funds in Taiwan, according to Keystone.
Of the other 39 firms, only Barings, Franklin Templeton, NN, Pioneer and UBS had NT$50 billion ($1.6 billion) or more in monthly average assets held by domestic investors in the preceding fiscal year. The other 34 are smaller players.
The new rules will come into effect on October 15, though the Financial Supervisory Commission said it would grant deadline extensions for firms that have submitted concrete plans for meeting the requirements.
If they do not satisfy the criteria, they must make a contribution towards personnel training and industry development in Taiwan. The contribution is equivalent to 0.01% of the fund house’s last-annual 12-month average offshore fund AUM, with a cap of NT$15 million, to be paid every year.
Changing master agents
Still, while it is harder for fund houses to enter the Taiwanese market, no foreign house has been forced to closed its onshore business as a result of the new rules, Chen noted. Small players can survive by paying donations, “so no one is really leaving”, she said.
Yet some have this year had to switch to more well established master agents to distribute their funds, Chen noted. Investec had acted as its own master agent but has changed to Nomura AM. Dutch asset manager Robeco switched from Shin Kong Investment Trust to Nomura, and Vontobel AM from Galaxy Securities Investment Consulting Enterprise (Sice) to Eastspring. Fidelity’s master agent changed from its own securities firm to a Securities Investment Trust Enterprise (Site).
Juan said the regulatory changes had in fact been positive for CTBC as a distributor, because bigger master agents such as Nomura could provide better sales support and after-sales service.
And ultimately, foreign fund houses want to retain their Taiwanese business due to domestic demand. Local investors tend to favour offshore funds (over onshore ones) due to their international brand and longer performance track records, CTBC’s Juan noted.
*The 16 firms are AllianceBernstein, AllianzGI, BlackRock, DWS, Eastspring, Fidelity, HSBC, Invesco, JP Morgan, Manulife, Nomura Pimco, PineBridge, Prudential, Schroders and UBP, according to Keystone.