Taiwan ETF manager plans international blitz

Could the Taiwan Top 50 Tracker Fund become bigger than Hong Kong''s Tracker?

Polaris International Securities Investment Trust, the fund manager for the recently launched Taiwan Top 50 Tracker (TTT) Fund - Taiwan's first exchange-traded fund - is preparing an international roadshow to market it to non-Taiwanese investors. The aim is to make the TTT, which has amassed $600 million since its launch on June 30, as big as, or bigger, than Hong Kong's HK$26.7 billion ($3.4 billion) Tracker Fund.

That's a tall order but Patrick Wong, Polaris' vice chairman, says over the next several years the TTT has the potential to attract a similar amount of assets. Next month Polaris will undertake visits to investors in Hong Kong, followed by Tokyo in November, and then Europe and the United States early next year.

The TTT, which follows a 50-stock index compiled by FTSE and the Taiwan Stock Exchange, already dwarfs the BGI iShare Taiwan ETF based on the MSCI Taiwan country index, which has $259 million of assets. Wong says that reflects TTT's better hedging opportunities (the Taiwan Top 50 Index has a local futures contract, whereas the MSCI Taiwan Index can only be hedged over Simex in Singapore). State Street Global Advisors served as Polaris' adviser.

But the main reason is that the government has thrown its support behind TTT. The National Stabilization Fund, established in 2000 to support the markets and now worth $5.4 billion in domestic equities, has been a heavy investor in TTT, as have several of the top government pension funds. Taiwan's authorities see TTT as a way to offload the Stabilization Fund's large stockholdings without disrupting the markets, as Hong Kong's government did via its Tracker.

Polaris has also benefited because the government has so far only allowed one fund manager to create an ETF off any given index, unlike in Japan and Korea. The other main competitor, Fuh-hwa International Investment Management, advised by BGI, is still waiting for permission to launch an ETF.

Today foreign investors comprise only 1% of the $600 million invested in TTT. The money invested in iShare Taiwan is foreign. So Polaris is going to go after that, as well as continue to build its domestic retail and institutional base. Taiwan's retail funds market is massive compared to Hong Kong's: Cerulli Associates estimates Taiwan's total assets (onshore and off) were $75.9 billion at the end of 2002, versus $21.6 billion for Hong Kong.

"Foreigners own NT$300 billion of the Taiwanese stock market," Wong says. "We'll be promoting ourselves not to the big global institutions but to the mid-sized managers that want exposure to Taiwan but because Taiwan's probably under 1% of their portfolio, they aren't interested in doing stock selection."

He says the TTT's size will double by the end of next year. With an average trading volume of 6 million shares at $6-7 million daily, TTT's trading activity already exceeds the Hong Kong Tracker's.

Wong says the Taiwan Stock Exchange is in the process of launching two or three new indices this year, perhaps in the small-cap or the technology-sector areas. Polaris and Fuh-hwa will be applying to create ETFs on the backs of these. Wong doesn't know if the National Stabilization Fund will support new ETFs. "They are using the ETF to unload their shares, they're not actively promoting ETFs per se."

In addition, he says Polaris is considering launching index products based on indices customized by third parties, instead of waiting for the stock exchange to act. He suggests at least one new product could be launched by the end of this year.