Foreign firms struggle to raise onshore fund assets in Taiwan

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1 Foreign firms struggle to raise onshore fund assets in Taiwan Article published on January 15, 2018 By Selena Li Editor s note: This is the second of a two-part series looking at the challenges for global firms to grow their onshore business in Taiwan as tightened regulations put them under pressure. More than two years after Taiwan s regulator issued a set of regulatory criteria to push global fund houses to invest more in their onshore, locally domiciled funds business, many foreign firms are struggling to raise sufficient assets to meet these obligations, with some blaming fund switching. The Financial Supervisory Commission (FSC) says foreign asset managers in Taiwan should work together to change the status quo, as the new commitment framework will not be revised anytime soon. As a result of the FSC s commitment scheme, launched in October 2015, 35 foreign asset managers in Taiwan that failed to meet any of the various asset-raising criteria in the onshore business chose instead to pay monetary contributions dedicated to nurturing talent and developing the local asset management industry so they could continue to launch offshore funds in the market. The contributions, which were paid in 2016 after the regulator s first review, totalled NT$54.59 million (US$1.84 million), as reported. Taiwan s Securities and Futures Bureau (SFB) will soon commence a second review, evaluating global firms onshore and offshore assets in 2017, and the regulatory body aims to complete the process within the first quarter, the official says. Keystone Intelligence, a Taipei-based asset management research firm, says at least 38 companies are not likely to meet the onshore commitment stipulations applied to their fundraising and business operations from last year, adding that the estimated total amount of monetary contributions these companies may make could be slightly higher than last year, at NT$55.8 billion (US$188 million). The research shows that, among foreign companies that are predicted to have failed to meet the asset-raising criteria for locally domiciled funds and discretionary mandates in 2017, Franklin Templeton Investments may have to make a NT$15 million (US$510,000) monetary contribution in order to continue launching offshore funds, the highest among its global peers. The assessments are calculated at 0.01% of the 12-month average of offshore fund assets sourced from Taiwanese investors at the end of the previous year, with a cap of NT$15 million (US$510,000) for companies that raised at least NT$50 billion (US$1.54 billion) in 12-month average over the year and which don t have more than a 50% stake in an onshore entity. Franklin Templeton had an estimated NT$426 billion (US$14.38 billion) in monthly offshore fund assets at the end of September 2017; however, assets in the firm s onshore business, including local funds and discretionary mandate business was below NT$1 billion (US$30 million), according to Keystone.

2 Other foreign asset management companies with average monthly offshore fund assets sourced in Taiwan during the first nine months of 2017 above NT$20 billion (US$680 million) that may have to pay contributions of more than NT$2 million (US$70,000) include NN Investment Partners, Aberdeen Standard Investments, Investec, Neuberger Berman and BNP Paribas Asset Management, according to the research. Fund switching a nightmare nightmare for asset raising Over the last two years, some foreign companies have taken steps to comply with the new regulations by launching locally domiciled funds and establishing domestic business entities to employ more local professionals. Donna Chen, Keystone Intelligence Ever since the introduction of Taiwan s commitment plan, apart from a very small number of the largest global firms, most companies have felt the regulatory pressure to enhance their investment in local infrastructure and hiring, says Donna Chen, Keystone Intelligence s Taipei-based president. But one of the biggest hurdles for growing assets in locally domiciled funds has stemmed from a culture of churning adopted across much of Taiwan s bank-dominated distribution landscape. Some companies have been trying very hard to launch new products, but they could not, in the end, keep the assets. Banks tend to switch their clients money from one to a newer one, which is a nightmare for them, Chen says. Singapore-based UOB Asset Management (UOBAM) was one of the first to react to the new regulation, becoming the first foreign firm in 14 years to set up, in March 2016, a securities investment trust entity (SITE) with more than 50% foreign ownership, as reported. In January 2017, UOBAM launched its first onshore fund for the market, the Smart Beta Taiwan Equities Fund, but raised only NT439 million (US$14.83 million), far lower than the normal inception asset threshold for an SITE s first fund, which is NT$3 billion (US$100 million). Nevertheless, the FSC approved its inception as a special case, information from the regulator s website shows. But the fund shrank to NT$4.5 million (US$150,000) as of September 2017 and entered the liquidation process in November 2017, regulatory records show. A Taipei-based spokesperson for UOBAM (Taiwan) says the company remains confident of and committed to Taiwan s domestic asset management industry but declined to provide details on the sales of its first locally domiciled fund.

3 A long-standing practice in Taiwan s fund industry is that salespeople in banks are paid in line with the gross sales they bring in, not by net sales, which means the more investors move their money from one fund to another, the bigger the pay packets are for these salespeople. A Taipei-based senior executive at one of the largest foreign fund firms in Taiwan tells Ignites Asia that banks, especially custodian banks for locally domiciled funds, tend to promise a big sum of investors money but will encourage their wealth managers to talk investors out of it several months later and persuade them to buy a new fund in order to book more sales incentive income. Her firm, which already fulfilled the onshore assets threshold and so will not have to pay a monetary contribution, has not launched any new local funds for more than a year because of the difficulties it has experienced with fund switching. Another case in point is UBS Asset Management (UBS AM) Taiwan, the company had only NT$4 billion (US$140 million) in its onshore business, data from Keystone estimated, falling short of the regulator s requirements. In March 2016, the company launched the locally domiciled UBS (TW) Global Biotech Equity Fund, which raised NT$2.8 billion (US$90 million) in assets during its initial fundraising but then shrank to only NT$79 million (US$2.67 million) over the next 12 months, lower than the required NT$2 billion (US$70 million) asset threshold for a fund in Taiwan. The fund was liquidated in July 2017, information from the company s website shows. UBS Taiwan has three other onshore funds, which in total had NT$3.9 billion (US$130 million) in assets as of end-november, data from the Securities Investment Trust and Consulting Association show. Challenging Challenging yet positive positive Some global firms have been afforded an extended grace period for raising assets in new onshore funds and so far have avoided paying a punitive assessment. By promising the regulator to set up an SITE and boost onshore business, Neuberger Berman was exempted from making a financial contribution in 2016, according to Nick Hoar, the company s Hong Kong-based head of Asia Pacific. Some of those criteria were challenging, but we were very positive about the new regulation. If you want to compete in Taiwan today, if you want to compete in a meaningful way in the Taiwanese market, you have to have an SITE, he says.

4 Neuberger Berman s first onshore fund, which was launched in August 2017, increased slightly from NT$1.3 billion (US$40 million) in September 2017 to NT$1.7 billion (US$60 million) as of November, still below the NT$3 billion (US$100 million) required for inception of an SITE s first fund in Taiwan. Jovi Chen, Neuberger Berman Taiwan Jovi Chen, Taipei-based general manager at Neuberger Berman Taiwan says that, by negotiating with the local regulator, the company was able to lower the threshold for a fund to be incepted to NT$2 billion (US$70 million), instead of NT$3 billon (US$100 million), by the end of January The regulator acknowledges it s a very challenging task to launch a Taiwan equities fund, says Chen. But we have been very creative and putting our resources into this fund. We are close to the regulator s requirement of NT$2 billion. Global firms need a push push In response to the difficulties global firms face in raising assets onshore, a Taipei-based official in charge of the department overseeing the operation of global firms at the SFB tells Ignites Asia that industry players need to unite and work together to change the status quo rather than counting on the regulator to negotiate for them. Fund switching is an issue faced by not only foreign firms but also domestic firms, she says. Any manager wishing to maintain their funds assets must put in more effort. She points out that, while distributors have a dominant role in fund distribution, things can change as long as the industry can collectively put pressure on distributors. Some companies are too afraid to upset distributors and give whatever they ask. We as regulator are pushing very hard, but we also urge them to negotiate with banks about the incentive fee model, she adds. Severe fund switching has drawn the local regulator s attention. In February 2017, the FSC asked Taiwan s fund, trust and bank industry associations to come up with a solution to reduce the churning behaviour and potentially to place a limit on sales incentives charged. A top-down regulatory push may be on the way, as the fund industry has been lobbying for a change, a Taipei-based general manager of a fund house tells Ignites Asia. But so far, no official moves have been made, especially as banks claim the incentives are a key source of revenue.

5 Meanwhile, the SFB official said some locally domiciled funds have gained traction in Taiwan with impressive asset growth and, if products have special designs or features which differentiate them from their peers, banks may rush to sell these funds. The official says she hasn t received any complaints from global fund houses about the new regulations being too tight, adding instead that she has, in fact, had reaction from domestic fund houses that the regulator is giving offshore fund managers too much favour. And it seems clear that the FSC is not likely to be revising the commitment rules for global fund houses anytime soon. The rules have just been put into effect, and we would like to wait a bit longer and see if there is a need for us to review the framework, the SFB official adds. Franklin Templeton and UBS AM declined to comment for this article.