BNP Paribas Investment Partners (BNPP IP) last week announced a new asset-management joint venture with Taiwan Cooperative Bank (TCB) that is puzzling some industry observers.

Taiwan's onshore fund industry suffers from fragmentation unlike anywhere else in the region. No fund house has been able to win more than 6% of market share, and none stays on top for long. The offshore fund market is as big as the one onshore, with NT$1.8 trillion ($56 billion) in assets under management as of September, according to Cerulli Associates.

Industry leaders, including Francis Tu, chairman of the Securities Investment Trust & Consulting Association (Sitca) and chief executive of Yuanta Fund, have long urged consolidation among the 39 onshore providers. 

Of these, 17 operate with an AUM below $1 billion but no differentiated strategies. The small fry have to compete with high-frequency trading, rapid portfolio turnover and concentrated risks. One of the smallest, Ontario Securities Investment Trust, has registered monthly portfolio turnover as high as 1800%.

This lack of scale means more costs get passed to customers, eating into investment returns, which is a problem even for the bigger fund houses. Moreover, money-market funds account for 55% of the onshore market, says Sitca, and equity funds for 38%. Despite a market recovery last year, Taiwan's mutual funds suffered a 5.3% net outflow in the third quarter of 2009.

Into this morass wades BNP Paribas Investment Partners, leaving market observers wondering where the profitability will come from. "I am stunned," says Venus Fan, research analyst at Morningstar in Taipei. "The profit margin is not worth the fuss [of setting up a new fund business from scratch]."

While BNP Paribas does not have an onshore fund business -- in local parlance, a securities investment trust enterprise (Site) -- it does have a presence thanks to its acquisition of Fortis Investments. Fortis inherited a distribution platform -- a securities investment consulting enterprise (Sice) -- from its acquisition of ABN Amro Asset Management.

ABN Amro AM once had an onshore business, mainly in fixed income, which got caught in a domestic crash in structured bond funds. The crisis, plus the lack of scale, prompted the Dutch firm to sell the local manufacturing business in 2006 to ING Investment Management in order to concentrate on providing higher-margin global product to Taiwanese investors.

Fortis Sice will become BNP Paribas Sice. It is run by Christine Jih, who is well connected in the local institutional and wholesale community. Fortis Sice is profitable and will now be able to augment its business with BNPP IP's expertise in fixed income, index solutions and Islamic investments, not to mention products from the French firm's affiliated boutiques.

Nonetheless, BNPP IP has decided it needs an onshore business as well, and will take a 49% stake in the JV, BNPP TCB Asset Management, against TCB's 51%.

Such deals are often about connecting a global fund manager with a local distributor, and this is no exception. But outside industry players think the deal may have another motive; to get TCB to finance a structure that allows BNP Paribas to claim it has a local presence to help it win global mandates from Taiwan's major pension funds.

In this respect, TCB could be a good partner. It is allowed to take cash deposits from the 'big four' public institutions -- the Bureau of Labour Insurance, Chunghwa Post, the Labour Pension Fund and the Public Service Pension Fund.

For the bank, the deal is an opportunity to use its cash-rich deposit base to diversify its business and cross-sell a variety of products. In addition to this JV, it has pursued other deals in areas new to it, including securities and life insurance.

TCB chairman Liu Dengcheng says he wanted to partner with BNPP IP because of its experience in other emerging markets, including China and South Korea.

Vincent Trouillard-Perrot, who will be BNPP IP's CEO for Hong Kong, Singapore and Taiwan in the post-merger BNPP IP-Fortis entity, did not reply to requests for comment by press time. The firm's announcement says BNPP TCB Asset Management will leverage a common distribution platform and provide fund and investment solutions.