Taiwanese mutual funds’ assets under management (AUM) recovered 22.8% to total NT$5.9trn ($203.2bn) during the six months between 31 March and 30 September last year, after plunging 17.8% in the first quarter following the onset of the Covid-19 pandemic.
However, the Financial Supervisory Commission (FSC) has indicated that it will amend the rules on managers’ business operations this year to “prevent managers from implementing unreasonable fee charges, which includes near-zero management fees and exorbitant trailer fees, to grow their businesses,” according to Boston-based consultancy Cerulli Associates, in a recent review of Asia’s mutual fund industry.
Although the FSC introduced an AUM-based fee model to alleviate product churning in 2018, it has resulted in banks requesting higher trailer fees, with some managers’ trailer fees to banks rising to 80% of fund subscription fees, the report said.
At the same time, the industry regulator found that some managers cut management fees to help promote their funds. For instance, fixed income funds, which usually charge a management fee of 0.5% to 1%, have slashed them to as low as 0.1%.
Meanwhile, some managers offered discounts on subscription fees in order to boost their sales volume toward the end of 2020.
“While such fee promotions can incentivise investors to commit their capital, ensuring business sustainability will be vital to build investor trust and develop a sustainable fund market,” noted Cerulli.
LOW RISK SENTIMENT
Although offshore (or cross-border) funds is the largest segment of Taiwan’s mutual fund industry, with NT$3.4trn in assets, the recovery in AUM was most notable in locally domiciled mutual funds, which received greater flows of NT$243.2bn over the second and third quarters and now total NT$2.4trn.
Most of the flows went into money market funds (NT$169.4bn), followed by bond funds (NT$30.6bn).
There was a similar preference for low-risk instruments among offshore fund categories, with fixed-income funds collecting the most flows of NT$135.4bn over the second and third quarters.
Nevertheless, some retail investors showed willingness to take on risk.
Balanced and equity funds (onshore and offshore combined) attracted positive flows of NT$15.8bn and NT$2.2bn, respectively, in the first nine months of 2020.
“While investors seek stability, the prolonged low-interest-rate environment is prompting them to take on exposure to these asset classes to achieve higher returns,” said Cerulli.
Taiwan Mutual Fund Net New Flows, 2016–3Q 2020 YTD (NT$bn)
| ONSHORE | 2016 | 2017 | 2018 | 2019 | 3Q 2020 YTD |
| Balanced | -0.9 | -18.7 | 29.5 | 7.7 | 15.6 |
| Bond | 12.0 | 57.7 | -14.7 | 145.2 | 30.6 |
| Equity | -23.3 | -15.2 | 0.0 | -44.1 | -18.5 |
| Money market | -146.8 | -68.7 | -105.9 | 101.1 | 169.4 |
| Others | -2.6 | -9.2 | -6.5 | -3.9 | 20.5 |
| OFFSHORE | |||||
| Balanced | -1.8 | 100.3 | 160.0 | 17.6 | 0.2 |
| Bond | 43.5 | 311.2 | -48.4 | 358.7 | 76.2 |
| Equity | -116.9 | -94.7 | -31.8 | -142.7 | 20.7 |
| Money market | 1.4 | -5.3 | 9.5 | -7.1 | -2.2 |
| Others | -0.1 | -0.2 | -0.3 | -0.1 | 0.0 |
ESG GROWTH
Meanwhile, asset management firms expanded their ESG product ranges in 2020 to include fixed income and balanced offerings. KGI Global ESG Sustainable High Yield Bond Fund and Pinebridge ESG Quantitative Multi-Asset Fund are examples of ESG-integrated funds launched last year.
More ESG-focused funds are expected to come, as the theme is a key priority for managers over the next two years, according to a Cerulli survey of retail asset managers conducted in 2020. Global bonds featured as the top ESG-centric product managers plan to launch during the next two to three years.
While serving as a risk management tool, integrating ESG factors in a fund helps identify low-quality targeted assets, especially for high-yield and emerging market funds where corporate transparency is often an issue for their underlying assets, according to the firm.
Apart from heightened awareness and understanding of the theme, especially among young retail investors, seminars held by banks and managers are other likely contributing factors to demand, it added.
On the other hand, diverse ESG definitions and scoring systems are a primary hurdle to greater acceptance – although the launch of the Taiwan ESG Dashboard by Taiwan Depository & Clearing Corporation last August, with access to the top 400 Taiwan-listed companies’ ESG scores, should help provide fair comparison on targeted investments’ ESG credentials.
ASIA FUND RECOVERY
In general, AUM in Asia recovered sufficiently by September 2020 to grow by 11% during the first nine months of the year, mainly led by China (21%), followed by South Korea (10.4%), according to Cerulli.
China’s fund industry was helped by several liberalisation measures, including further opening-up to foreign players, while South Korean flows were boosted by the government’s “Korean New Deal” which promotes new technology themes as well as sustainable investing.
Looking ahead, regulatory measures in other regional markets are expected to support the asset management industry, noted Cerulli.
In Hong Kong, the pilot scheme of the Greater Bay Area Wealth Management Connect, introduced last July, should help managers gain access to the large Chinese retail client pool, while the Monetary Authority of Singapore launched grants for the Variable Capital Companies framework, which aims to provide managers with operational flexibility and cost savings.
